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Do all used car dealers need insurance?
Definitely. All used car dealers must have some sort of garage policy that must be filed with the state by the insurance company. A cancellation of their insurance policy will end up in a suspension of their business license granted to them by the state. Used car dealers insurance in Chicago is the law.
What kind of insurance do you need?
You need a garage liability policy covering your business as well as the employees and salespeople of your business (who must be listed on the policy) in the event your business actions as a car dealer cause damages to the properties of others or harm to their body. Neither you, nor officers of your business, or employees are covered under any bodily injury or property damage. The minimum amount of garage liability insurance in Illinois is a split limit of $100,000/300,000/50,000, also expressed as [100/300/50]. These numbers donate the maximum amounts that your company will pay on your behalf for bodily injury per person, bodily injury per accident, property damage per accident; respectively; in the event that you, your business or listed employees cause any at fault accident in connection with your dealership operations. Some companies offer this minimum as a combined Single Limit of $350,000 bodily injury and property damage per accident, which is usually more expensive than the split limit. Used car dealers that run bigger operations should be concerned about liability limits. The author recommends a million dollar as a combined single limit.
Price of garage liability is based on several factors including limits of garage liability insurance, ZIP code, number of dealer plates (some companies verify it with the state); and number, ages, MVRs of each driver listed on the policy. A basic used car dealer policy with minimum plates and most favorable terms to the issuing company will be little less than $3,000 per year in the City of Chicago. It is cheaper in the suburban areas of Chicago. However, additional discounts may apply such as experience with no loss. Also there might be additional extra charges if there are younger drivers or if you have employees with bad driving records.
Sometimes the City of Chicago may also ask you to show a proof of driveway insurance. Normally it is set at $1,000,000 by the City. Certain garage policies issued at lower liability limits in the City of Chicago may be endorsed, for a small additional fees, to meet the requirements of the City of Chicago. However in other situations, you might need to get a separate policy for that if your policy does not provide that protection.
Workers Compensation is a very important coverage, one that is also very well overlooked by used car dealers. You need workers compensation for your car dealership because you have to meet your legal and ethical obligations towards your business and employees. Officers and owners of the business have the choice to include or exclude themselves from workers compensation. In case they want to be excluded (perhaps they get income and do not do any actual work at the dealership) they need to sign exclusion form. Remember that no employees/subcontractors/ officer of the dealership is covered for bodily injury with regard to any at fault car accident related to the activities of the dealers. Coverage for employees for these situations are provided under a workers compensation policy.
Workers compensation premiums are based on how much payroll you will pay in the next year. It has nothing to do with the past. People covered include all the employees with W2s (must include by law), independent contractors with 1099 (can be excluded only if you can prove that they have workers comp coverage on their own) and officers/ owners of the business unless specifically excluded. For independent contractors (i.e. drivers who transport vehicles from car auctions to dealership) they must be included unless they show you that they have workers comp coverage somewhere else. It is hard to estimate prices of workers comp because it is based on future payroll. For that reason, your insurance company gives you an estimate in the beginning, then it will audit your payroll towards the end of the policy term, after which they will decide the final premium. For that reason, you might be charged extra, or simply get a refund, at the end of the policy period for the previous policy!
Bonds: A used car surety bonds is normally requested for new used car dealer ventures which are three years or less. The amount of the bond is $20,000. The bond is some sort of guarantee by the bonding company that the used car dealer will stick to the rules set by the State of Illinois. A major issue related to bond is its price. The price of the bond could vary from $200 to $2,000 based on the credit of the Principal on the bond (owner / partners of the dealership). Most companies will not issue bonds for people with severe credit problems. Remember that any government body may ask for a bond. For example, Cook County Treasurer may ask a Chicago used car dealer for a bond to guarantee payments of sales tax! This could be triggered by situations related to the experience of the tax authorities with particular locations, old owners of business, or new owners/ partners.
Main Optional Coverages
There are some optional coverages that used car dealership may be interested in, based on their needs.
Dealer Open Lot refers to the collision and comprehensive coverages on dealer owned vehicle.. There is normally a limit set on coverage per vehicle. So if a dealer purchase a dealer open lot coverage with $150,000 per location, that coverage may limit coverage per vehicle of $25,000. Dealers must check their policies.
One of the source of trouble is related to the Coinsurance Penalty Clause. To save money, a used car dealer may get dealer open lot coverage of $100,000 on his/her lot which contains $400,000 of used vehicles. The coinsurance penalty ratio is the percentage which is used to determine if a particular dealer is properly insured or not. Coinsurance ratios range from 80% to 100%, and they are normally stated on the policy declaration page. In the pervious example if the customer has 80% coinsurance, then the dealer must maintain a minimum of $320,000 to be properly insured. If the dealer keeps less than that amount, then the company will make only partial payments on the claims made, because the customer was paying partial payments in relation to what he/she was supposed to pay. The amount the company will pay is based on the percentage of what the customer currently has [100,000] divided by the minimum that was supposed to be carried [320,000]. In other words, the insurance company will pay about 31.25% [100,000/320,000] of any potential claim, after the deductible!
Your business also needs Garage Keeper Liability, if you work on autos that you do not own, such as customers who bring their cars for minor repairs. Vehicles that you do not own require physical damage coverage (comprehensive and collision) with certain deductible ($500 to $1,000). Garage Keeper Liability insurance is not needed if the dealer does not perform any maintenance or repair work on vehicles they do not own. Garage keeper liability is not an expensive coverage and is based only on the amount of coverage you need. Normally the minimum amount is $25,000 per vehicle. The difference between $25,000 and $50,000 in coverage is very minimal. You can tell how much you need by knowing the average value of all vehicles that exist on your lot which you do not own.
There are other optional coverages that used car dealers may need. These include coverage on Building, Business Property, Security, Business Income, Crime (Robbery etc.) and some forms of Professional Liability.
by Ed Sneineh,