What is an Auto Dealer Bond?
Motor vehicle dealer bonds are a subset of the broader license bond category that must be filed with the state government agency (usually the DMV) responsible for regulating car dealers as a condition of licensure for most used auto dealers, motorcycle and ATV dealers, and new car franchise dealers.
Auto dealer bonds must be issued by insurance carriers admitted in the state where the bond is needed. The insurance carrier issuing any surety bond, such as a dealer bond, will also be referred to as the “surety company” or the “bond company”. Vehicle dealer bonds refer to the dealer as the Principal, the surety bond company as the Obligor and the state DMV as the Obligee.
Why is a motor vehicle dealer bond required?
Dealers are required to purchase motor vehicle dealer bonds by state statutes to protect the state government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a dealer breaking MVD license law. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed dealer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the dealer license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, dealers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Dealer license bond violations triggering a bond payout may include a wholesale car dealer bouncing a check at auction or a used dealer failing to deliver proper title to a purchaser.
How much does an auto dealer bond cost?
Auto dealer license bonds generally cost between 1% and 10% of the bond limit.
Example: $25,000 Used Auto Dealer Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or above | 1.0% | $250 |
| 650 - 679 | 1.5% | $375 |
| 625 - 649 | 2.0% | $500 |
| 600 - 624 | 3.0% | $750 |
| 550 - 559 | 5.0% | $1,250 |
| 500 - 549 | 7.0% | $1,750 |
| 499 or below | 10.0% | $2,500 |
The actual cost of a specific auto dealer bond can vary widely depending on the risk associated with the state regulations and the auto dealer’s license history, experience and creditworthiness.
Is a Credit Check Required for Auto Dealer Bonds?
Credit checks are required for most auto dealer bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond, and some companies may be less stringent than others.
How does the wording in the bond form impact the cost of a dealer bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and dealer (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the dealer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a dealer license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the
amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 dealer bond with an aggregate limit of $15,000 will pay out no
more than $15,000, regardless of the number of damaged parties or claim occurrences. Dealer bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the dealer and government agency requiring the bond with the cancellation taking effect within a set period of
time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the dealer failing to pay premiums due, claim payouts, or material changes in the dealer’s
credit score. Dealer bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty
to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Auto dealer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.