The automobile rental and leasing industries can say goodbye to vicarious tort liability, and the ABS market may soon be able to say hello to more rental fleet deals. A law put into effect last week eliminated vicarious liability and will significantly lighten insurance costs on automobile rental and leasing companies and is expected to spur activity in regional markets such as New York, where those costs caused many manufacturers to exit the business altogether.

Last week, President George W. Bush signed the Highway Bill, containing a provision eliminating vicarious liability on automobile rental and leasing companies. Vicarious liability allows a plaintiff to sue the finance company title holder of a vehicle in the event of an accident. The ban on vicarious liability became effective immediately upon signing.

Until last week, New York, Maine and Washington, D.C. had no caps on vicarious liability, and Florida, California and Connecticut had high liability caps. "This new law is going to open or re-open markets that rental and leasing companies have avoided," said Tom James, vice president of government relations for the Truck Rental and Leasing Association.

On the day of the announcement, the Big Three U.S. auto manufacturers, DaimlerChrysler Corp., Ford Motor Co. and General Motors Corp. all said they would resume auto leasing activity in New York. American Honda Finance Corp. also said it would lower its lease acquisition fees as a result of the change.

Eliminating vicarious liability "can potentially result in an increase in rental and lease activity in these states, and subsequently a need for additional funding from these areas," said Lena Katsnelson, an associate director in the ABS group with Fitch Ratings. "The players in the rental and lease market may elect to fund this growth through ABS issuance," she added.

"Everybody wins in this," said James. With interest rates and fuel costs on the rise, leasing is likely to become a more attractive option to consumers, and the removal of the vicarious liability law comes at "just the right time," added James. He summed up that the lightened liability would be a general economic boost and would likely spur securitization activity as well.

In what has been an active year in the auto sector, the market has generated nearly $10 billion in rental and lease-related ABS versus just $3 billion last year at this time. The auto sector as a whole has generated nearly $70 billion thus far, compared to $55 billion at mid-August 2004.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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