In my last article we discussed how auto dealers are slashing costs, including insurance premiums, by competitive bidding. Interestingly enough, in this new car dealership insurance market, cost and coverage quality often have little to do with each other. Obviously, one auto dealership insurance carrier may include a specific insurance coverage that another does not, such as earthquake, and that will affect the premium. However, there are plenty of possible pitfalls buried in the small print of your insurance policy. While most carriers offer coverages with the same name, the details in the policy language will determine whether or not your specific claim is paid. As they say, the devil is in the details.
Here are a few of those devilish details to look for:
• Wind and hail – Over the past five years, we have seen individual vehicle wind and hail deductibles go up. In addition, aggregate deductibles skyrocket to useless heights or disappear all together. Most dealers buy coverage for repair and replacement at 75 percent. However, some dealers, especially those without their own body shops, buy 100 percent coverage. At least they think that’s what they are buying. Some carriers propose 100 percent coverage, but the truth is they are only obligated to pay 75 percent for wind and hail. This caveat is often left off the proposal and is buried in a policy endorsement waiting for a hail storm.
• Employment practices (discrimination and harassment) –There are a number of issues here, but I’ll focus on only a few. First, what is covered? Some polices get very specific about which laws can be violated to trigger coverage. This can be a real problem if the lawsuit accuses your dealership of violations not listed. You want a policy that provides coverage all applicable local, state and federal laws, statutes and ordinances.
The second potential coverage gap relates to third parties or non-employees. Some states now say you owe all the same duties to non-employees as you do employees. This can also include accusations of discriminatory lending practices by one of your lenders.
The third gap relates to class action or group suits. Some polices exclude class action suits while others are silent. These suits often center on lending practices. Often the dealer is brought into the suit by virtue of the fact your dealership offered the loan to the customer. Unbeknownst to you, the lender may be engaging in discriminatory lending practices.
• Co-insurance – Unlike your health insurance, an 80 percent co-insurance clause does not mean the insurer will pay 80 percent of the claim and you will pay 20 percent. It does mean that you must insure your property for a value of at least 80 percent of the replacement cost, or you will suffer a contractual financial penalty at the time of the claim. Any claim will be penalized, not just those in excess of 80 percent of the insured value. Some carriers will eliminate co-insurance on your building and contents by adding an agreed amount endorsement.
One carrier also includes an 80 percent co-insurance clause for employee tools. Dealers often underinsure employee tools for a couple of reasons. They may think the service tech has coverage elsewhere, when they usually don’t. The other reason is the dealer really doesn’t know the value of the employees’ tools, or tries to save money by buying a lower limit of coverage. Under most policies this would not be a problem unless a single loss exceeded the value insured. However, if your employee tools are underinsured with a co-insurance clause, you can be severely penalized regardless of the size of the loss. The only way to avoid a penalty is to insure to the co-insurance level.
• Errors and omissions – Who’s going to sue you under this coverage? More than likely it’s going to be a customer. There are cases where dealers are sued by others, such as a lender. As an example, your back office does not title a vehicle correctly, leaving off the lender. Your opportunistic customer sees this, sells the car, and defaults on the loan. The lender now has no legal recourse and sues you for the omission of leaving their name off the title.
Most policies would cover such a claim, but one carrier limits their errors and omissions coverage to suits brought by customers. Is it your insurance company?
• Reporting forms and audits – It’s easy for an agent to low-ball a bid, and sometimes it does happen. Low-balling does not mean giving you a cheap price; it means using incorrect values and an employee counts that result in what appear to be low premiums. With most policies you pay at the end of the year or the end of the month for the exposure you really have through an audit or reporting form. Therefore it’s important for the dealer to know up front what values have been used to arrive at the quoted price. It’s the only way to get your quotes as close to comparing apples with apples as possible.
It’s easy to know that you’ve been had when the insurer does an audit. You get a big bill and say, “What the hell is this for?” A reporting form low-ball can be more difficult to detect since you figure out your premium each month and send a check. Unless your actual premiums are compared to your bid, you may never know you’ve paid much more than you thought you would. Beware of agents that encourage under-reporting to save money. Under-reporting may result in reducing your coverage at the time of a claim; or worse, a claim denial on the basis of fraud.
As you can see there are plenty of devils in these policy details, and this article only scratches the surface. Insurers all use different coverage forms, and all have different exclusions and limitations. It’s important to know each policy’s limitations so you can prudently pick the policy that best fits your needs.
Roger Beery is president of Austin Consulting Group, Inc., a firm that specializes in helping dealers cut their insurance costs and maintain optimum coverage by bidding and analyzing their policies.
