November 6th, 2020
Auto Dealer Bond: A Comprehensive Guide
This guide provides information for insurance agents to help new and pre-owned car dealership owners on Auto Dealer bonds
What is an Auto Dealer Bond?
Auto dealer bonds, sometimes called motor vehicle dealer bonds or car dealer bonds, are government required surety bonds that auto dealers must purchase to obtain a dealer license. Auto dealer bonds protect the public from financial harm resulting from violations of licensing law committed by the auto dealer.
Most states require dealers to purchase a surety bond as a prerequisite for licensure and the bond must remain active as long as the dealer is in business.
Unlike most insurance products, surety bonds protect a third party (customers of the dealer) for acts that are violations of the law. When the surety company suffers a loss due to the dealer’s actions, the dealer must repay to the surety company any losses and sometimes court costs and other fees.
Who is Considered a “Motor Vehicle Dealer?
Most states require motor vehicle dealers to obtain a license and surety bond to operate in the state. State definitions vary on who is considered a “motor vehicle dealer”, but the general rule of thumb is that individuals who buy or sell 2 to 6 motor vehicles a year must obtain a license.
Most states have some exceptions to this general rule, including:
- Individuals not engaged in the business of selling vehicles but buys or sells the vehicle for personal use
- A bank, trust or lending institution authorized federally to dispose of or repossess motor vehicles
- Government agencies acting in their official capacity
- Appointees of a court disposing of estate assets
Some states only require used auto dealers to obtain a surety bond, and may require different bond amounts based on the class of dealer license (new, used, wholesale, etc).
Who Regulates Auto Dealers?
State government agencies (usually the DMV) regulate auto dealers based on license law written by each state’s legislature.
Governments enforce the law by instituting licensing requirements like dealer education programs, background checks, and a surety bond. The surety bond ensures the public will be compensated if the dealer fails to comply with the law.
How Much Does an Auto Dealer Bond Cost?
Motor Vehicle Dealer surety bonds generally cost between 0.5% to 10% of the bond amount per year. Why such a large spread? Insurance companies determine the rate based on a number of factors including your customer’s personal credit and experience.
Dealers with the best credit and business experience can expect to pay the lowest rates, while dealers with poor credit will pay higher rates. The chart below offers a quick reference for the approximate bond cost on a $50,000 Auto Dealer bond
$50,000 Auto Dealer Bond Cost
|Credit Score*||Bond Cost (1 year)|
|660 – 689||$750|
|620 – 659||$1,000|
|580 – 619||$1,500|
|500 – 579||$2,625|
|480 – 499||$4,500|
*The credit score ranges do not include other factors that may result in a change to the annual premium offered to your customers, including but not limited to, years of experience and underlying credit factors contained within the business owner’s credit report.
Do Surety Companies Offer Financing on Dealer Bonds?
Most motor vehicle dealer bond premiums can be financed. To be eligible, the bond must have a cancellation provision in the bond form. Premium finance companies usually charge a finance fee and interest rate to provide the financing.
BondExchange offers in-house payment plans for bond premiums over $500. Our payment plans are interest free and can be set up instantly online with a customer credit card and a few clicks. We offer this option automatically for car dealer bonds.
Is a Credit Check Required to Purchase a Dealer Bond?
Yes, surety underwriters will review your customer’s personal credit to determine their eligibility and rate for motor vehicle dealer bonds. Most carriers use a “soft check”, so the credit review will not affect the applicant’s credit.
Underwriters will consider other aspects of the dealers application, but credit scores and their underlying data remain the primary underwriting tool for auto dealer bonds.
What Information is Collected for an Auto Dealer Bond Application?
Surety company underwriters will collect and review the following information to determine eligibility and rate for an auto dealer bond:
- Dealership Legal Name and DBA if applicable
- Address and Phone Number
- Years in Business
- Owner(s) Name, Address, and Social Security Number
For larger bond amounts (usually over $50,000), some surety companies will review the businesses financial statement. Underwriters will be looking for businesses with sufficient working capital (current assets – current liabilities) and a history of profitability.
How Does an Auto Dealer File Their Bond?
Surety bond companies will provide the dealer with a completed surety bond to be filed with the relevant licensing authority. Most states require the original bond with a raised surety company seal to be filed by mail.
Surety companies should include the following information on most bond forms:
- Legal name and address of entity/individual(s) buying the bond
- Surety company’s name, address and phone number
- Bond amount
- Signatures of the surety representative
- Date the bond is effective and issued
- Corporate seal of the surety company
- Power of Attorney
What Can Dealers Do to Avoid Claims on their Bond?
To avoid claims on a Motor Vehicle Dealer Bond, dealers must adhere to all dealer regulations in their state. Best practices for avoiding claims include the following:
- Do not engage, or allow representatives of the business to engage, in any acts of fraud
- Pay sellers of vehicles promptly and in full
- Transfer all vehicle titles when sold
- Do not engage in any illegal selling practices
- Honor all warranty agreements
- Pay taxes and fees on time
How Can an Insurance Agent Obtain an Auto Dealer Surety Bond?
BondExchange makes obtaining a Motor Dealer Bond easy. Simply login to your account, select the state the bond is needed in, and use our keyword search to find the “auto dealer” bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. Our friendly underwriting staff is available by phone (800) 438-1162, email or chat from 7:30 AM to 7:00 PM EST to assist you.
At BondExchange, our 40 years of experience, leading technology, and access to markets ensures that we have the knowledge and resources to provide your clients with fast and friendly service whether obtaining quotes or issuing bonds.
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Which States Require Dealers to Purchase an Auto Dealer Bond?
All 50 states and the District of Columbia require dealers to purchase an auto dealer bond. To view our comprehensive state-by-state guides, click the links below or download our eBook below:
What Other Insurance Products Can Agents Offer Dealers?
Most states require dealers purchase garage liability insurance on all vehicles with dealer plates. Dealers with employees will also need to purchase worker’s compensation insurance in most states. Bonds are our only business at BondExchange, so we do not issue any form of liability insurance, but our agents often utilize brokers for this specific line of business. A list of brokers in this space can be found here.