Auto dealers are businesses and/or individuals that contract with automakers to buy new vehicles and sell them to customers; most also deal in used vehicles.
Insurance on the commercial side of auto sales is more complex and comprehensive, covering a greater and more potentially costly range of risks than personal auto insurance plans, from employee errors to inclement weather (damaging displayed vehicles) and much more.
In this comprehensive guide, we will cover the various kinds of auto dealers, the insurance policies they typically sign up for, associated costs, and more so you can navigate this more technical area with a clear understanding of the basics.
In the same way that many household products are available at mom-and-pop shops, popular retail chains, and wholesale outlets, auto dealerships are classified as retail, wholesale, or specialty vehicle sellers.
When the everyday consumer hears the phrase “car dealership,” they likely picture a retail dealership. A retail dealer license allows these dealerships to sell new and used vehicles directly to the public, just like any other retail store buying wholesale and offering their wares at standardized prices. If the auto dealer is advertising to the general public, it’s very likely they are a retail dealer.
Where the retail vehicle dealer is the customer-facing arm of commercial vehicle sales, the wholesale dealer operates behind the scenes, buying cars (usually in bulk) and reselling them to other dealerships or sellers. Here’s a succinct breakdown covering more differences between retail and wholesale auto dealers.
Wholesalers watch the market closely in order to buy low and sell high, whether that’s buying at auction and selling to dealerships for a profit or buying from dealerships struggling to offload inventory and selling to other dealerships.
Some things you just can’t find at the “grocery store.” In the auto sales world, when you need to step outside of the conventional car or truck to purchase a tram or trolley, rare import, vintage car, or custom-built vehicle, you seek out a specialty vehicle dealer. As you might guess, carrying this kind of vehicle inventory presents both unique opportunities and risks to specialty dealers, often impacting their insurance needs.
The factors determining which auto dealer insurance requirements a particular business is beholden to go well beyond the type of dealership (per the above breakdown), encompassing various factors such as size, region of operation, number of employees, and more.
Keeping these circumstances in mind, here are the types of insurance auto dealers need to cover potentially detrimental risks.
Commercial general liability insurance protects auto dealers (and many other businesses) from a range of claims relating to physical injury, libel, property damage, false advertising, and more.
Commercial general liability insurance is also known as:
For example, if a customer suffers an injury on the auto dealership’s property, the dealer’s general liability insurance plan may cover any damages related to the claim.
Most general liability insurance policies focus on covering damages to customers or other parties harmed in some way by the dealership; it’s important to distinguish this from worker’s compensation or commercial property insurance plans, which protect the dealership’s workers and property.
Since virtually every auto dealership that interfaces directly with customers faces the above risks (bodily injury of a customer, libel claims, etc.), commercial general liability insurance is a crucial auto dealer insurance policy for minimizing the financial impact of these potentially costly claims.
Especially for the many car dealerships that provide auto maintenance and/or repair services, workers’ compensation insurance policies can save policyholders tens or even hundreds of thousands of dollars in damages from injured employees suing them.
Speaking of, this kind of auto dealer insurance program is of course only relevant for entities that employ workers. Depending on the specific policy and the context, workers’ compensation insurance generally covers the medical expenses of the injured (ambulance rides, medical care, physical therapy, etc.), along with a portion of the wages that the injured employee will be missing out on.
For example, if a service technician on the auto dealership’s lot slips on a wet surface and injures their back, they may pursue workers’ comp benefits for their medical expenses and lost wages.
For any auto dealership (or other business) employing workers, workers’ compensation is an extremely important form of car dealer insurance considering the potential costliness of unprotected claims against the business by injured employees.
Commonly abbreviated as “E&O insurance,” errors and omissions insurance provides a safety net to catch problems (affecting customers) not covered by general liability insurance. This kind of auto dealers insurance protects dealerships from damages caused by, as the name implies, the policyholder’s mistakes.
For example, if a customer slips and falls on dealership property and sustains an injury, commercial general liability will likely cover it, but what if a dealership employee makes a very costly error when filling out car loan papers with customers?
It’s issues of “professional negligence” like these, often amounting to honest (but costly) mistakes, that are covered by errors and omissions insurance policies.
Because life is messy and accidents can take many forms, errors and omissions insurance policies often cover a very wide range of potential issues, from clerical errors to accidentally damaging cars from your vehicle inventory before selling them and more.
Dealership or otherwise, if you operate a business on commercial property, the inevitability of human error makes errors and omissions insurance a high priority on the list of auto dealer insurance requirements for protecting your business.
If you own a car, you will inevitably need to leave it at a garage—possibly overnight—for repairs, detailing, storage, or another purpose at some point.
Garagekeepers liability insurance (or garage liability insurance) is a form of car insurance held by the service garage or other business holding your vehicle that protects your vehicle from various kinds of physical damage as it is being kept at their business.
