STATEMENT ON SALVAGE VEHICLES 

US Senate Commerce Committee Subcommittee on Consumer Affairs, Product Safety and Insurance November 16, 2005         

keywords, fraud, deception, salvage vehicle, accident, disclosure, claim, failure to disclose, damage, salvage vehicle claim. 

      Page 1
US Senate Commerce Committee Subcommittee on Consumer Affairs, Product Safety 
and Insurance November 16, 2005 Hearing"Protecting the Consumer from Flooded and 
Salvage Vehicle Fraud" Testimony Of Rosemary Shahan President, Consumers for 
Auto Reliability and Safety Mr. Chairman and Senators:

Thank you for the invitation to testify today regarding ways to protect consumers from flooded and 
salvage vehicle fraud. My name is Rosemary Shahan, and I am the President of 
Consumers for Auto Reliability and Safety, or CARS, a non-profit auto safety and 
consumer advocacy organization based in Sacramento, California. CARS is 
dedicated to preventing motor-vehicle related fatalities, injuries, and economic 
losses. Since 1979, I have worked at the state and federal levels on behalf of 
consumers on a range of auto-related issues. I appreciate the opportunity to 
highlight some of the worst problems posed by flooded and salvage vehicle fraud, 
and to make some recommendations for your consideration.

PROBLEM Damaged vehicles pose a serious threat to the American public Every year, millions of vehicles 
are in serious collisions, or in flood disasters. Most people assume that 
severely damaged vehicles are crushed, or sold solely for parts. In fact, many 
are destroyed. Many are taken apart and usable parts are recycled by 
professional and responsible recyclers. But every year millions of severely 
damaged autos are sent by insurers to auctions and then sold to unscrupulous 
auto dealers and rebuilders. They are then sold under false pretenses to car 
buyers. The deceptions artificially inflate profits for the unscrupulous 
insurers, auctions, rebuilders, and dealers who profit from perpetrating fraud, 
at the expense of the motoring public and honest businesses alike. This is 
particularly troubling since shoddily rebuilt wrecks and flood cars pose a 
serious safety problem”to the owners and to all who share the roads with them. 
11State of California: Report to the Legislature: A Study of Auto Body Repair 
Problems with Findings and Recommendations (July 1, 1994). According to a 1984 
DCA/BAR [Department of Consumer Affairs Bureau of Automotive Repair] study of 
unibody repairs, the ability of improperly repaired unibody vehicles 
(ninety-five percent of todays passenger cars are of 1

      Page 2
The problem of flooded and salvage vehicles goes far beyond title branding. At 
its core, the problem is systemic fraud---knowing and deliberate concealment of 
material facts. Fraud involving prior wreck or flood damage costs American 
consumers billions each year and also endangers lives. Prior damage vehicles may 
not provide adequate protection in a subsequent crash. Air bags are sometimes 
not replaced. Some major franchised auto dealers have sold cars missing air bags 
or with shop rags where the air bags belong.

This is a serious safety threat. Auto manufacturers have reconfigured seat belt designs so that seat belts work 
in tandem with the air bag as a safety system. Consequently, in a 
moderate-to-severe collision, a driver or passenger who is wearing a seat belt, 
but whose vehicle is missing an air bag, is prone to suffer and debilitating 
serious head, facial, or spinal cord injuries, or be killed. Insurers part of 
the problem Some insurers destroy vehicles that are nonrepairable and properly 
brand the titles of salvage autos, but others engage in fraud. The fraudsters 
send nonrepairable vehicles and salvage or flood cars to auctions, often with 
clean titles. In return, insurers recoup more than the vehicles are actually 
worth, given their damaged condition. The nation's largest auto insurer, State 
Farm, has a shameful record of violating state title-branding laws and failing 
to properly brand titles as salvage.

