Each year, Florida dealers are inundated by marketing campaigns offering dealer bonds. It’s time for license renewal. As we all know, the state needs a $25,000 surety guarantee.
It is surprising to me that so many dealers I speak to don’t know what the bond is or why it is required by the state. Let me answer the most frequently asked questions.
What is a Motor Vehicle Dealer Bond and how does it work?
A bond is a guarantee that a licensed dealer will adhere to the terms of any written contract relating to the sale of a vehicle. It also guarantees that the dealer will not violate any Florida laws.
Financial guarantee is the key word in this definition. Dealer bonds are frequently mistaken for insurance products because they are usually written by insurance companies. It is impossible to be more wrong. The bond is issued by an insurance company to inform the state that the dealer can “make right” any violations above $25,000 and that if the dealer is financially insolvent, the insurance company will compensate.
We see the following types of claims coming in under bonds:
* Failure to pay for vehicle
* Failing to disclose any prior damage or other relevant information at the time you sell
* Non-compliance with terms in written contract
What does an insurance company charge for?
A bond is different from an insurance contract. The principals of the dealership must personally insure the insurance company in case of a claim. This means that the owners are responsible for paying the insurance company any claim they may have.
This is why the principals’ credit scores play such an important role in pricing the bond. The bond’s cost is directly affected by your ability pay the insurance company. This is similar to a car loan in which your ability pay back the bank directly impacts the loan’s cost.
The Florida bond pricing is very diverse. Dealers with excellent credit and experience can earn as low as $250, in some cases even less. New dealers or dealers with poor credit may be able to get as high as $5,000. In certain situations, the dealer might be required to provide collateral or bring in another signer. Extreme cases have been seen where the dealer cannot be bonded at all.
Why is $25,000 the limit?
This is a hot topic in the industry. There are many opinions on the limits. Although the possibility of an increase in the limit was discussed over the years, no increase has been proposed.
One argument in favor of an increase is that the bond has not changed and car prices have risen steadily. Why shouldn’t the bond be increased to keep up with inflation? Perhaps $50,000 or $100,000 This is a sensible approach but there are some problems.
The dealership is “un-bondable” once a bond claim has been submitted. This happens until the claim has been settled and the dealer reimburses the insurance carrier. A legitimate dealer will try his best to settle a claim so that his bond isn’t cancelled. No bond, no license.
My experience shows that the true bond claims are made by the dealer who has given up. The dealer’s operating funds have been drained and he has begun “borrowing money from Peter to pay Paul”. This is when the downward spiral starts. It’s not just one claim, but many. The $25,000 doesn’t come close to solving the problem. These situations can easily reach the six-figure mark.
These situations are not as common as they might seem, but they are still very visible. In 2000, a state legislator tried to increase the bond’s amount to $250,000. A dealer who went out of business caused many people in his district to be hurt. The Representative presented a strong argument for an increase.
It was an honor to be asked to join the Emergency Task Force with Dino Mercurio, the president of FIADA, and other industry representatives. This task force was a collaboration between the DMV, FIADA and our own FIADA. The task force was charged with investigating how the increase would impact the entire independent dealer industry. At that point, it was clear that this increase would force at least half of the state’s dealers out of business. They simply couldn’t qualify to receive a large bond. The bond premiums of the remaining dealers would increase significantly. Approval would be difficult and would require financial statements and other documentation.
Refer to the comments I made earlier. These things are underwritten as unsecured credit lines. What number of people could be eligible for a $250,000 line?
We were able stop the increase by giving the legislator information about how it would affect our industry. In the end, we suggested a “trust fund” option to replace the increase. Another option was to amend the bond form to only cover retail transactions and eliminate the ability to claim “dealer-to-dealer” transactions. This option was not well received by franchise dealers or auctions. Fortunately, due in large part thanks to the FIADA the legislator dropped this issue for that year.
A bond is, in conclusion, a necessary evil. Although the limit is not sufficient to protect customers, we have shown that it may not be practical to increase the limit to Florida’s acceptable level. We also showed that dropping the requirement would remove some protection. It would not surprise me if a $50,000 increase is discussed. I might even support it. For those who support this, remember that twice the limit means twice the price and a more complicated underwriting process. We must be cautious about what we wish to get.
