What are surety bonds, and how do they affect the auto industry?

We've all head horror stories of friends who were taken by unethical auto dealers who were looking to do nothing more than pull the wool over their eyes to turn a quick, unfair profit. What you might not know about, however, are the steps the government takes to limit instances of auto dealer fraud. One way many government agencies protect consumers is by requiring auto dealers to purchase surety bonds before they can apply for a business license. But what is a surety bond? A basic definition explains that a surety bond is a legally binding contract that ensures a certain task is performed. Similar to other types of insurance, thousands of specific types of bonds exist. When it comes to the auto industry, a specific license and permit surety bond type is used to protect consumers from dealers who might try to take advantage of them. These bond types are commonly known as auto dealer bonds, but they also go by many other names such as DMV bonds, motor vehicle bonds, dealer license bonds or used car dealer bonds, just to name a few. No matter the specific name, all bonds work in the same basic way. Each surety bond that's issued provides a legally binding financial guarantee of a dealer's ability to work according to industry laws and regulations. Three entities are involved with each bond that's issued.

1. The dealership or individual auto dealer that purchases the bond is the principal. By purchasing a bond, the principal provides a legally binding promise that they will follow whatever industry regulations the bond form refers to.
2. The government agency that requires the bond is the obligee. By requiring the bond, the obligee reinforces industry regulations and protects consumers from financial loss at the hands of unruly dealers.
3. The insurance company that underwrites the bond is the surety. By underwriting the bond, the surety provides a financial guarantee that the principal will comply with all regulations according to the bond's terms.

If a dealer fails to follow industry regulations, harmed consumers can make a claim on the bond amount to gain reparation. Government agencies may also make claims on bonds to collect payment penalties and fines that result from an auto dealer's inability to operate a dealership according to law. Some instances in which claims may be made on a dealer's surety bond include

• misrepresented merchandise
• unethical sales tactics used to sell vehicles
• failure to deliver a valid certificate of title
• failure to pay necessary motor vehicle fees
• failure to forward sales tax payments to the state

If you or someone you know has been ripped off by a fraudulent auto dealer, contact your state's auto dealer licensing office immediately. You can report the infraction and get information on the dealer's surety. If the dealer did, indeed, violate the bond's terms, you can take the case to court. If the dealer is convicted, the harmed party will be compensated by the surety that provided the bond's financial guarantee. Danielle Rodabaugh is the chief editor of the Surety Bonds Insider, a publication that tracks news related to the surety bond industry. As a part of the publication's educational outreach program, Danielle specializes in writing about surety bonds and other forms of consumer protection.