By Steven P. Gibson, Dealer Risk Services
I want to return to a topic we touched on in a previous issue. It involves the acquisition of a Dealership (or multiple Dealerships) as it relates to the acquirer’s insurance program.
Most Dealers that are financially savvy enough to make major purchases are utilizing a Loss Sensitive program for their insurance. It could be a Large Deductible, Retention, or even a Captive Program – all are solid platforms designed to control the cost of insurance. However, with all Loss Sensitive programs, the risk/reward factor exists. Plans designed around premium reduction require the Insured to share in the cost of claims. The level of participation can be a “little” or it can be a “lot.”
Relate this to a new acquisition. While the acquiring Dealer is not responsible for occurrences of the past, he or she will most certainly be “on the hook” for occurrences Day 1 and afterward from the closing date. Point is, the Dealership Team should apply the same due diligence used in the financial analysis of the acquisition when looking at the “claims culture” of the entity being purchased.
Understanding the historical claims of a purchase is critical. Good operators know how their Dealerships work and have gone to great lengths to install policies and procedures to control claims. But, it takes time to implement those strategies into a new acquisition. Certainly it will not happen immediately.
So, how long? Is a 90-day window achievable for total immersion into the controls of the purchaser’s Risk Management system? That’s aggressive, but it’s also a full quarter of a year and a lot can happen from a claims perspective.
Example: A growing Dealer group purchased an Import store with some much needed “facility improvement” issues. Within 60 days of the acquisition, there were 2 “slip and fall” incidents citing “uneven pavement.” Both resulted in litigation…both could have been corrected (and incidents avoided) very shortly after closing.
Example: Changes in ownership always affects employees. At one Dealership a sales employee, fearing dismissal from the new Management Team, stole several dozen customer files. The ensuing Cyber/Identity Theft breach event consumed both considerable time and financial resources. This was avoidable with immediate identification of gaps in information security areas by qualified IT personnel.
Example: An over aggressive Sales Manager and F & I Manager failed to recall spot delivered vehicles when it was clear that financing had fallen through. The insurer had a 30-day limitation on coverage for spot deliveries. When units were finally returned to the Dealership totaled, the claim was denied and the Dealer left with $40K in loss after salvage. A review of the Spot Delivery procedures and units outstanding would have prevented and/or minimized the loss.
If a purchaser has a Loss Sensitive program that puts them at risk for the first $50,000 or $100,000 (or more) per occurrence, acquiring an entity that has a history of “sloppy claims” can be costly. These areas can involve premise issues that give rise to slip and fall claims, inadequate test drive procedures that cause auto accidents, or extreme aggressiveness in the Finance office that could result in class action litigation or regulatory scrutiny.
Certainly, the new Management Team will take control as quickly as possible. But, including a Risk Management Assessment is critical to uncovering the “issues” and ensuring that claims expenses are controlled as quickly as possible.
Bottom line: It is essential to understand the “claims culture” of the Dealership(s) you are purchasing.
Steven P. Gibson is the President of Dealer Risk Services, Inc., a Florida-based firm that provides insurance expertise to the Automotive Industry. He can be reached at email@example.com and 321-733-6253.