Let’s Talk About Warranty Reimbursement

By Andrew G. Thomas 

Vehicle manufacturers are required to reimburse dealers for parts and labor used in warranty repairs. In fact, most state franchise laws have provisions requiring manufacturers to reimburse dealers for warranty work at the rates they charge their retail customers for both parts and labor. These provisions typically allow dealers to submit warranty rate increases once a year, and the submission process requires calculating what the dealer’s retail parts rate and/or labor rate would be by averaging the rates charges to retail customers for warranty-like work over a certain period of time. This process is somewhat time consuming, but almost always leads to a HUGE benefit for the dealer, making the investment worth it. There are also many reputable companies that provide services to assist with these warranty rate submissions. 

However, manufacturers are aware of the money that these yearly rate increases cost them, and naturally they try to avoid these costs in any way they can. One common way manufacturers attempt to avoid these costs is by offering Consumer Price Index (“CPI”) programs. Dealers must be aware these CPI programs are VOLUNTARY. Further, nearly every state has franchise laws prohibiting a manufacturer from requiring a dealer to waive any rights it has under the state laws, so even if manufacturers represent the programs as mandatory, they are likely not. 

These programs DO NOT compensate dealers at the rates they charge retail customers, as required by most state franchise laws. Instead, they offer annual increases based on changes in the CPI—and these annual increases are almost always capped at under 5%. The manufacturer-offered CPI programs that we have seen also attempt to lock the dealer into multi-year contracts.  Furthermore, most of these CPI agreements attempt to limit dealer rights to warranty reimbursement under state law for the duration of the agreement. The only real benefit of these programs is that the dealer gets a rate increase every year with zero effort. However, most dealerships lose money by taking these small yearly increases over the reimbursement at retail rate they are entitled to. 

Any dealer that is offered one of these CPI warranty rate increase programs should not only be aware of their warranty reimbursement rights prior to signing up, but should also be aware of the implications of signing any such agreement. 

If you have any questions or concerns about these CPI programs or dealer rights relating to warranty reimbursement, you should contact an experienced franchise attorney.