In recent years these bonds have become increasingly more difficult to obtain and the premiums have steadily risen. A common misconception is that the bond is a type of insurance policy. In actuality, it is nothing like an insurance policy. It is a contractual guarantee that states a dealer is financially able to settle a “loss” up to the penal sum of the bond. A “loss” occurs when the dealer breaks the terms of the bond. This is normally when a dealer commits fraud or acts in otherwise unethical manner.
In the event the dealer doesn’t settle the “loss” with the claimant, the bond carrier steps in and pays on the dealer’s behalf. One of the biggest differences between the bond and insurance is that once the bond carrier pays the claim, it goes back after the dealer for reimbursement. The ability of the dealer to reimburse the bond carrier is the point that drives the bond’s price and availability. Much like an unsecured loan from a bank, if the bond carrier feels it will have difficulty being reimbursed by the dealer, the premium will go up.
The principal’s credit score is the primary factor in the underwriting process but other factors such as the length of time in business and the principal’s personal financial statements can also be factored in.
Dealers Insurance Services has been providing bonds to dealers since 1982 and has developed relationships with bond carriers that can handle any situation. We pride ourselves as guaranteeing the lowest price and quickest turnaround time in the industry.