L e g a l C o r n e r : W ha t I s N e g ligen t En t r u s t men t and W hen I s A D e aler L iable for Ac c iden t s C au s e d by Hi s Bu yer ?

What is Negligent Entrustment and When is A Dealer Liable for Accidents Caused by His Buyer?

D e a l e r Q u e s t i o n : I’ve received a demand letter from an attorney who represents an individual who was injured in an accident with one of my customers. My customer did not have liability insurance and the attorney claims I have liability because: (1) I am lien holder on the title; (2) I failed to ensure that my customer had liability insurance before delivering the vehicle, and (3) I negligently entrusted a vehicle to my customer who was a bad driver. My questions: (1) What is negligent entrustment; (2) Do I have a duty to see that my buyers have liability insurance before they drive away, and (3) If they don’t have liability insurance, do I have liability for accidents they cause?

F i r s t , s o m e b a c k g r o u n d .

At one time, dealers were obligated to present proof of liability insurance for their customers at the time of title transfer. While that law was in place, dealers were constantly struggling with their customers to bring in proof that they had liability coverage, and in many cases, missed the deadline for making timely transfer.

This problem was resolved when TIADA and the Texas Automobile Dealers Association convinced the Texas Legislature to drop the proof-of-liability-at-title-transfer requirement on dealer transfers. But there are some folks out there who still think that selling dealers have the responsibility to see that their buyers have liability insurance, or should otherwise be responsible for the accidents the customers cause.

No one questions the goal of universal liability coverage for drivers. All drivers should have liability insurance and the law requires it. How it should be enforced and who should bear the burden for enforcing it are other questions. Dealers should always notify their customers in writing that they are required by state law to have liability insurance.

But the reality is that there will always be people driving on the state’s roads and highways who don’t have current liability coverage. It is thus necessary to examine the law of liability and see how it applies to a motor vehicle seller and/or lien holder.

Generally, to be liable for an accident, a person must breach some duty to the injured party. For example, a driver of a vehicle has a duty to maintain control of his vehicle so that he can avoid striking a vehicle in front of him. If he causes an accident by driving too fast, by not keeping a proper watch out, by not braking soon enough, or by violating some traffic law, he has breached that duty, or put another way, has been negligent.

In order to be negligent in the ordinary sense, a person must be driving the vehicle. Unless the selling dealer or one of his employees was driving the vehicle when the accident occurred, the dealer wouldn’t be negligent in breaching a duty to drive safely. So, in a situation where the driver of a vehicle who causes an accident is insolvent and uninsured, an attempt is often made by the victim (and the

by Michael W. Dunagan TIADA GENERAL COUNSEL I n o r d e r t o b e n e g l i g e n t i n t h e o r d i n a r y s e n s e , a p e r s o n m u s t b e d r i v i n g t h e v e h i c l e . Un l e s s t h e s e l l i n g d e a l e r o r o n e o f h i s e m p l o y e e s w a s d r i v i n g t h e v e h i c l e w h e n t h e a c c i d e n t o c c u r r e d , t h e d e a l e r w o u l d n ’ t b e n e g l i g e n t i n b r e a c h i n g a d u t y t o d r i v e s a f e l y.

victim’s attorney) to reach beyond the driver or owner of the vehicle to, for instance, the dealer who sold the vehicle by alleging a breach of some other duty.

N e g l i g e n t E n t r u s t m e n t

One such theory is called negligent entrustment. This type of negligence refers to the negligence of an owner in entrusting a vehicle to someone the owner knows, or should know, is an unsafe driver. Some people think — incorrectly — that the owner of a vehicle is automatically liable for the negligence of someone else. First, mere ownership without something more is not a sufficient legal basis for liability. Second, a dealer who has sold a vehicle, even if a lien is retained, is not the owner. A seller who has completed a sale is no longer the owner, even if the title certificate hasn’t yet been transferred.

A dealer client once received a demand letter from an

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T h e f a c t o f t h e m a t t e r i s t h a t m o t o r v e h i c l e s e l l e r s h a v e n o o b l i g a t i o n w i t h r e g a r d t o t h e l i a b i l i t y i n s u r a n c e o f t h e i r b u y e r s o r f o r c l a i m s o f n e g l i g e n t e n t r u s t m e n t . . .

attorney who happened to be the person that the dealer’s buyer had rear-ended. The buyer didn’t have liability coverage. The attorney/ victim demanded that the dealer take responsibility for the damages because the attorney/victim had been informed by an attorney for the Motor Vehicle Division that, since the dealer had not yet transferred the title, he was still the owner of the vehicle. Being the owner, the MVD attorney concluded, the dealer was liable. In this case, both attorneys were wrong.

