What is a Motor Vehicle Manufacturer Bond?
Motor vehicle manufacturer license bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating motor vehicle manufacturing in the manufacturer’s jurisdiction as a condition of licensure car, truck and SUV manufacturers.
Motor vehicle manufacturer license bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a motor vehicle manufacturer bond, will also be referred to as the “surety company” or the “bond company”. Motor vehicle manufacturer license bonds refer to the manufacturer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Motor Vehicle Manufacturer Bond required?
Motor vehicle manufacturers are required to purchase license bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a manufacturer breaking state vehicle laws including warranty provisions. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed motor vehicle manufacturer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the vehicle 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, manufacturers 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.
Motor vehicle manufacturer license bond violations triggering a bond payout may include a manufacturer failing to comply with the terms of a vehicle warranty or failing to transfer vehicles to a dealer.
How much does a Motor Vehicle Manufacturer Bond cost?
Motor Vehicle Manufacturer license bonds generally cost between 1.5% and 10% of the bond limit.
Example: $10,000 Motor Vehicle Manufacturer Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|650 or above||1.5%||$150|
|499 or below||10.0%||$1,000|
The actual cost of a specific motor vehicle manufacturer license bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the manufacturer’s license history, experience and creditworthiness. Motor vehicle manufacturer bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Motor Vehicle Manufacturer Bonds?
Credit checks are required for motor vehicle manufacturer bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of a Motor Vehicle Manufacturer Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and motor vehicle manufacturer (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 manufacturer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a motor vehicle manufacturer license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
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 motor vehicle manufacturer 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. Motor vehicle manufacturer bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the manufacturer 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 manufacturer failing to pay premiums due, claim payouts, or material changes in the motor vehicle manufacturer’s credit score. Motor vehicle manufacturer 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.
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”). Motor vehicle manufacturer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.