During the final months of 1994 the subject of Dealer Bonds became very heated when a major provider of Dealer Bonds in the state of Florida came under the watchfull eye of the state and then filed bankruptcy. Thousands of dealers suddenly found themselves without a valid bond. Existing companies began frantically rewriting bonds for many of those unfortunates, and new bond suppliers sprang-up seemingly overnight to help fill the need. Some dealers had problems before finally finding a bonding company to write coverage for them. Some had to pay unusually large premiums before anyone would write them a bond. And, some never found anyone who would write them at all. To really begin understanding how the above situation developed, you need to understand a little bit about bonds and how they work.

First, you must never think of a bond as being anything at all like an insurance policy. They are vastly different. Examples of some of the differences are as follows:

A Surety Bond, also known as a contract of suretyship, assures the fulfillment of an obligation of one party to another by introducing the presence of a third party (bond company) who promises to make good, up to a specified amount, if a covered obligation is not fulfilled. A surety company acts like a co-signer who promises to pay if you cannot or will not pay your obligations. But, unlike an insurance company who pays claims without recourse for recovery from you, the surety company will pay the claim and then go after you to get their money back. When you sign for a surety bond, you, your partners and wives will also be asked to sign as guarantors. Surety companies don't fool around. If they pay a claim, they will go after all partners and wives with spiked boots to get their money back.

A bond may not be cancelled mid-term but an insurance policy could be. When you buy a dealer bond for the current year, it begins on the date you purchase it and it expires on the following April 30th. All dealer bonds expire at the same time. If you decide to just quit half way through the year, you cannot cancel your bond. In fact, you could be out of business for up to five years, and suddenly have a bond claim levied against you for something that happened during a past bond year and the bonding company could pay the claim and come after you to get their money back. (see FS 95.11 on statute of limitations for contractual obligations).

There are many different types of surety bonds on the market, and the coverages and requirements are very different for each bond classification. This article is intended to discuss Motor Vehicle Dealer Surety Bonds and the specific requirements and characteristics of only that type of bond. The exact wording on surety bonds for motor vehicle dealers is specified by the state of Florida. All surety companies who are qualified to do business in Florida, already have the required forms and will send a completed bond form to you after you have paid and been approved for the bond. You can normally expect from 5 to 10 working days to pass from the time you apply, until the time you receive your actual bond. This time may vary from company to company, and may be extended if there are any problems verifying the information you provided on your application.

Florida Statute 320.27(10) specifies the exact requirement for dealer bonds. You would be wise to read that part of the statutes for yourself, rather than just take the word of me or any other do-gooder who tries to explain it to you. Oh! This is a good place to tell you that I am not a lawyer and you would be well advised to get appropriate legal assistance rather than follow any advice that I may appear to be offering here.

In order to be qualified to purchase a bond, you must be able to satisfy the bonding company that you possess what is sometimes called the three Cs. They are: Character, Capital, and Capability. To learn about your three Cs , the bonding company will usually run a credit report on your dealership and on all guarantors (you, your wife, your partners, etc.).

When the bonding company runs a credit report on you, if they find that your credit is questionable, that you have a history of slow pays, that you have a history of bankruptcy, or that you have what they consider to be a less than honorable history you will probably fail the first C: character.

Some companies do not require a personal or company financial statement and simply rely on your credit report to give them an idea about your financial status. But, since the bonding company expects you to reimburse them if they ever pay a claim, they want to be sure that you have the ability to come up with the money. If the face amount of the bond is $25,000 they generally want you to possess liquidity of at least four times that amount ($100,000). There are, however, a number of bonding companies who appear to be very lenient on this liquidity requirement. Your ability to repay should tell the story about whether you pass or fail the second C: capital.

As previously stated, the third C is capability. How long have you been in business? If the dealership is relatively new, how long have the principals been involved in the industry? What kind of experience in management do the principals possess? Do they know enough about what they are doing, do they have the capability, to minimize potential bond claim situations?

There are not really any hard and fast rules to determine which bonding companies will accept or reject you. If you get turned down by one company, try another. But, be careful. Every time someone runs a credit check on you, their inquiry shows up on your report. After a few such inquiries, you may find that the next bonding company is afraid to consider you because all the others have already rejected you.

From what you have read so far, it should be apparent to you that if bonding companies follow the three Cs in approving or rejecting dealers, they should never really suffer any losses. Even if the dealer does cause a claim, the bonding company has the right to recover the money from him personally. So, why should any bonding company ever go broke? The answer is, the bonding companies have relaxed their requirements so much that there are a lot of dealers who don't have the capital or capability to really qualify for a bond, but are still being approved. When a claim arises, the dealer has no personal money to repay the bond company. It takes a lot of good dealers to pay enough premium to make up for one bad dealer. After awhile, bonding companies who are too lenient will suffer enough losses that they will be forced to either be more careful, raise their prices, quit writing bonds altogether, or go bankrupt.

