SHOULD I INSURE MY INVENTORY?
This question comes up much more often than one might think and, in working with my clients, I know why:
There are so many options available…And no two dealers think exactly alike!
Insurance philosophies are different.
Insurance budgets are different.
Business goals are different.
Lienholder requirements are different.
Insurance policies include different language and levels of protection.
So, the dealer is left to determine what direction to follow to best serve all of the above. Maybe he calls an agent – preferably a garage insurance agent – to discuss the situation and get his input. An agent’s input is necessarily influenced by the agent’s ability to solve the problem using a product at his disposable.
In this blog, let’s forget the source, i.e. the agent, of solving your dealer insurance need and just think about the many insurance options available to fill the blank. We will begin with the coverage available via your lienholder, commonly called single-interest coverage.
What Is Single-Interest Coverage?
Single-Interest Coverage protects your lienholder in the event of any loss to any vehicle on which he is the lienholder. That’s it. You have no protection outside of paying the lien amount for the damaged vehicle. You may have paid $15,000 for it, but the current lien is only $5,000. Single interest insurance makes the lienholder whole again. You are simply out of debt on that vehicle AND you have incurred whatever loss was created by the loss of inventory and investment.
I have been told that Single Interest Coverage is much less expensive than purchasing a blanket insurance policy. I have found that to be true only in the rarest of cases, i.e. very small inventory and high turnover, with vehicles being sold within days of being brought into the inventory. I always tell my dealers to ask their lienholder for an annual composite billing in order to have a real knowledge of their single interest insurance cost. This allows the dealer to know what money he is spending for insurance that protects only his lienholder.
Another change in the bonding process was the term dates. The state eliminated the statewide renewal date of April 1 and instituted a renewal date based on date of inception. Bonds are still two-year instruments, but now expire at two years from date of inception.
What Do You Want To Insure?
Perhaps, the next area to consider is ‘What do you want to insure?’ Insurance Philosophy determines what amount of risk any dealer is willing to assume. In today’s insurance market there are policy varieties that allow each insured to determine the risk he/she is comfortable with. My experience is: Insurance Philosophies are strongly influenced by insurance budgets and business goals.
Dealer inventories can be written on the same policy and in conjunction with the dealer’s garage liability coverage. The coverage may be written on a comprehensive or supplemental basis, with collision. Also, when coverage is provided under a one policy combination set up, almost, always, the coinsurance clause is 100%. If a coinsurance clause is 100%, it requires that the dealer be insured to 100% of what he has invested in inventory on the date of loss in order to prevent any coinsurance penalty on any less than total inventory loss.
For Example: A dealer has $100,000 invested in dealer-owned autos. He purchases a $50,000 inventory policy with a $1000 collision deductible. One $30,000 car is totaled in an accident. The claim would be settled as follows: $30,000 x 50% = $15,000 less $1000 deductible = $14,000 claim check instead of $30,000 – $1000 deductible= $29,000 claim check.
It is important that you understand the coinsurance clause in your policy. Too many dealers have learned the hard way, i.e. after a major hail storm, exactly how it works. A misunderstanding of the coinsurance clause can cost the dealer much more than what the premium would have been to properly insure his risk.
Currently, there are a number of Lloyds’ policies available to Texas dealers and many of those contracts include an 80% coinsurance clause. That translates to the 100% payment of claim, less deductible, provided the dealer has insured at least 80% of what he has actually invested in his inventory on the date of loss.
Of course, in either case described above, the policy will pay only the total amount insured should the entire $100,000 of inventory be damaged in catastrophic loss.
What Cars Do You Want To Protect?
Another area to consider when choosing what insurance is most appropriate to your specific operation is what cars do you wish to protect. Some dealers are concerned only with floor-planned vehicles; other are concerned only with the vehicles NOT included on their floor-plan.
Currently available Lloyds’ inventory products will allow the following policy endorsements:
• Limiting coverage only to the floor-planned vehicles
• Limiting coverage only to the non-floor-planned vehicles
• Limiting coverage only to vehicles valued above a pre-determined amount
• Limiting coverage only to vehicles stored at a specific location
• Adding an additional $25,000 or more in false pretense coverage & limit that additional protection according to the endorsement options listed herein.
Most contracts have a coverage option of either Comprehensive or Specified Perils and collision. It is important that you know the difference between the two:
Comprehensive: Loss from any cause except the covered auto’s collision with another object or the vehicle’s overturn.
Specified Causes: Fire, lightning, explosion, theft, windstorm, hail, or earthquake, flood, mischief, vandalism or the sinking, burning, collision or derailment of any conveyance transporting the covered auto.
Collision: The covered auto’s collision with another object or the covered auto’s overturn.
Lloyds’ contracts often refer to Specified Causes as Supplemental Coverage. They are the same for all practical purposes.
Your chosen deductible should help you determine whether you want to pay the extra premium to have comprehensive protection over specified perils. Generally speaking, most of the time the things covered under comp, but not supplemental are things that are eliminated from coverage by the deductible chosen.
How Can You Reduce Your Rate?
Once you have chosen your needed protection, there are several ways you can reduce your rate:
• Larger Supplemental deductibles. $1000/5000 is fairly typical for either comp/collision. You may eliminate the $5,000 aggregate to get some rate relief or you may choose to increase the total figure – something like $2500/12,500 – or whatever combination you feel comfortable with.
• Elimination of a covered peril. Perhaps you choose to eliminate theft protection because all of your vehicles are in a locked building or you have a 24-hour guard or whatever allows you to see no real theft exposure. Excluding theft protection has a significant impact on your premium.
• Wind/Hail/Flood. These perils almost always have separate deductibles, usually a minimum of $1500 per car with no aggregate. Again, you can choose a larger deductible or elimination of peril.
• The number of furnished dealer-owned autos. Most DOL rates have an amount built in to cover at least one 24-hour driver. If you are also covering your spouse, your children, your manager, and the list is endless, you are paying for it. Consider a personal auto policy rather than list multiple people as furnished autos. Most personal auto policies extend coverage to temporary substitutes and dealer-owned autos are likely to meet that definition.
• Proof of three years claim free coverage. Be sure you are receiving any and all claim-free credits available.
So, there you have it: There is an inventory physical damage policy available to fit every insurance philosophy and most insurance budgets.
My advice to work with a well-respected GARAGE INSURANCE agent. Writing coverage for independent auto dealers is a niche market and Texas has many agents who share this specialty. Find the one you trust and be as honest as possible in what you want and how much you can afford to spend.
Do not hesitate to contact me. I’m eager to receive your feedback, questions and comments. If you have specific subjects or insurance concerns you would like to discuss, please let me know. firstname.lastname@example.org or www.mulleninsurance.com.
If you’d like additional information on insurance for your business or you’d like to request a quote, please visit https://mulleinsurance.com/#Insurance-quote or give us a call at 972-681-6297.
MULLEN INSURANCE AGENCY, INC
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