One of the most common questions I get is “what is a surety bond for auto dealers“?
It’s an insurance product, but it’s not insurance. Dealer insurance, or typically any type of insurance, has a deductible, which means that you’re going to pay the first dollar up to a certain amount. Let’s say $1,000 deductible. On a car dealer policy, that’s probably average. This means that if you cause a car accident or if your car gets stolen perhaps, you’re going to pay the first $1,000 of that claim.
So if you’ve got a $5,000 claim on your hands, then you would get a $4,000 check because you’re paying the first $1,000 of it. That’s sort of the way that works. They charge you a certain amount of it, you can usually make a down payment, and then make monthly payments after that. That’s used auto dealer insurance.
That’s not a bond. A bond is very different. A surety bond is basically a guarantee from a third party. The guarantee is coming from the surety company on behalf of the surety bond auto dealer.
Potential surety bond claims:
1) the dealer stops making his payments to the auction,
2) dealer to dealer disputes because one of them didn’t pay up;
3) maybe the dealer offered an extended warranty but didn’t pony up the service.
4) maybe they sold a car on suspect pretenses or whatever have you.
5) DMV fees.
All of those bond claims could and do happen. Then once the bond company pays out, they give you a certain amount of time to pay it back. They may charge you a little bit of an admin fee for having to push around the paper.
And then they’re going to turn around and hit your bond with a claim and cancel your bond. If that bond gets canceled, they will inform the DMV. The DMV in turn shuts down your license. You must start everything over. Meaning, going back to the pre-licensing education. You’re going to have to go through the entire process again of getting licensed, taking the DMV test, etc. because your bond got canceled since it was a bond claim.
And they want every penny back. There’s no you pay the first X amount, and then they pick up the tab on the rest. You pay every penny of all surety bond claims. This bond is saying that you are going to fulfill your obligations and if you don’t, this bond is going to step up and protect the public, protect the DMV, which is the state, which is going to protect other dealers from that dealer that’s going out and causing these claims. It’s going to protect the auction. But then the surety company is coming for you afterwards.
That’s what a surety bond is for an auto dealer, used car dealer, motor vehicle dealer, surety bond auto dealer – whatever you want to call it. In different states, the DMV requires a different bond limit.
In California, if you’re a wholesale dealer that’s selling 24 cars or less per year then you can obtain a $10,000 auto dealer bond.
If you’re selling 25 cars or more, that’s a $50,000 bond. If you’re still doing wholesale only. And guess what. If you’re retailer, $50,000 bond. If you’re an auto broker, $50,000 bond. Wholesale dealers selling 25 cars or more per year, $50,000 bond.
Here’s the carve out. If you’re a retail motorcycle only dealer then you also qualify for a $10,000 bond. Every other segment of licensees will have to have the $50,000 bond.
