New Auto Dealer Risks Require Updated Insurance Coverage

• e-mail violations
• electronic fraud and vandalism
• identity theft
• finance and insurance (F&I) compliance issues

Dealership insurance policies should provide coverages that are applicable to today’s environment. Dealers should review their insurance policies – specifically the portions for auto inventory, property, crime and garage liability – to confirm they have proper coverage for diminished value, business income continuation and extra expense, vicarious liability, designated statute defense, and identity theft.

Diminished Value
There are many types of physical damage losses that could cause dealers to use their diminished value coverage, which covers new vehicles damaged prior to sale that are later sold below dealer cost. The most common example of a diminished value loss is when a person test-driving a new car is in a collision. Other common examples of such damage are fire, lightning, smoke, theft, explosion, vandalism and extended theft. If the repair costs are more than 10 percent of the dealer's cost of the auto, it would qualify for diminished value payment if the auto is sold for a loss. It's important for dealers to know if their insurer pays diminished value claims.

Business Income Continuation and Extra Expense
Business income continuation coverage provides for lost gross profit from the parts department and lost gross revenue from the service department that are the results of a covered loss. Business income continuation can also include the lost gross profit from auto and F&I sales. Most dealerships do not incur the additional expense of insuring the auto sales gross profit because they can quickly set up auto sales offices in temporary trailers or on an available lot. The parts and service departments are more vulnerable to business income losses because they depend heavily on the buildings and equipment to generate their income.

Extra expense covers the new expenses incurred after a loss, such as temporary facilities, security, advertising and equipment rental.

Dealers should make sure to buy the proper amount and time period for these coverages. If the dealership is spread among several buildings and locations, it may be better able to rely on undamaged facilities to lessen the loss. If all of a dealer’s operations are in one or two buildings, the dealer should buy the appropriate coverage amount for the worst-case scenario of losing all operations at the same time.

Vicarious Liability
Vicarious liability coverage provides protection from financial losses that can take place due to employee theft or forgery involving a third party. An example would be if employees forge dealership documents to fraudulently purchase electronic shop equipment for their personal use. Vendors believe these purchases are on behalf of the dealership and extend the employees credit. The employees may re-sell the equipment on the black market or keep it. Whatever occurs after the sale is completed, the dealership is still responsible for these purchases. A dealership with vicarious liability coverage would have its insurance company provide the financial reimbursement to the vendor. If a lawsuit were to arise, vicarious liability coverage would also cover the dealer's defense costs. Many times, it is discovered that employees are stealing from the dealership as well as outside vendors, which triggers employee dishonesty coverage.

Designated Statute Defense
Designated statute defense provides coverage for legal defense costs related to recently passed statutes that create new areas of business liability exposure. For example, a customer – while discussing automobiles he or she might be willing to test drive and purchase – releases driver's license and Social Security number information to a sales clerk. Without permission, the dealership checks the person's credit to verify if the customer would qualify for funds needed to purchase the vehicle. A customer has the right to sue the dealership under the Fair Credit Reporting Act for the erosion of his or her credit rating through an unauthorized inquiry.

This is just one example of the many statutes that exist and could expose a dealership to lawsuits. Designated statute defense helps protect a dealer from this type of exposure by providing coverage for legal defense.

Identity Theft
Identity theft protection covers defense costs from lawsuits associated with dealerships that do not properly safeguard their customers’ or employees’ personal information. Dealership F&I offices are often a target for identity theft. Sensitive information is requested and placed on forms that are sometimes entered repeatedly into computers moving from one employee to another. Some insurance policies include coverage in the event dealership staff mishandled this type of information and a lawsuit arises. An enhanced policy should include coverage for costs of hiring legal counsel to defend the lawsuit.

How to Make Sure You are Properly Protected
In today's ever-changing world, insurers need to improve and keep up with current risk trends—and make sure their customers do the same. At policy renewal time, dealers should make certain their insurance provider surveys their dealerships to determine what exposures have changed within their operations. The insurer should also help policyholders increase their awareness of potential risks and coverage options. Additionally, insurance providers should work with their customers to help them understand all aspects of their policies.

Dealers whose policies cover diminished value, business income continuation and extra expense, vicarious liability, designated statute defense, and identity theft are armed with an extra line of defense to face new risks that may come their way.

Vol 5, Issue 6