With vicarious liability gone, leasing returns to N.Y.

Leases once made up about half of the new-vehicle business at Rushneck Honda-Subaru in Tarrytown, N.Y. Then they all but disappeared.

Now leases are back to about 35 percent of the dealership's new-vehicle transactions, says Bill Reilly, Rushneck's general sales manager.

A big reason for the deep dive and partial rebound: the rise and fall of vicarious liability. For years, the legal principle grew in prominence in courts of various states, including New York. But a federal law that took effect last year bans its application.

Vicarious liability enables a crash victim to collect damages from the owner of a vehicle regardless of fault. For a rental or lease, the legal owner is the rental company or the lessor, usually a lender.

Providers of rented and leased vehicles learned how vulnerable they were in 2002. Chase Auto Finance Corp. was hit with a $28 million vicarious-liability judgment in Rhode Island.

In states with the strongest vicarious-liability laws, rental companies and lessors cut back on business or made it more expensive. In some cases, fees to initiate a lease or rental agreement tripled.

D.C. clout

Meanwhile, providers sought to change state laws. The results were mixed.

But with the help of automaker and dealer lobbyists in Washington, a national ban on vicarious liability was attached to a mammoth federal highway bill. It became law last August.

"We really locked it down as well as we could," says Mark Schienberg, president of the Greater New York Automobile Dealers Association. "I think it's going to stand under any challenge."

The cautious nature of his victory declaration may be warranted.

Dan Feldman, executive director of the New York Trial Lawyers Association, told Automotive News that members are looking for cases they can use to challenge the federal measure. Feldman calls the ban unconstitutional.

Trial-lawyer groups say people hurt in crashes, and the survivors of victims of fatal collisions, have a right to be compensated for their losses. Owners of vehicles involved in crashes have a responsibility to pay, the groups say.

Besides trying to overturn the ban in court, lawyers and their allies also could seek to repeal it with new federal legislation. That effort would stand a chance only if a shift occurs in the control of Congress and the White House.

Even then, repeal would not be guaranteed. Schienberg notes that New York's two U.S. senators, Democrats Hillary Rodham Clinton and Charles Schumer, did not try to block the ban in the highway bill last year. Neither did normally vocal Democratic House members, Schienberg says.

Lost customers

The lawmakers did not want to be seen as limiting consumer choice in New York, says Schienberg, whose group represents about 650 dealers in and around New York City. Public sentiment, including editorial opinion, overwhelmingly favored ending vicarious liability, he says.

Dealers succeeded in portraying trial lawyers as "fat cats that were just milking every dime out of this that they could," Schienberg says.

Judgments widely viewed as outlandish helped propel the vicarious-liability ban.

Flawed principle?

In a case in New York, a family collected nearly $1 million from Ford Motor Credit Co. The father had injured his daughter by backing a leased pickup over her while she sunbathed in the driveway, Schienberg says. "It's horrible that the father hit her," he says. But symbolically, the case showed the flaws in vicarious liability, he argues.

The industry hopes the debate is history. All of the automakers' captive-finance companies have resumed leasing in New York. Many banks also have returned, Schienberg says.

Companies that had stayed but charged higher fees to initiate a lease have cut those fees, he says. Those include Toyota's and Honda's captive-finance companies.

As a result, Schienberg says, "Consumers and dealers have the ability to go out and shop a good leasing deal."

Still, "it hurt," Rushneck's Reilly says of the plunge and only partial return in leasing business at his dealership. "We lost people."

Lenders and dealers tried other options. But most were unacceptable to customers who prefer leases.

One popular alternative was a balloon loan. With a balloon loan, buyers get a low, leaselike payment. But they must pay sales taxes upfront and have more trouble claiming tax deductions, Reilly says.

Some customers went away angry, he says, after they saw nationally advertised lease deals and came to the store. The dealership had to show them fine print that said "except in New York."

You may e-mail Harry Stoffer at [email protected]