- 27 -
It is undisputed that the full contract price was due and
collected at the time the VSC was sold. The timing of the
purchaser's performance is consistent with the distinctive
economics of the VSC arrangement. The purchaser agrees to part
with his money in advance of any repair services because the
benefit for which he is paying is the transfer of risk effective
upon execution of the contract. The Dealership demands the full
contract price in advance of repair services because it has begun
to perform when it accepts this risk.
The economic consequences to the Dealership of selling a
service warranty under the VSC arrangement are not the same as
the economic consequences of selling repair services on a fee-
for-service basis. The sale converts contingent future payments
into a fixed cash deposit immediately available for satisfaction
of the Dealership's liabilities to all its contract holders. The
deposit is invested and earns income that is accumulated on the
Dealership's behalf. If the actual cost of repairs under the
Dealership's contracts turns out to exceed the deposits plus
accumulated investment income in its account, and the Dealership
has failed to insure itself or to comply with the terms of the
insurance policy, the Dealership will bear the loss. On the
other hand, if the actual cost of repairs turns out to be less
than the reserves, some or all of the unconsumed reserves revert
to the Dealership. The credit that the Dealership receives for
Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 NextLast modified: May 25, 2011