Surety Bond Claims: Why Consumers File, What Auto Dealers Can Do

Surety Bond Claims: Why Consumers File, What Auto Dealers Can Do

To avoid future confusion or bad scenarios, here are some tips dealers should keep in mind.

Americans have had a long and lasting love affair with their cars.

Buying a car is the second-largest investment after buying a house. So, the business of selling new and used cars always has thrived and will continue to do so. Despite recent turmoil, auto dealers should be optimistic, for the auto industry currently is in good shape.

Regardless, statistics show auto dealers are the No.1 target of consumer complaints, usually involving some form of fraudulent practices. On the other hand, consumers are protected by the auto dealer surety bond and have the right to file a claim on the surety bond if foul play is suspected.

To avoid confusion or bad scenarios, here are some major points of the claim process to keep in mind.

1. The surety bond is not an insurance policy.

A surety bond is a contract outlining an obligation of one party (you, the dealer) to another (your customer), under the watchful eye of a third party (surety bond company).

The bond does not cover your business, but instead protects consumers. If there’s a valid claim against your business, the surety may have to pay the claim and later look to you for reimbursement. In other words, a bonded dealer is financially obligated to pay back the surety in the event of a paid claim.

Even if you haven’t been in business for up to five years, a claim can be levied against you for something that occurred during a past bond year. If this happens, and a surety pays out, it could come to you to get its money back.

2. Common auto dealer surety bond claims.

The majority of bond claims arise out of used car dealerships. They include:

  • Failure to report sale and/or provide valid title as contracted.
  • Failure to pay for a vehicle or write checks that later bounce.
  • Odometer tampering.
  • False information regarding a vehicle’s condition provided during a sale.
  • Fraud relating to the financing.
  • Sale of a stolen vehicle.
  • Failure to pay for purchased warranty and failure to honor written warranty.

3. Eligibility.

Here’s who can file a surety bond claim:

  • Consumer purchaser. Most such claims are related to the auto dealer’s failure to report the sale or provide the title, which creates a number of setbacks for the buyer. Claims also oftentimes are filed when an auto dealer fails to pay off the trade-in vehicle; when the mileage has been altered; when there are undisclosed facts about the vehicle’s condition that become evident after the purchase and so on.
  • The seller of a motor vehicle. Sometimes a seller may file a claim if an auto dealer fails to pay for cars sold to or through that dealership. The seller may be another dealer, an individual, a consignor or a regional or national auto auction.
  • Other creditors and floor planners. The latter are corporate business entities that secure inventory financing to the principal. Claims brought by them usually relate to breach of obligations under the financing contract.
  • A retail lender who financed the consumer. If a title hasn’t been provided, the lender may demand the full amount of the loan, although, the claim is normally limited to the amount paid to the dealer.

4. Be prepared.

Auto dealers should follow these basic steps:

  • Understand and follow the rules set by your state’s department of motor vehicles, and meet all terms of any contracts to avoid complications.
  • Be honest, but also ask the claimant to send proof of loss.
  • Document everything – correspondence, statements, and agreements.
  • Be proactive. Always try to find a solution to the problem before it becomes an official surety-bond claim.

5. Turn to your surety-bond agency for help.

When a claim is brought to the attention of the surety bond company, the parties involved in the argument will have an opportunity to tell their side of the story.

What the surety bond guarantees is that if your bonding company does not find a claim to be legitimate, it will not pay out. Just the same, if the evidence is against you, it will be obligated to pay the claim up to the bond’s penal sum.

The good news is that the bonding company provides legal defense for you and often wins on your behalf. The bad news: If it ends up paying a valid claim due to your negligence, you’ll have to reimburse the claim amount plus legal fees.

If you’re working with a strong surety bond agency, it will make sure you are immediately made aware of any claims placed against your bond. In turn, make sure you handle any potential claims aggressively and seriously.

If the claim is due to a misunderstanding, reach out to the claimant to get it resolved at your level. Keep your bond agency in the loop, so it can fight on your behalf. The right bond agency will serve as a partner through the process.

6. Protect yourself.

Claims on auto dealer surety bonds really do happen, but there are ways to protect yourself.

More importantly, you as an auto dealer need to make sure that all industry regulations are strictly followed. Also, if you are honest in your dealings with your customers, you have nothing to fear.

Keep your license up to date, renew your bond on time and file all necessary paperwork diligently. Then even if you have an unhappy customer who files a claim, it will be easy to plead your case and not let it hurt your business.

Have you had any experience with surety bond claims? If so, tell us in the comment section below how things got resolved.

Vic Lance is the founder and president of Lance Surety Bonds Associates.

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