In 1998, State Farm settled a case brought by the Attorney General of Indiana. According to Indiana Attorney 
General Jeffrey Modisett, State Farm sold, exchanged, or transferred salvage 
vehicles it had acquired without obtaining salvage titles…People who purchased 
these vehicles did so without knowledge of the damage, safety, reliability and 
true value of these vehicles.2That case reportedly came to light because a car 
dealer in Greenfield, IN, made a startling discovery. After repairing what he 
thought was a relatively new Ford pickup, he routinely sent the manufacturer a 
bill for his warranty work. Ford refused to pay. It told the puzzled dealer that 
a records check found that the pickup had been in a wreck, an insurance company 
had declared it a total loss and had resold it. That voided the warranty….After 
a two-year investigation, State Farm admitted selling about 1, 400 unibody 
design) to withstand a second crash is significantly compromised and would 
result inserious injury and death to the occupants….Finding: More than 70,000 
structurally damaged and 150,000 salvaged vehicles are returned to our streets 
and highways every year without a safety inspection, and they pose a potential 
hazard to all of California’s twenty million unsuspecting motorists. 2Attorney 
General Modisett, State Farm settle salvage motor vehicle title case, News 
Release, State of Indiana Office of the Attorney General, July 28, 1998. 

  Page 3

totaled cars, trucks and sport-utility vehicles in Indiana---all without the 
required state salvage titles.3Earlier this year, State Farm settled yet 
another case, this time with 49 state attorneys general and the District of 
Columbia. The company publicly admitted that it had resold at least 30,000 
totaled vehicles without salvage titles. State Farm reportedly conceded that 
the number could turn out to be as high as 40,000.4A spokesperson for State 
Farm is quoted as saying We don’t know whether it was an error, a mistake or 
malfeasance.5Owners of those salvage vehicles were not immediately notified. 

Over a year after State Farm notified the attorneys general, the owners received 
letters informing themtheir vehicles were salvage. The titles are belatedly 
being branded salvage. Some owners have found that not only is their vehicle 
worth far less than they paid for it, but they face losing insurance coverage or 
having their coverage reduced due to the salvage history. Hapless victims may 
also find the lender will call the entire loan due, on grounds the vehicle is 
not sufficient collateral for the loan. Under the new federal bankruptcy law, 
they may be held liable for the entire amount of the loan, based on the inflated 
price they paid, while in the past the amount could have been reduced to reflect 
the fair market value of the damaged vehicle. If the consumer is unable to pay 
the full loan, they may end up having the vehicle repossessed. For many people, 
that means they would lose their only means of transportation, and potentially 
lose their jobs. Flood cars pose unique problems The entire nation has witnessed 
national news coverage showing tens of thousands of new and used flooded cars 
resulting from the recent disasters in the Gulfregion and Florida. They have 
garnered tremendous media attention, and rightfully so. Flood cars pose a unique 
set of hazards to consumers.

Thanks to sophisticated, advanced safety technologies and the increasing computerization of automobile design, flood cars 
are even more hazardous than in the past. Virtually all of today's cars have 
sensitive electronic components that control major systems, including the 
engine, brakes, and air bags. Those electronic components, immersed in water and 
contaminants such as silt and petroleum residues, will inevitably deteriorate 
and corrode, particularly if the vehicle was submerged in salt water, rendering 
the vehicles unreliable. Compounding the problem: complicated electronic 
components tend to be the most expensive to replace. They are also not visible, 
but are usually enclosed, making their condition difficult to detect and easy to 
conceal. The temptation for unscrupulous rebuilders and dealers is to cut 
corners and simply do a cosmetic clean-up, replacing the carpeting and 
upholstery and leaving the compromised electronics untouched. 3State Farm 
violated agreement on selling totaled cars, St. Louis Post-Dispatch, January 
24, 2005. 4Ibid. 

      Page 4
At one time, the typical vehicle could be submerged in water over the sill 
without compromising its safety. Those days are gone. Now, most passenger 
vehicles have electronic systems located under the seats. Flood damage to the 
point where vital electronic components are soaked in water makes today’s 
vehicles totally unreliable.

They will be plagued by a whole host of major electronic problems. For example, the air bags may or may not inflate in a 
crash. If they do inflate, they may inflate too soon or too late. The anti-lock 
brakes may not work. In an emergency braking situation, on a rain-slicked road, 
a driver who has learned to slam on his or her anti-lock brakes may lose control 
and spin out. The engine may stall out intermittently, without warning, during 
driving in heavy traffic an obvious safety hazard. Over time, flood cars are 
also prone to develop mold and mildew that can cause serious health problems, 
particularly for people who suffer from allergies or asthma. According to one 
news report, some insurers, such as Progressive, have been destroying many of 
their flood cars, but others, including State Farm, reportedly have failed to do 
the same.6This raises the question: what possible legitimate purpose can there 
be for placing flooded vehicles back into the stream of commerce? This question 
takes on a certain urgency when it involves an unprecedented number of flood 
cars that were submerged in heavily contaminated salt water for days or weeks. 

