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Auto Dealer Bonds
A Required Bond for Every Motor Vehicle Dealer in the United States
If you operate as a motor vehicle dealer, whether you sell new cars, used cars, motorcycles, RVs, or trailers, your state requires you to carry an auto dealer surety bond as a condition of your dealer license. There are no exceptions. Every state has this requirement, and you cannot obtain or renew your dealer license without it.
An auto dealer bond protects the public. It guarantees that you will comply with your state's motor vehicle laws and regulations in every transaction. If you violate those laws and a customer or another party suffers a financial loss because of it, they can file a claim against your bond.
The bond does not protect you as the dealer. It protects the people you do business with. If a claim is paid, you are responsible for reimbursing the surety. This is how every surety bond works: the surety guarantees your compliance, and you stand behind that guarantee.
At Grit Insurance Group, we issue auto dealer bonds quickly and at competitive rates. Most dealer bonds can be approved on a simple credit-based application and issued within one to two business days.
What Does an Auto Dealer Bond Cover?
An auto dealer bond guarantees that the dealer will conduct business in compliance with state motor vehicle laws. The specific regulations vary by state, but the bond generally covers proper title transfers and title handling, accurate odometer disclosures, honest representation of vehicle condition and history, compliance with advertising laws and regulations, proper handling of customer deposits and payments, adherence to warranty obligations, compliance with lemon law requirements where applicable, and all other dealer obligations set by state motor vehicle statutes.
If a dealer violates any of these obligations and causes financial harm to a buyer, a lender, or another party, the harmed party can file a claim against the dealer's bond. The surety investigates the claim, and if it is valid, the surety pays the claimant up to the bond amount. The dealer is then responsible for repaying the surety.
The bond does not cover every type of dispute. It covers violations of state motor vehicle law that result in financial harm. General customer dissatisfaction, mechanical breakdowns, or disputes over the fairness of a price are not covered by the bond unless they involve a specific violation of law.
Who Needs an Auto Dealer Bond?
Every business that holds a motor vehicle dealer license needs an auto dealer bond. This includes new car dealerships (franchised dealers), independent used car dealerships, wholesale dealers who buy and sell vehicles at auction, motorcycle dealers, RV and recreational vehicle dealers, trailer dealers, and mobile home dealers (in some states).
The bond requirement applies regardless of the size of the dealership. A large franchise dealer with hundreds of vehicles in inventory and a small independent lot with 20 cars on the ground both need the same type of bond, though the required bond amount may differ.
Some states also require separate bonds for specific activities within the dealer business, such as a separate bond for operating as a vehicle dismantler or salvage dealer. Your state's motor vehicle division or department of licensing will specify exactly which bonds you need.
How Much Is an Auto Dealer Bond?
Auto dealer bond amounts are set by each state's motor vehicle division or department of licensing. They vary widely. Here are some examples of how bond amounts differ across states:
Utah requires a $75,000 auto dealer bond. California requires a $50,000 motor vehicle dealer bond. Texas requires a $25,000 motor vehicle dealer bond. Idaho requires a $20,000 motor vehicle dealer bond. Nevada requires a $100,000 motor vehicle dealer bond. Colorado requires a $50,000 motor vehicle dealer bond. Florida requires a $25,000 motor vehicle dealer bond.
These are examples only. Bond amounts change, and some states have different requirements for different dealer types (new vs used, wholesale vs retail, motorcycle vs auto). Always confirm the current requirement with your state's licensing authority before you apply.
The premium you pay for your auto dealer bond is not the same as the bond amount. The bond amount is the maximum the surety will pay on a claim. The premium is what you pay the surety each year to maintain the bond. For dealers with good credit, premiums typically range from 1% to 3% of the bond amount per year. A $50,000 bond might cost between $500 and $1,500 per year. A $100,000 bond might cost between $1,000 and $3,000 per year.
Dealers with credit challenges will pay higher rates, but there are surety markets that work with applicants across the credit spectrum. Premiums for high-risk applicants can range from 5% to 15% of the bond amount. If your credit is less than ideal, talk to your bond agent about your options before assuming you cannot get bonded.
How to Get an Auto Dealer Bond
The process is straightforward for most dealers.
Contact your bond agent and tell them what state you need the bond for, what type of dealer license you are applying for (new, used, wholesale, motorcycle, etc.), and the required bond amount. At Grit, you can call us at (801) 505-5500 or request a quote online.
Complete a short application. For most auto dealer bonds, the application is a single page. The surety reviews your personal credit score and basic business information. If you meet the credit threshold, the bond is approved.
Receive your bond. The surety issues your auto dealer bond certificate. You submit this certificate to your state's motor vehicle division or department of licensing as part of your dealer license application or renewal. Most bonds can be issued within one to two business days after approval.
For dealers with credit issues, prior bond claims, or other risk factors, the surety may require additional documentation such as business financial statements or a larger deposit. Your bond agent can walk you through the options and find a market that works for your situation.
Auto Dealer Bond Renewals
Your auto dealer bond must remain active for as long as you hold your dealer license. Most auto dealer bonds are issued on an annual basis, which means they need to be renewed every year.
Your surety will send a renewal notice before your bond expires. Do not let your bond lapse. Operating a dealership without an active bond is a violation of state law and can result in the suspension or revocation of your dealer license.
If your credit has improved since you originally obtained your bond, your renewal premium may decrease. If your credit has declined or if claims have been filed against your bond, your premium may increase. Either way, your bond agent can shop the renewal across multiple surety markets to find you the most competitive rate.
What Happens If a Claim Is Filed Against Your Auto Dealer Bond?
If a customer, lender, or other party believes they suffered a financial loss because of your violation of state motor vehicle law, they can file a claim against your bond. Here is what happens.
The surety receives the claim and conducts an investigation. They review the facts, the documentation, and the applicable state laws. If the claim is valid, the surety pays the claimant up to the bond amount.
Then the surety comes to you for reimbursement. You signed an indemnity agreement when you obtained the bond, which means you are personally responsible for repaying the surety for any claims paid on your behalf. If you do not reimburse the surety, they can pursue legal action to recover the amount.
Bond claims can also affect your ability to renew your bond or obtain bonding in the future. A history of claims signals to sureties that you represent a higher risk, which can lead to higher premiums or difficulty finding a surety willing to bond you.
The best way to avoid claims is straightforward: follow your state's motor vehicle laws in every transaction, maintain accurate records, handle titles properly, disclose vehicle conditions honestly, and treat your customers fairly.
Auto Dealer Bonds vs Garage Liability Insurance
Auto dealer bonds and garage liability insurance are two different products that serve two different purposes. Many dealers need both.
An auto dealer bond is a surety bond that guarantees your compliance with state motor vehicle laws. It protects consumers and the public. If you violate the law and someone is harmed financially, they can claim against your bond.
Garage liability insurance is a commercial insurance policy that protects your dealership from liability claims arising from your business operations. This includes bodily injury and property damage claims from customers visiting your lot, liability from test drives, and claims related to your service and repair operations if applicable.
The bond is required by the state for your dealer license. Garage liability insurance is required by most states as a separate condition of licensure and is also essential for protecting your business assets. They do not overlap, and having one does not satisfy the requirement for the other.
Ready to Get Your Auto Dealer Bond?
Whether you are opening a new dealership or renewing your existing dealer license, we can get your auto dealer bond issued quickly and at a competitive rate. Call us at (801) 505-5500 or request a quote online.