The multi-store dealership operation faces the same insurance struggles and challenges as any other dealer. However, with a larger number of stores comes a larger number of issues. Consistency is the key, especially if your carrier(s) issues a separate policy for each dealership.

From an insurance perspective, we see multiple dealership groups managed in three ways. First is a unified approach where all dealerships are included on one set of policies with consistent coverage, if possible. In some cases it is necessary to provide separate policies if the dealerships are in multiple states. Alternately, the dealerships are insured by the same insurer but each carry separate policies. The third choice is that each dealership acts as a separate buying entity. This is most often the case when minority partner/managers purchase the insurance separate and apart from the parent dealership operation. In this scenario, it is not uncommon to see different insurers in addition to different coverages.

The unified model is usually the easiest to manage, offering fewer policies and greater consistency of coverage. The larger premium created by bidding a group of dealerships as a single entity often creates a more competitive environment than a series of one dealership bids. When your dealerships are located in multiple states, it may pay to consider regional insurers for some of your dealerships. Sometimes they will be more competitive than their national counterparts. It remains important to maintain a single expiration date so each year you can decide whether or not it is better to consider multiple carriers.

Regardless of the model you choose, it is best practice to keep the coverages consistent between stores. Deductibles and sub-limits in coverages such as E&O and Employee Practices rank as the most common inconsistencies when separate policies are issued. However, on occasion we do find coverage missing on one store that management intended for all stores. When more policies exist, the chance for coverage gaps or inconsistencies increases.

When using the unified approach in particular, you must make a management decision about how you want to write the policy coverage and allocate the premiums. Large deductibles come to mind, and a few issues ago, I wrote a complete article on what to consider with large deductibles. That said, it is often tempting when looking at a single large policy to assume that large deductibles are the most cost-effective approach. Sometimes it is, and other times not. If you go down the large deductible path, you may want to consider how you are going to allocate a claim-related deductible to an individual dealership, if the allocation affects the pay or bonuses of the local dealership management.

As an example, let’s assume that all your building coverage is written on an aggregate blanket basis with a $50,000 deductible. At one dealership, a small $100,000 building is struck by lightning and burns to the ground. Is it fair to saddle the one dealership manger with the added expense of a $50,000 deductible on a $100,000 building? Certainly, if you were insuring that dealership on a stand alone basis, a $50,000 deductible would never have been considered. The same problem can occur when you face inconsistencies in coverages or a gap in coverage from dealership to dealership.

There are other areas where consistency problems can arise, such as physical damage deductibles, what percentages are paid for your own repair work, and your crime limits. Consistency definitely pays at the time of a loss.

A less obvious problem centers on the fact that all coverages are not created equally. Take as an example, “Employment-Related Practices” coverage. Some carriers cover third party claims and class actions suits, while others don’t. If the parent dealership were to buy coverage from two different carriers, some dealerships may have the coverage while others will not. Therefore, if two stores have similar claims, one may be covered and the other excluded.

Another question often asked is: how should the multi-store dealer allocate premiums between dealerships? Of course, there are no hard and fast rules. Some dealers allocate by exposure, such as by number of employees or inventory size.

However, I would like to offer another alternative that will reward those dealerships in your group with good loss experience while getting the attention of those with poor losses. Pick whatever percentages you want, but a good rule of thumb is to allocate 60% of the premium based on exposure, and the remaining 40% on two or three year’s average losses. It is also a good idea to limit individual losses in the formula to $50,000 or $100,000. That way, a single loss wouldn’t eliminate bonus possibilities because of an unrealistic amount of premium allocated to a singe store for too many years. Additionally, you may want to consider excluding acts of God, and only count the losses within management’s control. This system gives your managers a financial incentive to keep their losses down.

The system would work like this: Let’s say you have four stores of equal size each with $400,000 in premiums, and their losses are as they appear below.

Premium = $400,000 … $240,000 allocated to exposure and $160,000 allocated to losses.

As you can see, the manager who has been successful at keeping his losses down benefits by lowering his insurance expense, thus increasing his profit. Manager 4 gets to take $25,600 in savings to the bottom line while Manager 2 takes on $28,800 of additional expenses due to excessive losses. You’ll have their attention, and they’ll work hard to get their losses under control. Ultimately, lower losses will mean lower premiums for the entire group.

Consistency is the key to eliminating coverage gaps, and loss-sensitive premium allocation is a key to loss control.