Self-insured entities A complicating factor: some self-insured entities, 
including rental car companies, large auto dealers and auto dealer chains, may 
not be required to brand titles salvage, or flood, and since there is no 
claim filed, it is harder to trace and document the damage history. New vehicles 
Salvage and flood car fraud also involves new vehicles. For example, some auto 
dealerships had hundreds of new vehicles on their lots when the flood waters 
rose. If history is any guide, new car buyers from coast to coast will 
eventually end up saddled with problem-plagued new vehicles that were once 
submerged in flood waters. In some cases, the manufacturers will refuse to honor 
the warranties, citing the prior flood histories. Those histories will be known 
to the manufacturer, but not the buyer. Certified  damaged vehicles Some 
rebuilt wrecks are even being sold by supposedly reputable dealers as 
certified used cars, and the dealers are charging a premium---with the 
representation6  What insurers are doing, Automotive News, October 31, 2005. 

      Page 5

made that the vehicles have passed a rigorous, 130+ or 150+ point inspection. 
Sometimes the vehicles are advertised complete with factory/manufacturer 
warranty. But”manufacturers will not honor warranties on prior damage vehicles, 
certainly not for area repaired, and sometimes for entire vehicle. Nor will 
consumers who paidextra for an extended service contract be able to have 
necessary repairs covered, since prior wreck and flood damage are excluded under 
the contracts. This is a triple whammy for consumers. Consumers pay extra for 
certified used cars, pay extra for factory or OEM [original equipment 
manufacturer] warranties, and pay extra for extended service contracts, in order 
to be protected. Then when problems arise, they discover not only did they pay 
thousands more than the Blue Book price when the vehicle is actually worth 
thousands less, but the warranty is void and the contract wont cover repairs. 
Its a very rude surprise to be forced to incur unexpected, unanticipated repair 
costs---if the vehicle is repairable. Some are beyond repair. California 
recently enacted landmark legislation, the Car Buyers Bill of Rights, signed 
into law by Governor Schwarzenegger, to curb various forms of auto fraud, 
including sales of previously damaged vehicles as certified used cars. The 
impetus for the certified provision came from numerous cases where consumers 
paid thousands extra to buy cars that had been certified, only to find they 
were grossly unsafe to drive, due to prior damage that had been shoddily 
repaired and was concealed at the time of sale. California’s law, which will 
take effect next July, expressly forbids the sale of used vehicles with ANY 
frame damage as certified.

Salvage and flood car perpetrators target victims 
Who is targeted for sales of rebuilt wrecks and flood cars? While even highly 
sophisticated, well-educated consumers sometimes fall prey to auto salvage 
fraud, somedealers have shown a propensity to target particularly vulnerable 
individuals. Due to their inexperience buying cars, teenagers and students 
buying their first vehicles are often targeted. Other targets: recent 
immigrants, and members of our armed forces, especially enlisted personnel. 87AB 
68 (MontaÃlez), Statutes of 2005. 8In Harms Way”at Home: Consumer Scams and the 
Direct Targeting of Americas Military and Veterans, Report by National 
Consumer Law Center, May 2003. Automobile-related scams: Cars are a big source 
of financial trouble for service people. The Navy-Marine Corps Relief Society, 
for instance, gives the largest single portion of its cash aid to military 
families nearly a quarter of all its aid for car-repair assistance military 
legal assistance officials in the San Diego region told NCLC that high-priced 
used car sales are the single largest consumer [contract] problem that we see 
here in Legal Assistance.

      Page 6
The armed forces themselves have documented the harm that ensues from used car 
fraud, noting that such frauds can compromise the troops ability to perform 
their duties, even to the point of endangering themselves, their unit, and the 
mission itself.

