Auto dealers in all 50 states must obtain a surety bond before they’re granted a license to do business. Bond requirements are so common because they protect the auto-buying public and help to regulate the industry at large. Auto dealers can’t, under any circumstance, avoid getting a bond and keeping it active for as long as they’re in business. What they can avoid is bond claims – which should be a top priority for both new and long-running dealerships. In this blog, we will explain why bond claims are so damaging to an auto dealership and how to prevent them over the long term.
What a Bond Claim Means for an Auto Dealer
A surety bond agreement works like this: If an auto dealer engages in unlawful or unethical behavior that harms another party monetarily, that party may file a claim against the surety bond seeking damages. As long as the details of the claims are true, the surety company that issues and backs the bond pays the full amount of the claim without delay. After paying, the surety focuses on collecting the entire amount of the claim, which can be in the tens of thousands of dollars, from the auto dealer who triggered it in the first place.
Under the bond agreement, the bonded auto dealer has financial responsibility for ALL valid claims, meaning they must either pay the party that filed the claim or pay the surety company that settled the claim. Paying for claims costs vastly more than the cost of the bond itself. In addition, it can damage an auto dealer’s reputation as a trustworthy seller and make it harder to attract customers. A claim might also invalidate the bond agreement. In that case, an auto dealer would need to secure a new surety bond immediately or risk losing the business license. Considering the deep and lasting consequences of claims, auto dealers must avoid them at all costs.
A Process to Avoid Bond Claims
Most businesses, auto dealerships included, put processes in places to avoid risk. A bond claim represents a substantial risk as it not only will cost the dealership money, but also affect their licensure. Making sure this financial shock and/or license jeopardy doesn’t disrupt a business takes a process of its own; one that’s comprehensive and consistent so that it systematically prevents the possibility of a claim. That process will look a little different at every dealership, but all of them can use the same method to devise the details:
- Study the Bond – Read the entire bond agreement to understand exactly where, when, why, and how it obligates the bond holder to pay for claims. Even when this information doesn’t prevent a claim, it may help to minimize the cost. Ideally, the surety company that issues the bond offers to walk the bond holder through the agreement, highlight the important information, and explain anything that doesn’t make sense.
- Know What’s Prohibited – Every state has it’s own set of laws to regulate auto dealerships. Broadly speaking, any behavior that violates state law could potentially trigger a valid claim against the bond. That could include tampering with an odometer, failing to report a sale or pay for a vehicle, committing fraud, or refusing to honor a warranty. This list is far from complete, and the exact details are different in every state, so individual auto dealers will need to investigate what specific behaviors the law prohibits. Then, they must put policies/practices in place that keep the business on the right side of the law (and the bond).
- Understand Who Can Be a Claimant – Most claims against Auto Dealer Surety Bond come from auto buyers, but they’re not the only ones with the right to seek damages. Someone selling a vehicle with the help an auto dealer’s help can also file a claim, as can a retail lender that’s financing an auto buyer. This is another instance where auto dealers need to study the details and build their business to avoid claims from any source.
What to Do When Someone Files a Bond Claim
The process can go one of two ways. If someone files a fraudulent claim against the bond, the surety company will refuse payment and the auto dealer won’t pay anything. If the claim is valid, though, the surety will obligated to pay. They will then attempt to collect that same amount from the auto dealer with interest and fees included. Because of the added costs, it’s less expensive to settle valid claims before they proceed through the surety bond process. Alternately, there’s no reason to settle claims that will obviously fall apart under investigation. When there’s uncertainty about whether a claim is true/false or if it makes sense to settle or refuse, reach out to the surety bond provider for guidance. The best ones in the business look out for the interests of the auto dealers they bond.