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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5869

March 31, 1981

MOTOR VEHICLE SALES FINANCE ACT:

Cost of indemnity bond as a permissible cost

The cost of an indemnity bond to secure the lender against default of the buyer under the Motor Vehicle Sales Finance Act is, in essence, the purchase of collateral security which is not includable in the installment sales contract.

Honorable Kerry Kammer

State Senator

The Capitol

Lansing, Michigan

You have requested my opinion on the following questions regarding the Motor Vehicle Sales Finance Act, 1950 Ex Sess PA 27, as amended; MCLA 492.101 et seq; MSA 23.628(1) et seq, and its applicability to a miscellaneous indemnity bond as collateral security.

1. Does the inclusion within an installment sales contract of the cost of the premium for a miscellaneous indemnity bond, which guarantees the lender against default by such buyer, violate Section 16 of the Motor Vehicle Sales Finance Act?

If the answer to the above question is negative:

2. May the insurance premium for an endorsement to the bond be financed as part of principal amount financed?

3. Is the insurance premium for an endorsement to the Bond includable as part of the 'Finance Charge' as that term is defined by the Act for purposes of determining whether an automobile loan is usurious?

The Motor Vehicle Sales Finance Act, supra, regulates the installment sales of motor vehicles, including their financing and other costs. There are generally three parties to the transaction, the 'seller,' the 'buyer,' and the 'sales finance company' (which includes banks), each defined in the Motor Vehicle Sales Finance Act, supra, Sec. 2.

You have presented a specimen miscellaneous indemnity bond with your questions, which if utilized would involve another party in the transaction. Examination of the specimen miscellaneous indemnity bond shows that it is a surety contract between the surety and the lender [sales finance company], on the installment sales contract of the borrower-principal [buyer]. Simply stated, should the buyer default on the installment sales contract, the surety has agreed to indemnify the sales finance company for the loss, which is stated as the amount remaining as principal indebtedness.

The Motor Vehicle Sales Finance Act, supra, Sec. 2(16) defines 'collateral security' as:

"Collateral security' shall mean any security, other than a security interest in a motor vehicle, which is the subject of an installment sale contract, which is given to secure performance of any obligation of the buyer or of any surety or guarantor for him under an installment sale contract, extension, deferment, renewal or other revision thereof, and the term shall include the undertakings of any surety or guarantor for the buyer and any interest in encumbrance on or pledge of real or personal property other than the motor vehicle which is the subject of the installment sale contract.' (Emphasis added.)

Clearly the miscellaneous indemnity bond you propose must be considered collateral security as defined in the Motor Vehicle Sales Finance Act, Sec. 2(16), supra.

Your first question asks whether payment of the premium by a buyer for a miscellaneous indemnity bond violates the Motor Vehicle Sales Finance Act, supra, Sec. 16. The issue is whether the payment of the premium by the buyer is a permitted cost item chargeable to the buyer under the Motor Vehicle Sales Finance Act, supra. Section 16 of the Motor Vehicle Sales Finance Act, supra, governs insurance, and provides, in pertinent part, as follows:

