Alabama Auto Dealer Bond

What Is the Purpose of the Alabama Auto Dealer Bond?

Alabama law requires car dealers to file a surety bond with the Motor Vehicle Division of the Alabama Department of Revenue (DOR), Motor Vehicle Division in order to obtain and maintain a license to sell vehicles. The bond represents a guarantee from the surety company that auto dealers will pay for claims proved valid by the DOR for reasons such as a check bouncing auction, improper disclosures, or nonpayment of taxes to the Department.

What Businesses Need the Auto Dealer Bond in Alabama? 

Any person who sells new or used vehicles, including trailers and motorcycles, either to the public or wholesale, must be licensed as a motor vehicle dealership in Alabama. Automotive rebuilders must also be licensed. All dealership types must hold a Master Dealer License with the Department of Revenue. In order to get the license and keep it active, the Auto Dealer Bond is obligatory. 

As of October 1st, 2020, and with the passing of Alabama House Bill 393 (AL HB393), the Master Dealer License encompasses the following dealership types: new vehicle dealers, used vehicle dealers, rebuilders, and wholesale dealers. Prior to AL HB393, the license types were separate, each with unique requirements. 

What Do Surety Underwriters Need to Know?

In general, Motor Vehicle Dealer Bonds are considered high risk when compared to other industries. The historical loss ratios for Alabama Auto Dealer Bonds sit around 9% for auto dealers selling new cars (aka “franchise dealers”) and 18% for used vehicle dealers. In addition to creating a single Master Dealer License, the new Alabama House Bill increased the bond limit from $25,000 to $50,000, substantially increasing the exposure to carriers, particularly for used car dealers. The main reasoning behind the bond increase is to combat “curb stoning” or “curbing”, a practice whereby a dealer acts as a private seller in order to avoid state regulations. With curb stoning being a common occurrence, the Auto Dealer Bond limit was raised in Alabama to enable more funds for large claims in the full amount of the bond. The Alabama DOR reports that claims are often in the full amount of the previous bond limit of $25,000. The bond amount being doubled may result in more stringent underwriting, such as higher premium percentages to account for losses incurred.

Even though losses occur for Auto Dealer Bonds, there is mitigation by the Alabama courts and the Department of Revenue which allows dealers to resolve disputes before the bond is used for reimbursement. Claims result from unfair dealer practices including, but not limited to: improper recording of sales, selling a vehicle without a title, and failure to remit license fees.

Consumers wishing to file a bond claim in Alabama must first go to court and receive a final judgment. When a final judgment is obtained, the DOR steps in to investigate the validity meaning that even though the court has made a decision the DOR must evaluate the documents to decide whether or not to pursue the bond. DOR justified claims are sent to the Surety who will perform a thorough review of the claim details. The DOR will often seek civil penalties directly from the dealer prior to pursuing the bond for reimbursement of financial damages. Prohibited dealer actions can result in civil penalties in various amounts depending on the violation(s). Nonpayment of civil fees leads to using the license bond as restitution.

The claim process mitigates some of the risks, but underwriters still face challenges. The Alabama DMV does not make public information sufficient for underwriters to determine if an auto dealer applying for a bond had a past claim. The DOR provides records of Alabama auto dealers which states if their license status is active or revoked. However, a revoked status can be for a number of reasons. Underwriters typically evaluate the dealership owner’s personal credit and years in business to determine an appropriate rate.

What Do Surety Claims Handlers Need to Know?

The new Alabama dealer law revised motor vehicle dealer regulations from the Code of Alabama 1975 to include more details on when the bond can be used for penalties.

When a claim reaches the Surety, it has already been investigated by the Department of Revenue (DOR). In cases where the claim is filed by the customer, there are two governmental entities involved: the court which has given final judgment, and the DOR who investigates the legitimacy. By the time the surety company receives a claim, the court and the DOR have conducted a thorough review of documentation surrounding the dispute. Still, surety companies have 30 days to conduct a final investigation upon receiving notice from the DOR.

All Alabama dealerships are required to hold blanket motor vehicle liability insurance in addition to the license bond. Liability insurance protects the dealership against things like customer bodily injury or property damage that happens on the lot. Depending on the scenario, this policy may be used prior to the bond. Minimum limits are $25,000 for bodily injury per accident, $50,000 for combined bodily injury per accident, $25,00 for property damage per accident, or a combined single limit of $75,000 per accident. Failure to uphold liability insurance can result in a civil fine of $5,000 which can be assessed against the bond.

Can a Motor Vehicle Dealer Avoid the Bond Requirement? 

No. The Alabama Motor Vehicle Division of the DOR requires a surety bond for all active auto dealers and will not accept cash deposits, irrevocable letters of credit (“ILOC”), or any other form of alternative collateral or guarantees in lieu of the bond. To keep their license active, Alabama dealers must maintain an active bond on file with the DOR for the entirety of the company’s operations. 

How Much Does the Dealer Bond Cost in Alabama?

Car dealer bonds in Alabama now cost between $500 and $2,500 depending on the credit and license status of the dealer. Because most carriers set their premium as a percentage of the bond penal sum, the recent legislation doubling the Alabama Auto Dealer Bond limit from $25,000 to $50,000, likely also doubled the bond premiums. The cost is anywhere from 1% to 5% of the bond amount based on the years in business and the personal credit of the dealer.

How Is the Bond Filed With the Alabama Department of Revenue?

Once the surety company receives payment of the bond premium, the carrier must sign and seal an original copy of the bond and send it to the bond principal (the car dealer) along with the power of attorney (gives the surety agent legal authority to act on behalf of the surety company). The Department of Revenue, Motor Vehicle Division, requires the dealership owner(s) to sign the bond prior to filing it. If the bond and power of attorney are sent separately, the DOR will return paperwork to the sender - all paperwork is to be sent together. 

Each dealership entity type requires the bond form to be filled out in a specific way. In order to properly execute a bond form, refer to the entity type examples below:

All documentation must be sent to the following location:

Alabama Department of Revenue, Motor Vehicle Division
PO Box 327643
Montgomery, AL 36132-7643

Can the Alabama Auto Dealer Bond Bond Be Cancelled?

Yes, the Surety can request cancellation of the bond with the DOR for any reason with a 60-day written notice; the bond will remain in effect during those 60 days. Any unused premium at the time of cancellation will be returned to the auto dealer net of any cancellation or other fees. Auto Dealer Bonds often have a $100 minimum earned premium, which could reduce the amount of premium returned depending on the amount of the premium and when during the term the bond was cancelled.

Do Motor Vehicle Dealer Bonds in Alabama Renew?

Yes, licensed auto dealers must keep the bond active for as long as they are in business. The bond is continuous until cancelled so will remain outstanding as long as the renewal premium is paid as billed and the Surety does not cancel for any other reason. The Alabama DOR does not require surety companies or dealers to file any paperwork to renew the bond. However, if the dealer purchases a bond from a different surety company instead of renewing with their existing carrier, the new bond must be filed per the instructions in the section above. The most common bond terms range from one to three years.