For example, if inclement weather or a fire damages your vehicle while it is parked at a garage, garage liability may cover the expense. In many cases, theft and vandalism are also covered. As always, the level of coverage varies based on the specific auto dealer insurance policy.
Especially considering the fact that severe weather or fires can inflict serious physical damage on dozens of parked cars in one fell swoop, garagekeepers liability insurance can save a business hundreds of thousands of dollars.
Dealer plates are special, temporary license plates exclusively available to licensed auto dealers. With this kind of plate, the dealer can legally drive and ship unregistered vehicles within their vehicle inventory on public roadways, including offering test drives to customers.
Thanks to dealer plate insurance, these vehicles can still be protected while in this period of unregistered use.
Similar to personal auto insurance, dealer plate insurance plans will provide coverage for damages that happen on test drives (accidents, losses, etc.), including bodily injury in some cases.
Dealer plate insurance is a must for any dealership that doesn’t want to roll the dice every time a customer takes the wheel of a car they’ve never driven before.
More than just providing a fund for covering claims, an auto dealer bond (also known as a motor vehicle dealer bond) signals to a dealership’s customers and potential partners that the business has invested in its own reliability and upstanding practices.
Specifically, auto dealer bonds cover claims of unreliable and/or unethical pricing, service, customer service, and other key practices.
For example, if a dealer tampers with odometers to sell used cars at higher prices, any customer negatively affected by this deceptive practice may be compensated from the auto dealer bond. The auto dealer will then compensate the bond for the claim.
As for determining the optimal bond amount, this can vary significantly based on state rules and regulations as well as the type and size of the dealership. States often enforce a minimum auto dealer bond amount ($50,000 in some states) to comply with regulations.
Especially for those not accustomed to an auto commercial insurance policy, it can be a bit flustering to weigh and compare all the different options outlined above.
One way to clearly group these policies in your mind is to draw a line between auto dealer bonds and the various insurance plans we’ve reviewed (general liability, errors & omissions, garage keepers insurance, etc.), as these two categories have clearly distinct purposes.
Where an auto dealer bond is intended to protect a dealership’s customers from unethical or otherwise harmful business practices, insurance policies aim to protect dealers and their vehicle inventory from the wide spectrum of unavoidable risks associated with operating their car dealership.
Even similar occurrences may be approached in opposite ways (regarding who receives compensation) depending on which side of this divide the plan is on. For example, an auto dealer bond may compensate the customer when the dealership makes a mistake that harms them somehow, while errors and omissions insurance would compensate the dealership for the same event.
Because auto dealers' insurance plans can vary greatly in cost based on each policyholder’s coverage needs, location, size, history of claims, and other factors, it’s impossible to give “standardized” insurance rates without delving into these factors first.
The best way to estimate the cost of car dealer insurance is to speak directly with well-qualified auto dealer insurance companies, who will assess these factors and others as they apply to your specific business to prioritize your most needed policies and provide cost estimates.
As for how insurance companies determine insurance rates for each business, many policies are priced in proportion to the cost of the covered assets. For example, some workers’ compensation insurance plans will charge businesses a certain amount of money for every $100 in payroll.
Though these commonly used pricing methods help to provide context, there is no substitute for direct consultation with an insurance provider when it comes to accurately gauge your real, total insurance costs.
Like an auto dealer insurance policy, pricing an auto dealer bond for any business is a case-by-case affair. Still, it doesn’t necessarily involve as many variables.
Primarily, a dealer’s credit score and financial strength are the two most considered factors when determining the value of the bond.
Where the entities being covered by insurance policies are more concrete, like car repair bills or hospital bills, remember that auto dealer bonds are essentially insuring the business’s “word,” or their pledge to practice ethically and responsibly.
Finally, state regulations often set minimum bond amounts, below which no party can officially acquire a license to sell vehicles in that state.
With all the insider terminology and plenty of numbers flying around, it may not seem intuitive at first. Still, auto dealer insurance and auto dealer bonds are common sense when you simply evaluate all the potential risks on both the consumer and commercial side of the business.
As we reviewed, risks (and consequently, insurance needs) can vary based on the type of dealership, as well as their size, number of employees, location, and several other factors.
Still, in the vast majority of cases, some form of commercial general liability policy, workers’ compensation insurance (if the business employs workers), and other common policies listed above make up the top auto insurance dealer requirements for these businesses to comprehensively cover their own potential losses while also protecting customers and employees.
Outside of insurance plans, auto dealer bonds are funds meant to reimburse customers who are adversely affected when a dealer falls short of their promise to fulfill certain duties. These bonds assure both customers and potential partners of the dealership that they can trust the business will either perform without fail or make it right in the event of any issues.