Under almost identical facts, the Court of Civil Appeals in San Antonio held that a selling dealer could not be liable for negligent entrustment, even though the title certificate had not yet been transferred at the time of the accident. First, the court held, the law of Texas is that a seller cannot have liability under negligent entrustment. Next, the court addressed the non-transfer issue by concluding that ownership passed upon signing the sales contract papers, payment of the down payment,

and delivery of possession to the buyer. Title transfer, while important, was not the same as transfer of ownership.

The Texas Supreme Court, in the case of National Convenience Stores, Inc. v. TT Barge Cleaning Company, refused to review or change the long-established rule that a seller in Texas can’t be held liable for the acts of a buyer under the theory of negligent entrustment.

How about a seller’s potential liability under negligent entrustment for selling a vehicle to a person who has no driver’s license? It would appear that since negligent entrustment does not apply to a completed sale, it wouldn’t matter if the buyer had no driver’s license. Many years ago, a bill was filed in the Texas Legislature that would make it illegal to sell a vehicle to an unlicensed driver. The bill didn’t pass, and Texas statutes do not contain any provision that makes it a violation to sell to an unlicensed driver (but pay heed to the warnings below about allowing test drives or loaning a vehicle to an unlicensed driver).

We’ve seen several attorneydemand letters and even lawsuits that alleged that the selling dealer had a duty to make sure that the buyer had liability insurance. None of these claims has succeeded.

One of the aspects of the argument that a selling dealer has some type of obligation with regard to

If such a letter is received, however, it should not be ignored. The dealer should contact his or her attorney and also notify the garageliability carrier about the claim.

One warning about relying on the defense of a completed sale: this defense would not be available if the sale is incomplete. In one court case a dealer “sold” a vehicle to an employee, but failed to have all the paperwork signed. The dealer was found liable under the theory of negligent entrustment when the employee caused a wreck without liability insurance, even though the accident occurred on the employee’s personal time.

Another word of warning: This rule does not apply to test drives or loaners. A seller could be held liable under a negligent entrustment claim if there has not been a completed sale. Thus, it is risky to allow a potential customer to test drive a vehicle without (1) a current driver’s license and (2) a valid liability insurance policy. The law carries a presumption that an unlicensed driver is an unsafe driver. It would be an easy step to establish that a dealer negligently entrusted a vehicle to an unlicensed (and thus, unsafe) driver in a demonstrationdrive situation.

With regard to liability insurance coverage, dealers should make sure that customers test driving vehicles are covered by the dealer’s garage liability policy or, alternatively, that the test driver has his or her own liability insurance. The same standard would apply to supplying loaners to customers.

liability insurance that is most puzzling is just how far the obligation would extend. If, for instance, the dealer required that a buyer have an insurance card, and the card was good for only 30 days, would the dealer be obligated to see that the policy was renewed? What if an accident occurred on the thirty-first

. . .Ye t d e a l e r s c o n t i n u e t o r e c e i v e d e m a n d l e t t e r s i n s u c h s i t u a t i o n s a n d , o c c a s i o n a l l y, l a w s u i t s .

day and the insurance company denied the claim? How about an accident a year later? What if the insurance card was forged?

D e a l e r s A r e N o t t h e L i a b i l i t y I n s u r a n c e Po l i c e

The fact of the matter is that motor vehicle sellers have no obligation with regard to the liability insurance of their buyers or for claims of negligent entrustment. Yet dealers continue to receive demand letters in such situations and, occasionally, lawsuits.

M i c h a e l W. D u n a g a n i s a n a t t o r n e y i n D a l l a s , Te x a s w h o h a s r e p r e s e n t e d t h e Te x a s I n d e p e n d e n t A u t o m o b i l e D e a l e r s A s s o c i a t i o n f o r o v e r 4 0 y e a r s . H e h a s w r i t t e n a n u m b e r o f b o o k s a n d h u n d r e d s o f a r t i c l e s f o r t r a d e j o u r n a l s a n d l a w r e v i e w s . H i s c l i e n t e l e i n c l u d e s d e a l e r s , b a n k s , fi n a n c e c o m p a n i e s , a u t o a u c t i o n s a n d c r e d i t u n i o n s .