According to experts, unscrupulous dealers prey on military 
families. 10Recently, representatives of the armed forces testified at a hearing 
in California that auto-related scams, including rebuilt wrecks being sold as 
certified used cars, are the worst consumer-related problems troops stationed 
in California face.11To make matters worse, some auto dealerships are 
disregarding the Service members Civil Relief Act, intended by Congress to 
protect all active-duty families from foreclosures, evictions, and other 
financial consequences of military service.12RECOMMENDATINS Designate vehicles 
non-repairable and retire VINs

Severely damaged vehicles and flood cars that have been submerged in salt water 
should be declared non-repairable and destroyed. The Vehicle Identification Numbers,
or VINs, should be permanently retired to curb fraud and to reduce 
the incidence of VIN-switching, which 
contributes to vehicle theft, carjackings, and other related crimes. National 
databases present opportunities, challenges 9Financial Fitness: The Importance 
of Financial Fitness to the United States Marine Corps Mission. A Final Report. 
Prepared for and funded by The United States Marine Corps, prepared by The 
Financial Fitness Evaluation Team, University of California, Riverside. August 
2000: We found widespread agreement that when Marines have pressing financial 
problems, their performance in the field can be significantly compromised, even 
to the point of endangering themselves, their unit, and the mission 
itself Buying cars causes more problems than any other single financial factor.
Scamsters preying on military families, Los Angeles Times, April 2, 2003. 
Operating just outside the gates of major bases, some car repair shops and 
dealerships prey on military families, particularly when a husband has been 
shipped out of the country, said Karen Varcoe, a consumer economics specialist 
at UC Riverside who has written academic studies on the financial problems of 
military personnel.

After car breaks down, Iraq vet wages new battle”with dealer. Sacramento Bee,
April 14, 2005: Last month, the Assembly Committee on 
Banking and Finance heard testimony about financial scams aimed at members of 
the military. John Irons, director of the Navy-Marine Corps Relief Society in 
San Diego, told lawmakers his informal survey of Navy lawyers found ‘the number 
one issue they are confronted with is used car dealers who are taking advantage 
of military personnel. Among the alleged problems: sale of certified 
junkers [Note: Active duty representatives of the U.S. Armed Forces also 
testified that they had conducted their own informal surveys and reached the 
same conclusions.]Creditors Press Troops Despite Relief Act, New York Times, 
March 28, 2005.

      Page 7
For vehicles that are suitable for repair and resale as safe, reliable 
transportation, full disclosure to sellers and consumers alike is needed. With 
the advent of CLUE13and other vast electronic databases, insurers, 
manufacturers, lenders, dealers, and other entities have access to relevant data 
that is sometimes withheld from consumers, or is not provided in a timely 
fashion. The challenge policy makers face is how to make that information 
accessible to prospective buyers in an efficient, cost-effective, meaningful 
way. While improved title branding will assist as an important enforcement tool, 
title branding is of limited usefulness in curbing salvage fraud. One reason: 
consumers usually do not see the titles until after a sale is consummated. It 
may be years later, when the lien is paid, that they finally see the title for 
the first time. Also, thanks to computer technology, it is now quite easy for 
unscrupulous sellers to counterfeit titles, so even if states were to adopt 
uniform standards, and carry forward other states title brands, auto salvage 
fraud involving vehicles with false clean titles would continue to occur. 

However, a national electronic database with relevant information holds promise 
for curbing fraud. Prior to sale, prospective buyers should have access to the 
sameinformation about the vehicle’s history as the insurers, manufacturers, or 
other entities that already enjoy access. (Of course, the prior owner(s) 
personal information should be kept private.) Vehicle owners, who are entrusting 
their personal safety, and their family’s safety, to the reliable operation of 
the vehicle, should not be the last to find out their vehicle’s damage history. 
The most effective way to provide vehicle history information in a timely 
fashion to all prospective purchasers and bridge the Digital Divide is to 
require relevant information from a national database be displayed on vehicles 
themselves. A precedent to consider: after extensive research into effective 
means of disclosing vehicle safety information to the public, the National 
Academy of Sciences issued a report recommending that the relevant information 
be provided on a separate sticker on the vehicle itself. 

The National Highway Traffic Administration sought comments on that approach, and adopted the 
Academys recommendation, requiring on-vehicle safety ratings disclosures on all 
new vehicles. 13CLUE is a registered trademark of ChoicePoint Asset Company. 
14As part of the Department of Transportation and Related Agencies 
Appropriations Act, 1995 (P.L. 103-331; September 30, 1994), Congress provided 
NHTSA funds "for a study to be conducted by the National Academy of Sciences 
(NAS) of motor vehicle safety consumer information needs and the most cost 
effective methods of communicating this information." The NAS study was 
completed and released to the public on March 26, 1996. It is titled "Shopping 
for Safety - Providing Consumer Automotive Safety Information," TRB Special 
Report 248. Based on its findings, the study makes recommendations to NHTSA on 
ways to improve automobile safety information for consumers. 7

