(October 2022)
Underwriting the Insurance Services Office (ISO) Auto Dealer Coverage Form involves examining several different areas. Some important ones are eligibility, operations, covered autos, employee information, types of operations, premises, loss experience, tailoring coverage and deductibles. Auto Dealer coverage may be written on a monoline basis or as a coverage part of a package policy.
THE
NAMED INSURED
Insurance policies are designed to protect the named insured's assets. This means that in order to underwrite the exposure, there must be an understanding of who is being protected. There can be multiple named insureds. Each named insured must be individually underwritten, and there must be an explanation as to how each of the named insureds is related to the others. The first named insured has certain rights and responsibilities related to premium and notices, but being first does not grant any differences in coverage.
Only franchised and non-franchised auto dealers, trailer dealers and implement and equipment dealers are eligible.
The coverage provided by this coverage form is very specific to auto dealerships. A number of coverages and definitions restrict coverage to only auto dealership operations. This means that exposures that are not part of an auto dealership as defined in this coverage form must be identified and alternative coverage solutions developed.
These dealers can be insured under this coverage form:
Franchised dealers are likely to have more procedures than non-franchised dealers do because they must adhere to franchise standards. Franchisers assist the underwriting process by demanding a certain level of quality through procedures and methods, but underwriters must verify that the franchisee actually follows the standards.
Non-franchised dealers are more independent and usually require more stringent underwriting. Above average, non-franchised dealers have their own standards and procedures.
Franchised dealers also have manufacturer backup for products losses. Products claims from new vehicles with limited customizing ordinarily pass through the franchisee to the manufacturer. Non-franchised dealers are not similarly protected, particularly if they sell highly customized vehicles.
Most dealers service vehicles. It is important to understand the services that are performed. Services provided that affect how a customer's vehicle operates must be considered. A checklist and written procedure should accompany each service provided. Each vehicle should be driven after servicing to verify that the work was done correctly and that the vehicle is safe to drive. For example, procedures for tire changes should have a requirement to check and verify that lug nuts are securely attached.
Tow trucks and similar vehicles must be addressed. If the dealership has a towing operation, issues such as the number of runs, the size of vehicles towed, operator training and monitoring, hours of operation, and contracts with AAA or local law enforcement authorities must be considered.
MANAGEMENT
Management establishes procedures that are designed to protect employees, customers, vehicles, and others. Loss ratios deteriorate rapidly if management does not clearly communicate acceptable behaviors.
The auto dealer program assumes that any employee may be driving a vehicle.
Motor vehicle records (MVR) must be ordered prior to hire and kept current. A procedure should be in place as to what is acceptable and what to do when an unacceptable MVR is received regarding a current employee. Procedures that explain the consequences and actions of new infractions that appear on them should be in place and must be followed consistently.
Drug testing programs generate positive results only when written procedures, standards, and post-testing actions are in place. They are ineffective if management fails to follow through in a consistent manner.
Management should have guidelines on the personal use of company vehicles. When family members are permitted to use them, motor vehicle records on each potential driver must also be obtained and examined. In addition, other information, such as each driver's level of training, may be needed, depending on the frequency, type, and radius of operations. Any driver training that the named insured offers should also be evaluated.
Formal safety programs should be evaluated to determine if they are comprehensive and properly address the operation involved. Positive incentives should be offered to encourage safe driving, such as bonuses for good driving and for loss-free or accident-free drivers. A tracking system should be in place to check and verify that all mandatory licenses are current.
A formal procedure must be in place for when and how vehicles are made available for test drives.
Premises present numerous concerns, particularly those involving customer safety and vehicle security. Customers are present to purchase vehicles or to have them serviced. Slip and fall hazards in the showroom and in the lot must be evaluated. Adequate lighting is required in the sales area as well as in waiting rooms and areas for customers having their vehicles serviced. The lot should be fenced and secured to prevent customers from driving in after hours. Obstructions should be clearly marked or removed. The lot should be free of potholes and similar hazards. Procedures should be in place for removing snow and ice and to keep the lot and showroom in excellent condition.
