Surety bonds are an essential part of the car dealer licensing process. Bonds guarantee compliance with obligations and responsibilities under state law. They also guarantee the state and public will be compensated if a dealer violates the law.
But for business owners, a bond claim can have negative consequences, apart from the immediate costs.
That's why it’s important to understand how the process works, why claims occur and what can be done to avoid them.
Depending on the state, a dealer bond agreement includes various conditions. Most commonly, bonds will refer to state law when defining responsibilities under the bond agreement. While state laws vary, they inevitably include responsibilities such as:
- Accurately reporting sales and paying taxes.
- Honestly and clearly representing vehicle conditions.
- Meeting warranty obligations and furnishing vehicle titles.
- Paying lenders and other dealers in full and on time.
- Not committing fraud.
- Not selling stolen vehicles.
- Not tampering with odometers.
Violations can lead to a claim against the bond. Based on the nature of the violation, a claim can be filed by anyone: a consumer, another dealer, a lender and even the state licensing agency itself.
How does the claims process work?
The claims process follows a series of steps. These are the following:
An individual completes a bond claim form and submits it to a state licensing authority.
Sometimes claimants need to complete a complaint first, and the claim is filed by the authority on behalf of the claimant.
The surety company that backs the bond is notified of the claim and begins an investigation to determine its validity. If the surety determines the claim to be invalid, the claim is not accepted and it is dropped.
If the surety determines the claim to be legitimate, the bonded dealer is asked to satisfy the claim.
If the dealer does not satisfy the claim, for whatever reason, the surety steps in and extends compensation to claimants. Compensation offered by a surety cannot exceed the total amount of the dealer's bond. How fast the surety extends compensation depends on state-specific requirements.
If the dealer did not satisfy the claim, and the surety stepped in, the dealer must then repay the surety.
As per the bond agreement, the surety is simply a guarantor but does not assume any liability for acts that lead to a claim. Once the dealer repays the surety, the claims process ends.
How do claims affect dealers?
The claim amount can range between several hundred to several thousand dollars or even tens of thousands, in rare cases.
Moreover, a claim can damage a dealer’s reputation. Customer trust is hard to win in the first place, and a dealer who is found to have violated a bond agreement usually will lose business.
In many states, a claim can lead to the revocation of a dealer license.
If this happens, a dealer would need to reapply for a license and may not be allowed to work as a dealer for a certain amount of time. If actions are found to be criminal, legal charges and penalties may ensue.
Finally, claims can significantly raise bond premiums, make bonds hard to get (even if credit is good) and leave a negative mark on relations with the surety company. (Wards Industry Voices contributor Todd Bryant, left)
How to avoid bond claims.
There are several ways to avoid the complications of a bond claim. These are:
- Understand state laws and regulations, and strictly comply with them.
- Comply with all contractual conditions and terms.
- Document everything carefully. That includes correspondence, statements, agreements and inquiries. You may end up needing such information if a claim is filed. The greater the detail, the easier it will be to protect yourself from a claim.
- Don’t push customers too hard to buy something they don’t want. Give them enough space and time so they don’t feel rushed or duped afterwards.
- Don’t hide important information about a vehicle from clients.
- Present clients with clear information about the financial side of the deal: price, monthly payments, down payment, etc.
- Avoid giving verbal warranties. Some states consider them as legally binding as written ones. Being too generous with promises may have a positive sales impact but could cause trouble later.
- Train yourself and staff on practices that are in line with legal requirements.
- Be proactive. Try to resolve issues before they turn into claims. If you are not sure how to handle a potential claims situation, consult your surety company.
Todd Bryant is president and founder of Bryant Surety Bonds.