Auto Dealer Bonds for Dealer Licenses

Some states require only dealers who sell used vehicles to be bonded, while others also require dealers selling new vehicles to purchase an auto dealer bond. There are also state-to-state differences as to whether dealers who sell vehicles on a wholesale basis need to be bonded or only retail dealers. Additionally, the definition of “motor vehicle” also varies by state, with some states including not only cars, trucks and motorcycles, but also mobile homes, manufactured homes, and certain types of trailers within the bonding requirement.

One thing that all auto dealer bonds have in common is that the surety bond agreement is a legally binding contract among three parties: the obligee, the principal, and the surety.

• The obligee is the state’s motor vehicle department or other state agency that issues motor vehicle licenses. The obligee establishes the required bond amount (the bond’s penal sum) and the terms of the surety bond agreement.
• The principal is the auto dealer required to purchase the bond and legally obligated to pay valid claims against it.
• The surety is the company underwriting and issuing the bond.

When a claim is filed against an auto dealer bond by someone who suffered a financial loss because of the dealer’s unlawful or unethical sales practices, the surety will first determine whether the claim is valid and should be paid. While the terms of the surety bond agreement legally obligate the principal to pay all valid claims, the surety usually pays a valid claim on behalf of the principal, who must then reimburse the surety.

There are good reasons for this arrangement. It ensures that the claimant receives prompt payment, and it allows the principal to repay the debt over a certain period of time rather than having to come up with a large sum all at once.