Along the same lines, dealership lots should be adequately secured and barriers placed to prevent vehicles from being removed. Perimeter fencing should be adequate to keep individuals from entering and vandalizing or damaging vehicles. Procedures should be in place to keep more expensive vehicles in the showroom or other protected areas. Key control is extremely important. Keys should be coded so that non-employees cannot easily identify them. If both customer and company vehicles are kept in the same lot, they should receive the same protection. Customer key control is equally important. Procedures should be in place so that customer vehicles are released only to the proper person. Delivering vehicles to customers presents other exposures that must be considered.
Because it is assumed that all employees will use an automobile, this coverage is rated based on the number of employees and type of vehicles rather than a by-the-vehicle rating method. There are two groups of ratable Class I employees. The first includes the businesses' active proprietors, partners, officers, salespersons, general managers, service managers and employees who primarily operate autos or are furnished a dealership auto. Driver information must be gathered, and a motor vehicle report ordered on each of them. Auto Dealer operations should have formal procedures with respect to the personal and family use of company vehicles. Motor vehicle reports should also be ordered on family members who are permitted to drive garage autos. In some cases, certain drivers must be excluded. The best driving policy is to prohibit family members from using company vehicles, and it should be applied and enforced uniformly for all employees, including owners.
The second is employees who work in the dealership but do not regularly drive a garage auto. Examples are cashiers, service mechanics, and administrative personnel. They may take a vehicle to run an errand or move it around on the lot but doing so is not part of their regular duties. In addition, it is quite unusual for such employees to be provided a company car for their personal use. However, since they may occasionally operate a company vehicle, motor vehicle reports should be ordered on them as well. If a driver's record is unacceptable, he or she may be excluded and strictly prohibited from operating company or customer vehicles.
The dealership's safety program must be evaluated in conjunction with evaluating employees. Program components should include driver-training programs, driving incentives and written procedures addressing customer test-drives.
Class II–Non-Employees are regularly furnished a dealer's auto but are not Class I employees. They are not clearly defined, but rating factors vary, depending on their age, such as older or younger than 25. This category may be used to supply family members with vehicles. It is important to get motor vehicle reports on each of these employees as well and to carefully review and understand why they are included. Their previous loss history is particularly important and should be obtained. Personal lines underwriting guidelines should apply to drivers under the age of 25.
Another consideration may be to run background checks on employees who have direct contact with customers. The dealership should establish written procedures for dealing with customers. Customer access to certain parts of the premises should be restricted, and employees should enforce such restrictions. All employees should be familiar with techniques to deal with unruly customers.
Section III of the Auto Dealers Coverage Form provides coverage for the legal liability imposed on the named insured because of acts, errors, or omissions related to four specific activities:
Underwriting this coverage must focus on office procedures and administration. Regular training must occur, and established protocol should be in place to prevent accidents or oversights in these areas. Paper trails are vital. Having one or two persons responsible for reviewing all paperwork is vital in preventing mistakes.
Loss experience is critical to underwriting auto dealer risks. Special loss information should include the date, time of day, driver, vehicle identification, and type of loss or description of the accident in order to identify trends. In addition to the amount of the loss, the status should be provided whether it is open, closed, in reserve, or in suit. A minimum of three years of experience is necessary, but five or more years is preferred. It is important to understand changes in the operation that may have occurred during the period of the loss experience to determine if the information is relevant.
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Example: Ma-Bell Auto has been in business for more than ten years. It started out selling and customizing used recreational vehicles, and its loss history reflected those operations. However, Ma-Bell signed with a franchise three years ago and now sells only new recreational vehicles. All customizing work is subcontracted. Since many of its losses were from its previous business, Ma-Bell's long-term loss experience is much less relevant. |
Varieties of endorsements are available to modify coverage. Additional interests may be added, but doing so increases exposure. The named insured should completely understand the impact of attaching endorsements. Changes may create additional hazards, the potential for additional losses, and affect current and future premiums.
Certain other endorsements that clarify and restate a condition or provision in the coverage form are important to certain insureds.
Related Article: ISO Auto Dealer Coverage Form Available Endorsements and Their Uses