Surety Bonds and Auto Dealers: Understanding Claims

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.

The surety bond is NOT an insurance policy.

Business owners shopping liability protection should keep several distinctions in mind between surety bonds and insurance policies. Primarily among these is that liability losses aren’t expected with surety bonds. With insurance policies, liability losses are expected. Businesses with each type of coverage can offer customers liability protection. The key difference is whether or not the business is protected from potential liability payouts.

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).

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.

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.
  • False information regarding a vehicle’s condition provided during a sale.
  • Sale of a stolen vehicle.
  • Failure to pay for purchased warranty and failure to honor written warranty.

Auto dealers should be prepared in these cases.

Once a claim is filed, you should proceed to follow the succeeding 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.Document everything – correspondence, statements, and agreements.
  • Be honest, but also ask the claimant to send proof of loss.
  • Be proactive. Always try to find a solution to the problem before it becomes an official surety-bond claim.
  • Turn to your preferred surety bond agent for more information and how to proceed with the claim.

What can your surety agent do for you:

  • 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.
  • 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 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.

Auto dealers should learn how to protect themselves.

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.

The best tip to tackle problems with surety bonds claims is, naturally, to avoid them with care. In this respect, it is important to be well acquainted with the legislation of the state in which your auto dealership operates, as well as with your customers’ expectations in terms of the sales process and the warranty clauses. For details on the state legislation concerning your dealership, you can consult your state’s Department of Motor Vehicles, which can provide you with the most extensive and up-to-date information.

Remember, if you do have a claim filed against your surety bond, make sure you take reasonable steps in compliance with state legislation. This also includes an appropriate course of action even after a claim has been validated. It pays to comply with the legal ramifications because failure to do so can result in even more serious problems for you and your dealership.

The best thing to do is get specialists involved in your case. Turning to an experienced lawyer or accountant is likely to save you a lot of time and stress. This is equally true for the period of the claim investigation as for the period after a claim has been validated.

With a clear understanding of the way surety bond claims work, even if you come to face such a challenge, you will be prepared to overcome it in the most efficient way possible.

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