In the Wake of Hurricane Destruction, Blumenthal Demands DoT Protect Consumers from Dangerous Flood-Damaged Vehicle Sales

[WASHINGTON, DC] – Today in a letter to U.S. Department of Transportation (DoT) Secretary Elaine Chao, U.S. Senator Richard Blumenthal (D-CT), ranking member of the Senate Commerce Subcommittee on Consumer Protection, Product Safety, Data Security, and Insurance, urged DoT to take immediate steps to prevent the fraudulent sale of flood-damaged cars to unsuspecting consumers in the wake of the catastrophic damage of Hurricanes Harvey and Irma. In the aftermath of Hurricane Katrina and Superstorm Sandy, flood-damaged vehicle sales resulted in mechanical failures and threatened the safety of drivers and passengers across the country. Experts estimate nearly one million vehicles have been damaged by Hurricane Harvey alone, making definitive action by DoT highly urgent.

“These vehicles have been described as ticking time bombs. They can be superficially cleaned up to look just like new, but there is no way to halt the salt and rust from slowly corroding wires, sensors, and other vital components, or prevent the inevitable total failure of the vehicle. Even worse, buyers of flood-damaged vehicles often have no clue about their car’s history until their vehicle stalls in the middle of the road or breaks down on the freeway. There is no question that flooded vehicles are unsafe – endangering the lives and safety of drivers, passengers, and everyone with whom they share the road,” wrote Blumenthal.

Blumenthal urged Secretary Chao to caution insurance companies against fraudulent “title skipping,” a practice by which insurance companies fail to transfer a total loss vehicle’s title to themselves before it is resold to a new owner. He further demanded Chao rigorously enforce federal odometer disclosure laws, which aid in the transparency of vehicle ownership chains so consumers are assured for-sale vehicles are in the condition advertised, against auction companies.

Blumenthal’s full letter to Secretary Chao is copied below and available here.

September 18, 2017

The Honorable Elaine Chao

Secretary of Transportation

U.S. Department of Transportation

1200 New Jersey Avenue, SE

Washington, DC 20590

Dear Secretary Chao:

In the past weeks, Hurricanes Harvey and Irma have devastated swaths of the Gulf Coast and East Coast, inundating whole cities and communities with water from the skies and seas. Recovering from the destruction wrought by these hurricanes will be long and challenging. As we embark on this road to recovery, we must work together to contain the scope and scale of the damages incurred. With that in mind, and as ranking member of the Senate Commerce Subcommittee on Consumer Protection, Product Safety, Data Security, and Insurance, I write to draw to your attention a pernicious problem that arises in the aftermath of hurricanes and spreads the suffering caused by these hurricanes beyond their paths of devastation – the fraudulent sale to unsuspecting of flood-damaged cars.

Experts estimate about one million vehicles have been damaged by the deluge caused by Hurricane Harvey alone, and most of these will be declared total losses by insurance companies. Indeed, aerial footage of the historic flooding show cars stranded on streets, highways, and parking lots – almost wholly submerged in the salty water from the Gulf of Mexico.

In the aftermath of Hurricane Katrina and Superstorm Sandy, we saw thousands of flooded cars and trucks sold to unsuspecting customers.  These vehicles have been described as ticking time bombs. They can be superficially cleaned up to look just like new, but there is no way to halt the salt and rust from slowly corroding wires, sensors, and other vital components, or prevent the inevitable total failure of the vehicle. Even worse, buyers of flood-damaged vehicles often have no clue about their car’s history until their vehicle stalls in the middle of the road or breaks down on the freeway. There is no question that flooded vehicles are unsafe – endangering the lives and safety of drivers, passengers, and everyone with whom they share the road.

There is already evidence that vehicles originating from Houston’s flooded areas are appearing on auto auction websites and I am worried that vehicles with undisclosed flood damage will soon end up in the hands of unsuspecting consumers far from the Gulf Coast if appropriate action is not immediately taken. One way to address this issue is to bring strong enforcement actions against insurance companies that fail to properly record the transfer of titles to themselves after they declare a vehicle a total loss, as well as auto auction companies that fail to accurately document a vehicle’s ownership history.