'(a) The buyer of a motor vehicle under an installment sale contract may be required to provide insurance on such motor vehicle at the buyer's expense for the protection of the seller or subsequent holder. Such insurance shall be limited to insurance against substantial risk of damage, destruction or theft of such motor vehicle: Provided, however, That the foregoing shall not interfere with the liberty of contract of the buyer and seller to contract for travel emergency benefits pertaining to the operation of the automobile or other or additional insurance as security for or by reason of the obligation of the buyer, and inclusion of the cost of such insurance premium and said travel emergency benefits in the principal amount advanced under the installment sale contract. Such insurance shall, if possible to obtain, be written for the dual protection of the buyer and of the seller, or subsequent holder, to the extent of his interest in the motor vehicle. Such insurance shall be for an amount, and period of time, and upon terms and conditions, which are reasonable and appropriate considering the type and condition of the motor vehicle, the amount of the time balance and the schedule of payments in the installment sale contract. In the event such insurance cannot be obtained for the dual protection of the buyer and the seller, or subsequent holder, or if obtained, is cancelled by the insurance company prior to expiration, the seller, or subsequent holder, may obtain insurance to protect his interest in the motor vehicle and the buyer may be required to pay the cost thereof. In such event, the seller, or subsequent holder, shall promptly notify the buyer that such insurance cannot be obtained, or is cancelled, and credit to the buyer the difference between the amount charged by the seller for such dual protection insurance and the cost to the seller of such single interest insurance (less, in the event of cancellation, the earned premium on the dual interest insurance for the period it is in force): Provided, That whenever such insurance is written for the protection of the seller, or subsequent holder, only, neither the insurance company issuing the policy nor any other person shall be subrogated to the rights of the insured as against the buyer.' (Emphasis added.)

Clearly, the Legislature has expressly provided that insurance premiums be a cost item that the buyer must bear. However, the collateral security miscellaneous indemnity bond contemplated here is not insurance, but a contract of surety. The distinctions were explained in Moore v Capital National Bank of Lansing, 274 Mich 56, 61; 264 NW 288 (1936):

'. . . The contract of guaranty or suretyship requires three parties, the principal, the obligee and the guarantor or surety. One of indemnity requires two parties, the indemnitor and the indemnitee. The indemnitor undertakes to save the indemnitee against loss arising from an unknown or contingent event. The contract of indemnity is one of insurance. A contract of guaranty is a form of suretyship. See Stearns, Law of Surety (4th Ed), footnote p 37; Hall v Woodin, 35 Mich 67. In the instant case the 'guarantors' were not to answer for the payment of a debt of another, but were to indemnify the Capital National Bank for any loss in connection with the performance of the contract.'

It is also to be noted that in First National Bank & Trust Co of Ann Arbor v Dolph, 287 Mich 219, 225; 283 NW 35 (1938) the Court stated:

"While a surety and guarantor are not the same in all respects, they are similar in the particular that each promises to answer for the debt or default of another, the surety assuming liability as a regular party to the primary undertaking, while the guarantor does not, but his liability depends upon an independent, collateral agreement by which he undertakes to pay the obligation if the primary payor fails to do so. The authorities, in discussing certain principles common to both, often use the terms interchangeably.' In re Kelley's Estate, 173 Mich 492 (Ann Cas 1914 D, 848).' (Emphasis added.)

Furthermore, Section 13 of the Motor Vehicle Sales Finance Act, supra, enumerates with specificity the permissible contents of every installment sales contract, and the order in which items must appear. Section 13(b) provides that every contract include cash price, down payment, unpaid cash price balance, insurance premiums, other costs, principal amount financed, finance charge, time balance, and payment schedule. Section 13(c) provides for collateral security as a separate item apart from insurance premiums. Thus, the Legislature has clearly distinguished between insurance premiums and collateral security.

Finally, in Section 17 of the Motor Vehicle Sales Finance Act, supra, the Legislature has enumerated those cost items in addition to the cost of insurance premiums which are chargeable to the buyer for the installment sales contract. These additional costs include fees for filing and recording a lien, notarization fees, and registration and transfer fees. Section 17 contains no provision permitting the cost of the collateral security miscellaneous indemnity bond contract.

It is my opinion, therefore, that the purchase of an indemnity bond to secure the lender against default of the buyer under the Motor Vehicle Sales Finance Act, supra, is, in essence, collateral security, the cost of which may not be included in the installment sales contract because the Legislature has not authorized it as a permissible cost. Inclusion of the cost, however designated, would be a violation of the Motor Vehicle Sales Finance Act, supra, Sec. 16.

Having determined that payment for the collateral security miscellaneous indemnity bond may not be charged to a buyer under the Motor Vehicle Sales Finance Act, supra, it is unnecessary to address your other questions.

Frank J. Kelley

Attorney General

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