Secondhand Dealer Bond: A Comprehensive Guide
This guide provides information for insurance agents to help their customers obtain a Secondhand Dealer bond.
What is a Secondhand Dealer Bond?
Secondhand dealer bonds are government-required surety bonds that secondhand dealers must purchase as a prerequisite to selling or exchanging previously owned goods. Secondhand dealer bonds ensure that the public will receive compensation for financial harm if the dealer violates the terms of their license. Specifically, these bonds protect the public from financial harm if the secondhand dealer commits fraud or engages in unethical business practices.
For example, if a customer unknowingly purchases a damaged or illegally obtained item from a secondhand dealer and the dealer does not provide a full refund, the customer may file a claim on the secondhand dealer’s bond to receive compensation.
Many states and local governments require secondhand dealers to purchase a surety bond as a prerequisite to obtaining a business license. The bond must remain active for as long as the secondhand dealer remains in business. Unlike most insurance products, surety bonds protect a third party (consumers purchasing secondhand property) from acts that violate the law. When the surety company suffers a loss due to the secondhand dealer’s actions, the secondhand dealer must repay the surety company for any losses and sometimes court costs or other fees.
Who is Considered a “Secondhand Dealer”?
Most states and local governments require secondhand dealers to apply for a license and purchase a surety bond before conducting business. State definitions vary on who is considered a “secondhand dealer”, but a secondhand dealer is generally defined as a person who purchases or collects personal property from a person who is not a wholesaler, for the purpose of reselling or exchanging the property.
General exceptions to this definition include:
- Licensed pawnbrokers or precious metal dealers
- Licensed dealers selling used automobiles
- Retail stores providing trade-ins or exchanges of goods
Each regulatory agency has its own set of rules on what types of sales fall under the scope of a secondhand dealer, so it is important to check your customer’s local regulations. Some local governments also determine the bond amount or the license type required based on the type of goods sold.
Who Regulates Secondhand Dealers?
State government agencies and local municipalities regulate secondhand dealers based on licensing laws written by state legislatures and city councils. Governments, specifically local police departments, enforce the law by instituting requirements such as a business license and/or permit, fingerprinting, background checks, and a surety bond. The surety bond ensures the public will be compensated if the secondhand dealer fails to comply with the law.
How Much Does a Secondhand Dealer Bond Cost?
Depending on where the secondhand dealer is conducting business, a secondhand dealer bond can either cost a fixed rate (typically $100 per year) or a percentage of the bond amount paid annually. Secondhand dealer bonds are typically considered low-risk, so surety companies will usually not run a credit check before issuing one. However, companies will run a credit check for higher-risk secondhand dealer bonds to determine eligibility and pricing.
For higher-risk bonds, secondhand dealers with good credit and business experience can expect to pay the lowest rates, while secondhand dealers with poor credit will pay higher rates. Below is an example of the cost of a $10,000 secondhand dealer bond with a credit requirement.
$10,000 Secondhand Dealer Bond Cost
| Credit Score* | Bond Cost (1 Year) | Bond Cost (1 month) |
|---|---|---|
| 625+ | $100 | $10 |
| 600 – 624 | $150 | $15 |
| 550 – 599 | $250 | $25 |
| 525 – 549 | $300 | $30 |
| 500 – 524 | $500 | $50 |
*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.
BondExchange now offers monthly pay-as-you-go subscriptions for surety bonds. Your customers are able to purchase their bonds on a monthly basis and cancel them anytime. Learn more here.
How Does a Secondhand Dealer File Their Bond?
Surety bond companies will provide the secondhand dealer with a completed bond form to be filed with the relevant government agency. Most states require the original bond with a raised surety company seal to be filed by mail or in person.
Surety companies should include the following information on most bond forms
- Legal name of the entity/individual(s) buying the bond
- Surety company’s name and state of incorporation
- Name of the obligee and the license type being applied for
- Date the bond is signed and goes into effect
- Bond amount
- Power of Attorney
What Can Secondhand Dealers Do to Avoid Claims on Their Bond?
To avoid claims on a secondhand dealer bond, secondhand dealers must adhere to all local and state regulations governing their license. Best practices for avoiding claims include the following:
- Do not engage in any acts of fraud
- Adhere to all consumer contracts
- Do not purchase or sell any stolen goods
- Accurately represent all goods up for sale
- Provide all goods that have been paid for
How Can an Insurance Agent Obtain a Secondhand Dealer Surety Bond?
BondExchange makes obtaining a Secondhand Dealer Bond easy. Simply log in to your account, select the state the bond is needed in, and use our keyword search to find the “Secondhand Dealer” bond in our database. Don’t have a login? Gain access 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 ensure 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 Secondhand Dealers to Purchase a Bond?
10 states either require secondhand dealers to purchase a bond or have municipalities that do. The following states and municipalities require secondhand dealers to purchase a surety bond:
| State | Bond Limit |
|---|---|
| California |
|
| Connecticut |
|
| Kansas |
|
| Michigan |
|
| North Dakota |
|
| Nevada |
|
| New Jersey |
|
| New York |
|
| Texas | |
| Washington |
|
What Other Insurance Products Can Agents Offer Secondhand Dealers?
Some municipalities require secondhand dealers to obtain liability insurance coverage against possible loss or damages of merchandise. Secondhand dealers with employees will also need to purchase worker’s compensation insurance in some states. Bonds are our only business at BondExchange, so we do not issue any other types of insurance, but our agents often utilize brokers for this specific line of business. Agents can access a list of brokers here.