NHTSA has long stated that an insurance company is considered a “transferee” if it pays the insured’s claim for total loss of a flood-damaged vehicle.  However, to expedite claims or avoid fees, insurance companies will often fail to properly transfer the title of a vehicle to themselves in a practice known as “title skipping.” As a result, the insurance company’s name is essentially omitted from the chain of title, making it appear that the vehicle was sold by the original owner. This means that when these vehicles are sold at auctions – as they often are – prospective buyers have no way of knowing that the insurance company was “skipped” in the ownership chain and that the vehicles in question were declared a total loss. So, these buyers will end up overpaying for a vehicle that is certain to experience mechanical and electrical failure down the road.

Fortunately, “title skipping” is already considered unlawful under the current federal law. In the wake of Superstorm Sandy in 2012 and flooding in Texas in May 2015, the National Highway Traffic Safety Administration (NHTSA) took proactive steps to protect consumers by sending letters to insurance companies and reminding them of their obligations under federal odometer disclosure laws (49 U.S.C. §32705). Samples of those letters are enclosed. While I have reached out to the Insurance Association of Connecticut for assurances that titles will be properly handled to denote that a vehicle was transferred to an insurer and marked in some way as a flooded vehicle, I strongly recommend NHTSA also write to insurance companies to help protect consumers. Furthermore, per 49 U.S.C. §32709, NHTSA may impose up to $10,000 in civil penalties for each violation of the federal odometer law. I urge NHTSA to fully utilize this civil penalty authority to stop unlawful behavior if initial warning letters are not heeded.

It has also come to my attention that “title skipping” often occurs when the insured chooses to keep a vehicle declared as a total loss by the insurance company. Some insurers actively promote this process and even advertise it on their websites. In these cases, the insurance company will pay the insured for the total loss, deducting what they claim is a fair salvage amount. I urge NHTSA to clarify to insurance companies that “title skipping” under this scenario is also clearly in violation of federal odometer disclosure laws. Regardless of whether a total loss vehicle is returned to the owner or not, any declaration of a total loss triggers obligations on the insurance company to act in compliance with federal odometer disclosure laws. Clearly warning insurance companies that such practices will not be tolerated, followed by strict enforcement of the laws, will go a long way toward protecting consumers. If you are unable to do this, please explain why and what, if any, new legislation is necessary for you to do so.

I also urge you to also increase enforcement actions against auto auctions that act in violation of federal odometer disclosure laws. Under the Federal Odometer Act, auction companies are required to maintain records regarding the name of the most recent owner of the motor vehicle. However, even the major auto auction companies have been known to accept vehicles from entities who were clearly not the original owner. This significantly interferes with buyers’ ability to discern a vehicle’s ownership history – a highly relevant factor in determining the value of the vehicle. Civil penalties should be imposed on any auction company that accepts vehicles with improper titling.

Rigorous enforcement of the federal odometer disclosure laws is critical because it may provide the only red flag to prospective used car buyers that a vehicle is a total loss due to flood damage. Due to different state laws and requirements regarding when a vehicle needs to be branded as salvage or flooded, consumers cannot necessarily depend on a vehicle’s branding to ascertain if it is a total loss. However, if NHTSA does its job enforcing federal odometer disclosure laws, consumers can look out for vehicles that were once titled to insurance companies. Furthermore, as we remain in the midst of the massive Takata airbag recall, taking action to protect consumers from total loss vehicles damaged by flooding is even more important because we know the defective airbag inflators can be even more prone to violently exploding when exposed to moisture.

In closing, I welcome suggestions for specific actions Congress can do to protect consumers from becoming unknowing owners of flood-damaged vehicles. I appreciate your prompt attention to this matter and look forward to working with you to address this troubling issue. I respectfully request a response by October 6, 2017.