Auto dealers have a laundry list of exposures, and underwriters require a good amount of information about an auto dealership's risk and want answers to several common questions.

Sarah Maguire, Garage Department manager at RPS, and Sandy Atkinson, RPS senior underwriter/producer, share six key issues that carriers focus on when writing auto dealer risks.

1. Physical Damage for Vehicles in Transit

Dealer's Open Lot/Physical Damage insurance will typically include some coverage for vehicles in transit, whether the insured or a third party is transporting inventory.

"The transporter may or may not have coverage or have insufficient coverage," says Maguire. "It's important that an insured confirms that the transporter has Cargo insurance, since the transporter should be responsible for damage while the vehicles are in transit. If there is no coverage, then the insured's coverage would likely step in."

Maguire also explains that an insured's transport coverage under the Dealer's Open Lot policy typically includes a radius restriction, which may be increased with an endorsement.

"Radius restrictions differ depending on the state. For example, the maximum radius in Kentucky is automatically 50 miles; in other states, it may be 100 miles. Find out the radius of operations and who is responsible for transporting the vehicles. If the insured uses contract drivers, the insurance company may want the drivers to be listed on the insured's policy and want to review the drivers' motor vehicle reports. Insurers typically require that insureds get certificates of insurance from non-scheduled drivers, and insurers usually ask to be listed as an additional insured on the contract driver's policy."

The number of different contract drivers that insureds use is also important.

"If there is an excessive number of contract drivers, particularly if an insured does not schedule them in the policy, the carrier may not want to provide coverage," says Atkinson.

2. On-the-Road Accidents: Test Drives

Test drives are one of the riskiest exposures for a dealer and account for a large percentage of claims, with many rear-end collisions. Insurance carriers want to ensure dealers offer no unaccompanied and overnight test drives. Overnight test drives are almost always a red flag and are usually prohibited by most carriers.

It's important to check for driver's licenses before allowing clients to test-drive vehicles. In addition, if a client wants to test drive a heavy truck on a public road, the insured must verify that the driver has a commercial driving license.

3. Out-of-State Owners: A Red Flag

Insurance carriers generally want dealership owners to be active in the business and not to operate the business from a distance.

"The policy will be written in the state the dealership is domiciled. The concern is when the owner doesn't live in that state, he or she, for example, might live in Illinois but choose to open the dealership in Indiana due to insurance costs or costs of doing business," explains Maguire.

"If it makes sense, some carriers will make an exception if the owner is within a 50- to 100-mile radius from the dealership," adds Atkinson.

4. A Per-Person Limit on Dealer Plates

While it is standard practice for a dealership to use dealer plates for owner or employee personal use, carrier guidelines typically limit the number of these plates to two or three per insured.

"The concern here is that a dealer will get several dealer plates for family and friends who are not involved in the operation to use instead of hard plates," explains Atkinson. "Some will get an excessive number of dealer plates to loan, lease or rent them." This practice is prohibited.

"The security of the dealer plates is critical. They must be locked away when not in use to prevent unauthorized use or theft," she adds.

5. Key Security: Out of Reach

The number of auto thefts from dealerships has increased since the pandemic, making ignition key security a critical risk-management practice.

"Keep keys in a locked box or location and away from anyone unauthorized to use an auto. Keys should not be hanging from a peg board during or after business hours," says Atkinson. "Carriers are looking closely at how keys are stored and protected."

Many dealers have special lockboxes or computerized lockers with encrypted passwords to keep keys safe and prevent auto thefts.

6. Annual Vehicle Sales

The auto dealership must operate as an actual business rather than a hobby. Most carriers require a minimum of 15 to 20 annual auto sales to qualify for a Garage policy.

"Carriers want to ensure the dealership is a legitimate business and that the prospective insured isn't obtaining a dealer license and plates for personal use," says Maguire.

"A Garage policy is not intended to replace a personal auto policy for the owner and/or family members. The number of vehicles sold annually should line up with the number of dealer plates an operation has obtained. Carriers are unwilling to write a dealer operation with multiple dealer plates if annual sales are low."

Keeping these six points in mind when coverage shopping for auto dealer clients is critical, as is partnering with an expert. RPS provides Physical Damage and Liability insurance and other coverages for new and used cars from franchised and non-franchised dealerships.

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