Insurance: Do You Have Adequate Coverage?
Before they can legally drive a vehicle, individuals must obtain a minimum level of automobile liability insurance. Similarly, dealerships are also legally required to carry certain types of insurance to operate in most states.
If you haven’t reviewed your store’s insurance policies recently, now might be a good time to do so. Your goal is twofold: to make sure you have the right coverages for the risks involved in operating your dealership and to keep your insurance premiums as low as possible.
Sorting through types of insurance
There are three main types of insurance for automobile dealerships:
1. Garage liability insurance. This coverage forms the foundation of most dealerships’ insurance programs. Combining premises, auto, and products and completed operations liability coverage, it provides protection for bodily injury and property damage claims caused by an accident that arises out of your garage operations. Dealerships are normally required by law to carry garage liability insurance.
As you review your garage liability policy, look for exclusions and limitations that can limit the amount of your coverage. For example, rental and leasing, racing and watercraft often aren’t included in a standard policy. Some carriers will offer limited coverage for these events, but you might have to buy a separate policy to cover them.
Garage liability insurance also typically excludes property damage to customer vehicles left with your dealership for repair, servicing or storage. You can purchase additional coverage, known as garagekeepers coverage, for protection against damage to customer vehicles left in your care, custody or control.
2. Physical damage insurance. Also sometimes called “dealer’s open lot insurance,” this coverage protects against loss to your vehicle inventory that’s held for sale. Coverage may also extend to other land motor vehicles, such as golf carts and construction equipment. Dealerships are usually required by lenders and floor planners to carry physical damage insurance.
Most physical damage policies cover collision losses and at least one of the following: comprehensive coverage, fire and theft coverage, or coverage for “specified perils.” Comprehensive covers all damage risks except those specifically excluded by name, while specified perils covers specific risks listed by name; and fire and theft covers these risks specifically.
It’s important to review your physical damage policy carefully to determine what types of losses are — and more importantly, aren’t — covered. Many insurance carriers have absorbed big losses in recent years due to severe weather events such as hurricanes, tornadoes and floods. As a result, some are excluding weather-related damage from physical damage coverage or offering coverage only for fire and theft.
3. Workers’ compensation insurance. This coverage provides medical benefits and wage replacement for employees who are injured while performing their jobs. Specific requirements for carrying “workers’ comp” coverage vary from state to state, but dealerships generally should consider this insurance to be a “must have.”
Some dealers try to lower their workers’ comp costs by classifying as many workers as possible as independent contractors, instead of full-time employees. However, be extremely careful here.
The “employee or independent contractor” classification criteria can be open to interpretation. If your workers’ comp carrier determines that one or more of your independent contractors are actually employees, you’ll be billed additional premiums for them.
Reducing insurance costs
Here are a few proactive steps you can take to lower your dealership’s insurance premiums:
Don’t furnish customers with loaner vehicles. While this is a common practice, it exposes dealerships to liability claims that can raise garage liability premiums. Instead, consider obtaining rental cars for customers who leave vehicles with you for service.
Minimize personal use of dealership vehicles. This includes not only your own personal use, but also use by your friends and family members and those of your employees. This can help reduce exposure to liability and vehicle damage claims and, thus, keep insurance premiums down.
Keep customers out of your work areas. You probably have signs telling customers to stay out of the service area for safety and insurance reasons, but are you enforcing this rule? Doing so will help prevent injuries to customers that can raise insurance costs.
Maintain a safe work environment. Work closely with your department managers to minimize the potential for accidents in the workplace. This will help lower your workers’ compensation experience modification factors, which could lower workers’ compensation premiums.
Understanding the co-insurance penalty
To keep physical damage insurance costs down, dealerships sometimes insure their inventory at less than 100% loan to value. If you choose this strategy, be aware that a co-insurance penalty will apply if you file a claim.
This penalty will effectively reduce the amount of money you receive if you make an insurance claim due to a damaged or stolen vehicle. Depending on the amount of coverage you buy, your claim could be reduced by 50% or more.
Meet with your agent
Plan now to meet with your insurance agent to perform a comprehensive insurance review. Doing so will help ensure that your dealership will have adequate coverage when the time comes that you must file an insurance claim.