Industry Voices | Warranty Rate Shrinkage: Are OEMs Suppressing Dealer Warranty Settlement Standards?

Are OEMs shortchanging dealers on warranty claims? Frustration continues to build among car dealers and other retailers: OEMs often respond to their submitted warranty labor times and parts markup rates with evasion and negotiation tactics, reimbursing at rates lower than retail labor rates, which violates laws in 49 states.

Beyond eroding dealer profitability, this stance also devalues technicians, exacerbating the nationwide technician shortage.

Not all OEMs do this, but a significant number, including some Asian and European manufacturers, have been enough to anger retailers. This is a long-standing competitive game.

"OEMs claim their warranty rate reimbursements are 'reasonable,' but in many cases, they determine reasonableness based on the rates they have already paid, rather than the definition of 'reasonable' under state warranty laws," said Mike Volkman, president and CEO of Service Department Solutions Inc., a dealership fixed operations and warranty service consulting firm in South Carolina.

Interestingly, the legislative intent in 49 states is based on the principle that OEM reimbursement must not be less than what dealers charge "retail customers" for similar warranty repairs. However, OEMs continue to "bargain," and many dealers choose to compromise because:

• The time and effort required to dispute OEM payment rates exhausts dealers.
• Even if the difference per claim is small, over the course of a year's warranty claims, it accumulates into a substantial amount of money, and dealers are reluctant to "bite the hand that feeds them."
• Too many dealers are unaware of how they are being treated, or fear potential retaliation.

Volkman believes some OEMs should be called out by name.

"These practices amount to price fixing. Some OEMs exploit legal loopholes merely to delay rate increases." — Mike Volkman

The risk lies in financial loss and further deterioration of technician recruitment—technicians are dissatisfied with the warranty labor times paid for many repairs.

Approved OEM parts and labor warranty claims contribute 15% or more of a dealer's gross profit. Warranty work accounts for 25% of a dealer's service volume. This provides a strong incentive for dealers to accurately label and correctly submit warranty parts and labor claims according to OEM warranty claim requirements.

Volkman advises dealers to pay closer attention to the details of this "subtle game."

The following case comes from an Asian import brand dealer: The dealer submitted the 100 qualifying repair orders required for OEM analysis, declaring a total labor amount of $200. After analyzing its franchise dealers in the dealer's market area, the OEM agreed to reimburse $150 instead of $200. Unfortunately, there are two problems here:

• Many state regulations have a clear definition of "reasonableness." In this case, the surrounding dealer market is not the statutory basis, but the OEM used that standard.
• The rates reported by the OEM are derived from its historical submission data after previously suppressing reimbursements.

"State regulations vary, but they all stipulate that the labor rate reimbursed by the manufacturer must not be less than the rate the dealer charges retail customers for similar repairs," said Frank O'Brien, partner at WithumSmith+Brown, an automotive accounting firm headquartered in Princeton, New Jersey, and head of its warranty reimbursement services group.

He notes that the impact lies in the broad and ever-changing interpretations by OEMs, which limit dealers from receiving full retail reimbursement rates.

Ready to fight back?

OEMs control costs by limiting rate payments; this is not a new idea. Sometimes dealers inflate claims, hoping that the final reimbursement based on claim experience will be higher than what the OEM accepts, but price suppression is common.

State laws are often straightforward on this, although some states allow various exceptions and requirements, leaving considerable room for maneuvering.

"Because OEMs are the 'big kids on the block,'" O'Brien said, "we see huge variations in how each OEM interprets state warranty rate reimbursement practices. A dealer may have multiple brands in the same market, and each OEM treats them differently."

The core issue is how the definition of "reasonable" is determined. States have written the term into law (where it exists) and specified retail rate language. Yet OEMs still rely on their own strength to pressure.

The use of the term "reasonable" by OEMs is a specific concern for dealers. Interestingly, many state regulations do include this clause, but it contradicts the regulation—the rate should be determined by what dealers charge retail customers for non-warranty repairs, not by the OEM's unilateral definition.

"We see huge differences in the interpretation of 'reasonable' among OEMs and within state laws. It's like comparing apples and oranges," O'Brien said.

Big business overall

WarrantyWeek magazinereports warranty data across industries, revealing the scale of money involved in warranty business. According to the publication, as of the end of 2024, Ford, General Motors, and Tesla collectively held $31.32 billion in warranty reserves. Reserves are funds these companies set aside to pay future warranty claims.

Ford paid $5.83 billion in warranty claims, up 22% from $4.78 billion in 2023. GM paid $4.47 billion, up 12% from $4.01 billion in 2023. Tesla paid $1.45 billion, up 19% from $1.23 billion in 2023.

These figures cover dealer reimbursements for repairs, parts, labor, towing fees, sublet, and paint charges.

"Don't forget, part of this growth stems from OEMs raising parts prices to dealers," Volkman said.

Dealer actions

Dealers don't know how to challenge OEMs' cuts to warranty rates, but just as OEMs control costs, dealers also need reimbursements to pay technician wages and commissions to stay profitable.

"But once dealers learn and understand what's happening here, they get tough and start speaking up," Volkman said.

O'Brien said: "We're seeing more dealers willing to legally fight back against OEMs that adjust their submitted labor rates. OEMs have sometimes realized how their definition of 'reasonable' favors their own interests, and dealer lawsuits and public relations actions have prompted them to moderate their rate aggressiveness."

"OEMs engage in price fixing through this reasonableness strategy," Volkman said. "Their definition of reasonableness is determined by the warranty rates they control."

A dealer might think a $30 difference between a single rate claim and reimbursement isn't worth challenging the OEM, but the difference between a retail labor claim of $197 and the OEM-approved 'reasonable' rate of $160 means a loss of $222,000 in gross profit annually for a dealer averaging 500 warranty labor hours per month.

This system warrants a challenge from the dealer community. Otherwise, OEMs will continue such practices.

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