Operating a used car dealership comes with unique risks requiring the right used car dealer insurance. Whether you’re a small, independent dealer or part of a multi-state operation, minimizing risk and protecting your business is essential.
In this article, Jason McConkey, Director of Transportation at Central Insurance, shares insights on the key factors influencing used car dealer insurance coverage. We also explore best practices for reducing risk, protecting assets, and ensuring smooth business operations.
Key Risks Faced by Used Car Dealerships
Used car dealerships face multiple liability and property risks. Risks include a constant flow of customers, frequent test drives, and valuable inventory, which create unique exposures that can significantly impact business operations and financial stability if not adequately addressed.
Common risks include:
Slip-and-Fall Accidents
Car dealerships typically include a mix of outdoor lots, showroom hard flooring, and service areas where oil spills can occur. These potentially slippery surfaces increase the likelihood of slip-and-fall accidents. Regular floor maintenance, proper signage, employee safety training, and quick responses to spills or icy lot conditions lower the risk of accidents and injuries.
For Example: A dealership incurs legal expenses after a customer slips in its lot and sues for medical reimbursement. The dealership enhanced its snow and ice removal procedures and retrained employees on winter safety protocols. Implementing these proactive measures reduces the likelihood of future incidents and improves overall customer safety.
Test Drive Liability
Test drives are essential to car sales but also introduce significant liability risks. Accidents can occur without proper procedures in place, leading to costly claims. Dealerships should require valid driver’s licenses and proof of insurance before test drives. Requiring employees to accompany customers on test drives and utilizing pre-determined test routes can also minimize exposure risks.
For Example: A prospective buyer took a test drive on a high-traffic route without an employee present, leading to a collision. The dealership revised its policy to require employees to accompany customers on all test drives and utilize pre-approved routes. These measures significantly reduced the dealership’s exposure and improved overall risk management.
Inventory Damage
Outdoor lots increase exposure to weather, theft, and vandalism risks. Dealers can mitigate these risks by investing in covered storage, security cameras, fencing, and weather-resistant barriers.
For Example: A dealership experienced a series of overnight vehicle thefts and vandalism. These incidents decreased significantly after installing high-resolution security cameras, upgrading perimeter fencing, and adding a lighting system.
Fluctuating Vehicle Values
Used car values can fluctuate based on market demand, potentially creating gaps in coverage and leaving a dealer underinsured in the event of a loss. Dealers should conduct frequent inventory appraisals and adjust their coverage limits to ensure adequate protection.
For Example: A dealership faced a significant coverage gap when the market value of its used cars surged due to increased demand. After consulting with its agent and conducting a thorough inventory audit, it adjusted its coverage limits to reflect real-time valuations. This proactive approach ensured that inventory remained adequately insured, preventing unexpected financial losses.
Environmental Risks
Many dealerships handle hazardous materials, including motor oil, coolant, and other automotive fluids. Improper disposal of these substances can lead to environmental fines and liability claims. Implementing a compliant waste disposal program and working with certified disposal companies can help mitigate risks and ensure regulatory compliance.
For Example: A dealership was fined for improperly disposing used motor oil, leading to reputational damage and costly legal consequences. The dealership partnered with an environmental consultant to develop a structured waste management process. This process included employee training on hazardous waste handling, installing secure oil disposal containers, and scheduling regular audits to ensure compliance with environmental regulations.
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Small vs. Large Dealership Risks
Dealership size doesn’t necessarily determine risk level. While larger dealerships may have more resources to implement sophisticated risk management strategies, smaller dealerships can be equally effective if they invest in proper safety controls and best practices.
“It comes down to pride of ownership and whether the business invests in proper controls,” McConkey explains. “You can have a well-run small operation and a well-run large operation. The most important factor is in how they manage risk.”
Independent dealerships often face additional challenges compared to franchise dealerships, which must adhere to manufacturer-imposed policies and standards. Without built-in guidelines, independent used car dealers must proactively establish policies to reduce risk, protect assets, and ensure smooth operations.
McConkey notes that independent dealers take a wide range of approaches to running their businesses. “Some dealerships go above and beyond to establish strong processes, while others may struggle without guidance. We aim to work with dealerships embracing a proactive, open approach to risk management, and we want to help them take the necessary steps to prevent claims and ensure long-term success.”
Essential Used Car Dealer Insurance
Several key coverages are necessary to protect a used car dealership from financial losses.
1. General Liability Insurance
General liability provides essential coverage for incidents occurring on dealership property, including customer slip-and-fall accidents and other third-party bodily injury claims. General liability also includes completed operations liability, which protects against claims related to work performed by the dealership.
2. Auto Dealers Policy
This policy bundles general and auto liability, protecting dealership-owned vehicles, test drives, and other business-related vehicle use.
3. Dealer’s Physical Damage Coverage
This coverage protects inventory from severe weather damages and criminal activity, making it crucial for dealers who store vehicles outdoors.
4. Garagekeepers Insurance
Garagekeepers covers customer-owned vehicles left in the dealer’s care for repairs, servicing, or storage.
5. Pollution Liability
Pollution liability covers environmental risks related to the disposal of hazardous materials such as oil, coolant, and other automotive fluids. It helps dealerships comply with environmental regulations and protects them against fines, cleanup costs, and third-party claims arising from improper waste disposal.
6. Auto Dealers Extension Coverage
Auto Dealers Extension is a specialized endorsement designed for used car dealerships. It provides enhanced protection tailored to their unique risks. This extension often includes expanded coverage for property damage, additional liability limits, and specialized endorsements addressing niche dealer needs.
Best Practices for Risk Management
In addition to having proper used car insurance coverage, dealerships can take several additional steps to reduce the risk of costly claims and business disruption.
1. Implement Physical Security Measures
Theft and vandalism are significant concerns for dealerships, especially those with extensive outdoor inventories. Dealerships can reduce these risks by installing proper fencing, lighting, and security cameras. Curbing, landscaping, and concrete planters can also serve as passive deterrents to restrict unauthorized vehicle access.
2. Establish Test Drive Procedures
Test drives present liability risks, particularly if the dealership does not have structured policies in place. Dealers can mitigate these risks by requiring all test drivers to present a valid license and proof of insurance. Accompanying buyers on test drives and establishing designated routes also helps minimize exposure to high-risk roadways.
3. Enforce Proper Housekeeping and Maintenance
Maintaining a safe dealership lot, showroom, and service area can prevent injuries and property damage. Make it a best practice to inspect surfaces for slip and trip hazards routinely.
4. Determine Appropriate Deductibles for Weather Risks
Severe weather events such as hail, hurricanes, flooding, and high winds can damage dealership inventory. To safeguard against these risks, dealers should assess their location’s climate patterns and work with their agent to ensure they’re adequately protected.
The Central Difference
Choosing the right insurance carrier for a used car dealership goes beyond price; it’s about finding a partner that understands the industry. “Many carriers see franchise dealers as good and independent used dealers as risky,” McConkey notes. “At Central, we don’t view it that way. We look for well-run operations, regardless of size, taking pride in their business. We want to work with dealerships that want to do things the right way.”
With a strong track record in loss control, underwriting expertise, and a commitment to long-term partnerships, Central is the right choice for used car dealerships looking for comprehensive protection and industry expertise.
Contact your agent for more information about how Central Insurance can protect your dealership.
The information above is of a general nature and your policy and coverages provided may differ from the examples provided. Please read your policy in its entirety to determine your actual coverage available.
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