      Page 8
Federal Trade Commission Used Car Buyers Guide For used vehicles, an on-vehicle 
Buyers Guide already exists. Since 1985, the Federal Trade Commission has 
required that all licensed auto dealers must post a Buyers Guide on each used 
vehicle sold to retail consumers. The Guide includes information about warranty 
coverage and warnings aimed at informing consumers about common pitfalls 
involved in purchasing used cars. Dealers must provide consumers with the Buyers 
Guide as part of the sale or lease transaction. Requiring the disclosure of 
vehicle history information would also help address the inherent deception that 
occurs when a vehicle is advertised and sold with a supposed warranty that is 
actually void due to prior damage. 

Currently, the Buyers Guide on relatively new 
damaged vehicles usually states that the vehicle is being sold with the 
remainder of the manufacturer's factory warranty. However, if the warranty is 
void due to prior damage, that should be fully disclosed prior to sale, along 
with the prior damage history. Otherwise, buyers are being misled into believing 
they are obtaining vital protections that prove to be illusory. Enforcement and 
remedies for victims In order to discourage scamsters from engaging in auto 
salvage fraud, it is important for any federal legislation to provide for 
remedies and penalties that are at least as strong as under the Federal Odometer 
Act. That act provides for victims to obtain multiple damages and attorneys 
fees, and also provides criminal penalties. Salvage and flood car fraud is even 
more serious than odometer fraud, since it clearly impacts the motoring public’s 
safety, and should invoke commensurate sanctions. Any federal statute should 
create a floor and not a ceiling for states, allowing states to provide stronger 
protection. 

This non-preemptive effect is particularly important since some 
states may find they are being targeted, and need to take stronger steps toavoid 
becoming dumping grounds for salvage and flood car frauds. Ease of enforcement: 
providing damage information on the Used Car Buyers Guide would provide law 
enforcement agencies with a relatively simple, cost-effective, uniform method 
for monitoring disclosures and ensuring compliance. Rather than attempting to 
delve into whether or when the prior damage disclosure was made during 
complicated sales or lease transactions, law enforcement officials could simply 
monitor and spot-check the Buyers Guides on open display. CONCLUSION Thank you 
again, Senators, for the opportunity to testify. I appreciate the Senate's 
interest in examining this serious form of fraud, and I welcome the opportunity 
to work with you and the Subcommittee Counsel to develop positive, effective 
ways to protect the public from flooded car and salvage fraud. 

      Page 9
Attachments: 1. Federal Trade Commission Used Car Buyers Guide from a so-called 
certified BMW.T he buyer, who works as a landscaper, paid over $30,000 for the 
BMW. When he test-drove it, the traffic was congested and he was unable to drive 
more than about 35 mph. As soon as he drove it home, and got to speeds over 60 
mph, it shook violently. A subsequent expert inspection found that the vehicle 
had sustained major damage in a crash. The repairs were woefully inadequate and 
shoddy.

As a result, the frame was bent and the suspension was shot. It would 
take thousands more dollars to fix it so that it was safe to drive. BMW refused 
to honor the Full factory warranty, 4 years or 50,000 miles touted on the 
Buyers Guide due to the prior damage. The buyer had also purchased an extended 
service contract. The holder of the service contract excluded coverage for 
repairs due to the prior damage. The dealer refused to refund the purchase 
price. The BMW sat unused in the owners driveway for over a year, while he 
drove an old truck and continued making $500 per month in car payments, pending 
resolution of a lawsuit. 2. CARFAX Vehicle History Report for the same BMW, 
reporting  severe accidents reported to DMV, Guaranteed! This report was 
presented by the dealership to the buyer prior to sale.3. Blank Federal Trade 
Commission Used Car Buyers Guide 9

keywords, false advertising, deception, New York, claim, deception, false statement,  New York false advertising, consumer fraud, false statement, deception, claim,

Law Offices of Howard A. Gutman,
230 Route 206, Mount Olive, New Jersey 07836
(973) 598-1980, E-mail Howian@aol.com
Fax (973)598-1982
305 Madison Avenue, Suite 449
New York, New York 10165 (212) 886-4838 (please call our NJ office for initial consultations)
 

Keywords, New York lemon law, attorney,  law, lawyer, New York lemon law attorney, problems  defect.