What is a Motor Vehicle Rental Company Bond?
Motor vehicle rental company 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 auto rental and leasing activity as a condition of licensure for most motor vehicle passenger rental companies.
Motor vehicle rental company 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 an auto rental bond, will also be referred to as the “surety company” or the “bond company”. Vehicle rental company bonds refer to the rental company as the Principal, the surety bond company as the Obligor and the state DMV as the Obligee.
Why is a Motor Vehicle Rental Company Bond required?
Motor vehicle rental companies are required to purchase auto rental 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 motor vehicle rental company breaking license law. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed rental company 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, rental companies 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 Rental Company license bond violations triggering a bond payout may include a rental company providing false information regarding the vehicle’s condition, or any other fraudulent or dishonest causing financial harm to a customer.
How much does a Motor Vehicle Rental Company Bond cost?
Motor vehicle rental company bonds generally cost between 1% and 5% of the bond limit.
Example: $25,000 Motor Vehicle Rental Company Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|700 or above||1.0%||$250|
The actual cost of a specific motor vehicle rental company bond can vary widely depending on the risk associated with the state regulations and the auto rental company’s license history, experience and creditworthiness.
Is a Credit Check Required for Motor Vehicle Rental Company Bonds?
Credit checks are required for most motor vehicle rental companies. 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 Motor Vehicle Rental Company Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and rental company(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 auto rental company 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.
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 rental company 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. Auto rental 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 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 rental company failing to pay premiums due, claim payouts, or material changes in the dealer’s credit score. Motor vehicle rental company 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 rental company bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.
Where can I find more information on a specific Motor Vehicle Rental Company Bond?
To find information on specific auto rental company license bonds, select the state and use our search function to find any requirement across the country.