What is an Motor Vehicle Wrecker Bond?
Motor vehicle wrecker bonds are a subset of the broader license bond category that must be filed with the government agency responsible for regulating auto repair shops as a condition of licensure for most auto wreckers, rebuilders, repairers or salvagers. Many states handle motor vehicle wreckers and dismantler licensing directly, while some local municipalities regulate these business activities.
Motor vehicle wrecker 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 wrecker bond, will also be referred to as the “surety company” or the “bond company”. Auto wrecker bonds refer to the wrecker as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Motor Vehicle Wrecker Bond required?
Motor vehicle wreckers are required to purchase license 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 auto shop breaking license law. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed motor vehicle wrecker will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the auto wrecker 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, motor vehicle wreckers 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 wrecker license bond violations triggering a bond payout may include an auto wrecker transporting a motor vehicle with an expired or suspended license, failing to meet safety requirements specified in their license, or transporting a vehicle to a location not agreed upon by the vehicle owner.
How much does an Motor Vehicle Wrecker Bond cost?
Motor vehicle wrecker bonds generally cost between 1% and 5% of the bond limit.
Example: $50,000 Motor Vehicle Wrecker Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|650 or above||1.0%||$500|
The actual cost of a specific motor vehicle wrecker bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the auto wrecker’s license history, experience and creditworthiness. Motor vehicle wrecker 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 Wrecker Bonds?
Credit checks are required for most auto wrecker bonds. Motor vehicle wrecker bonds required by cities, townships or counties with bond amounts under $25,000 generally do not require a credit check to purchase the bond. 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 Motor Vehicle Wrecker Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and wrecker/rebuilder/salvager (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 wrecker via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a motor vehicle wrecker 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 auto wrecker 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 wrecker 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 auto wrecker failing to pay premiums due, claim payouts, or material changes in the auto wrecker’s credit score. Motor vehicle wrecker 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”). Auto wrecker bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.