Alabama HB393 sets out new licensing and surety bond requirements for new and used Alabama Auto Dealers, automotive dismantlers, and parts recycler, secondary metals recyclers. The legislation also introduces a "master dealer license," new fees for applications, new rules for dealer plates, and additional restrictions for off-site sales.
The surety bond requirement changing from $25,000 to $50,000 is arguably the most important change for dealers. Dealers should expect a proportional cost increase. There is potential for higher premium costs as well due to additional risks. The regulations make the surety bond liable for not only end-customer claims and failure to pay sales taxes to the state, but also penalties for failure to maintain liability insurance ($5,000 penalty).
"§40-12-398. 21 "Before any master dealer license shall may be 22 issued to a new motor vehicle dealer, used motor vehicle 23 dealer, motor vehicle rebuilder, or motor vehicle wholesaler, 24 the applicant shall deliver to the commissioner a good and 25 sufficient surety bond, executed by the applicant as principal Page 23 HB393 1 and by a corporate surety company qualified to do business in 2 the state as surety, in the sum of twenty-five thousand 3 dollars ($25,000) not less than fifty thousand dollars 4 ($50,000) or an amount as prescribed by the department.
The new surety bond must be filed before October 1, 2020. Dealers should expect a pro-rata refund for the portion of their current surety bond beyond September 30, 2020. For dealers changing sureties, that refund will likely be in the form of a check and for dealers maintaining the same surety, the pro-rata refund will likely be applied to premium owed for the new bond. Because the legislation outlines an annual license term beginning on October 1 each year, the surety bond should be maintained to match the licensing cycle. The legislation does provide a means for the licensing to offer a bi-annual license in future years, but for 2020, the annual license is the new standard.
Some sureties will likely adjust their underwriting standards for the bond based on the new bond requirements, the increased bond amount, and claims paid. As always, sureties will use the credit report(s) of the owner(s) to help evaluate the premium that is paid, so with the higher bond amount, maintaining a clean credit report and high credit score can make a big impact on the cost of premiums.
If you don't work with a specialized surety broker, now might be a good time to check your rates. Specialized surety agencies often have access to surety markets that other property & casualty agents don't have access to.
Surety bonds above $50,000
The legislation sets the $50,000 bond amount as a minimum and some dealers may be required to post bonds for larger amounts. At this time the legislation does not articulate in detail which dealers may be subject to higher bond amounts. Likely factors would be dealers the perform multiple services, dealers with multiple locations, and dealers with previous tax infractions or liens with the state.
We will continue to update this section as information becomes available
What Bond Amount for New Dealer License Applications?
Updated August 11th, 2020
Because the new bond form won't be ready until September, a dealer applying for a license to begin before October 1, 2020 should obtain the current $25,000 surety bond to submit with the application. The surety will then cancel your bond effective September 30th, 2020 and apply a pro-rata rebate of the premium for that bond to the new $50,000 bond that will will be in effect starting October 1, 2020.
Most sureties are planning to underwrite the $25,000 bond as if they are underwriting the $50,000 bond, so new applicants should not expect to have to apply additional information to apply for the $50,000 bond but this could vary by surety.
We will continue to update this section as information becomes available