The bond market is in a mess right now. And, it will get worse before it gets better. It will become harder to get a bond. The questions on the application will become harder and more numerous. The price will rise. There will be multiple pricing levels based on your ability to pass the three Cs test. More dealers will be asked to find a co-signer or guarantor. Even the face amount of the bond could rise from the current level of $25,000 to a much higher level (some people have suggested $100,000). If the face amount does get raised, God help the small dealer who possibly could never qualify or afford the additional costs.

The fact that dealer bonds are not very restrictive about who may file a claim and for what reason, creates a disproportionate number of dealer-to-dealer and dealer-to-auction (wholesale) bond claims as compared to dealer-to-public (retail) claims. It may be time to examine the wording of the bond itself, or else become prepared to see the entire issue get out of control. The wording of the bond issues a promise to pay to ANY person in a retail or wholesale transaction ANY loss or damages which such person shall sustain as a result of ANY failure to comply with the conditions of ANY written contract made by such dealer in connection with the sale or exchange of ANY motor vehicle or as a result of ANY violation of the provisions of Chapter 319 or 320 of the Florida Statutes. This is a pretty full cup of promises. We will sooner or later be forced to pay for a bigger cup, or cut-back on the promises that are causing our present cup to overflow.

Dealer Bond Claims

Since every motor vehicle dealer is required by the State to maintain a Dealer Bond, it would be wise to understand as much as you can about what kind of claims and problems may occur. Most dealers will probably never find themselves on the defendant side of a bond claim, simply because they will take the time and trouble to seek a solution before it goes that far. But, even the best dealers sometimes run into a situation where they may have to defend themselves against a questionable claim. And, sometimes a dealer will find himself a victim of another dealer and must resort to filing a claim against that dealers bond in order to find justice. Either way, you would be wise to know as much as you can about the subject.

First, let us clear up the subject of an Irrevocable Letter of Credit. It is an option that a dealer can use if he does not want to buy a bond. The Statutes treat a letter of credit in the same manner as a bond. You may find a bank who is willing to issue a letter of credit for you, but you will probably be forced to maintain a collateral bank account of some kind that is at least as big as the bond requirement. And, since claims may potentially be made for up to five years, the collateral account will most likely be frozen for that time. It is also possible (I get mixed signals about this) that if you were to use a letter of credit each year for five years and then quit, the bank could find itself facing a different $25,000 claim every year for up to five years. The problem is, bank regulators don't like it when banks issue a letter of credit that spans more than one year. It certainly looks like a bond is probably a better solution simply because you don't have your money (collateral) tied up for a long time, and bonding companies usually have lawyers on their staff who have great experience in fighting frivolous claims and protecting your rights. Talk to your attorney or your banker if you are in doubt about which method is best for you.

If a person wishes to file a claim against a bond, he must have proof of a written contract between him and the offending dealer. Some examples of acceptable contracts are:
Bill of Sale.
Draft issued by Dealer.
Dealer agreement with auction containing on going promise to pay upon tender of good title.
Written warranty.
Cash deposit on specified vehicle for specified price
(could be considered contract if dealer defaults)
Contract where dealer promises to provide title for payment.

There are numerous ways that a dealer could be in default of a written contract. And, the Statutes are written in a manner so general that a claim could be made by a person that you never even met, simply because he was part of the chain of purchasers and was subsequently the injured party. Courts have ruled that the Bond Statute should be construed as giving remote purchasers protection under the bond. There have been incidents where a dealer tampered with an odometer, took the vehicle to the auction, where it was sold to another dealer, who then sold it to a customer who discovered the tampering. A claim was made and paid against the original dealers bond, even though by that time the original dealer himself had gone out of business. Some examples of types of defaults that may end in a bond claim are:
Failure to honor a draft.
Failure to provide vehicle or valid title as contracted.
Dishonored check as payment for draft or contract.
Odometer tampering.
Failure to disclose significant fact.
Failure to follow contractual promise.
Any violation of Statutes 319 and 320.
Breach of Auction Registration Agreement promise to pay.
Darn near anything else that anyone wants to claim.

The courts are strict about the interpretation of what is a valid written contract. Bonding companies are well informed about contract law and do act on your behalf by attempting to defend you against claims; however, if punitive damages are awarded against you they will not be paid under your bond. Remember, even if a bonding company pays a claim for you, they will come after you to get their money back. Fortunately, they provide legal defense for you and often times win on your behalf. If your bonding company goes out of business, you are still responsible for the claim the bonding company would have paid, and you are also responsible for the cost of your own defense.

There is much more that you should know about bonds. Your insurance agent, your attorney, and your state and local Dealer Associations are good sources of information.