By Steven P. Gibson, Dealer Risk Services, Inc.
The current market of dealership purchasers includes the normal mix of the mega-dealers and the smaller “hometown” dealers looking to expand their footprint. But, we also see an influx of well-financed newcomers looking to make their mark on the automotive industry. Some of these are international purchasers who have enlisted experienced General Managers to safeguard their efforts and protect their investment.
As insurance professionals, we are always intrigued by the Non-Disclosure Agreements surrounding these transactions, which can make insurance placements extremely difficult and often costly. But not having insurance can prove even more costly.
Without access to historical claims and underwriting information, most insurance carriers tend to treat newly-formed entities with higher rates and less-than-robust coverage. Insurers look to principals’ years of experience as a guidepost for favorably pricing or acceptance, adding complexity and cost.
For the buyer with established dealerships or dealer groups, adding locations and absorbing entities with little advance notice to insurance agents and carriers can prove to be problematic and provide a fertile field for errors and omissions.
Not ideal. But, the frequent requests for transparency from insurance brokers and carriers have been overruled by the need for secrecy and non-disclosure. These are often ineffectual, as word tends to travel quickly when there are “strangers” posing as auditors milling around a dealership. These deals are never as clandestine as either seller or purchaser presume.
In these situations, the cost of the transaction can last well beyond the signing of documents and exchanging of funds. Buyers are purchasing an established “dealership culture” that has a history of claims activity that will continue for at least the next 90 to 120 days. This timeframe could be longer, depending on the initiatives of the new management team and how quickly they can integrate their policies and procedures.
Each claim carries a deductible and, in some cases, claims can erode insurance limits. This adds to the cost of the purchase and can potentially endanger the purchaser. In addition, workers’ compensation experience mods can go up or down with claims history of the newly-purchased entity.
Simply put, you need to understand (from an insurance standpoint) what you are purchasing. This is particularly essential for new dealers, or those dealers new to U.S. laws and litigation.
Examining the books on a purchase is essential to reveal profitability, and looking at the insurance history can provide valuable insight into the culture you are purchasing.
From the seller’s perspective, exposure to claims does not end with the signatures and hefty bank deposit. It can get complicated. Discontinued Products coverage needs to be considered for all areas of exposure until a prudent timeframe has passed.
One of our single point clients recently sold his dealership. We were notified late in the process and quickly put together offerings for Extended Reporting Periods on the EPLI, Cyber and Pollution policies as well as Discontinued Operations coverage for the Dealership. All were declined by the principals, as they felt their insurance exposure had ended with the sale.
As we explained to them, it did not. Verification came with the suit that arrived 75 days after the sale and outside any normal Extended Reporting Periods in the policies. Some incidents have immediate notification and some do not.
Certainly, a slip and fall or an auto accident that occurs during the policy year would be covered under that policy even if the suit arrives 18 months after the incident. The occurrence clearly happened during the coverage period. But, what about those policies that are written on a Claims Made basis like the afore-mentioned EPLI, Pollution or Cyber policies? And, what about the Completed Operations exposure in the Service Department?
Accidents that occur after the policy period as a direct result of your work can get really complicated with regard to coverage and payment. Obviously, if there is continuous coverage there are no issues. But, the brakes that fail or the wheels that fall off 90 – 120 days (or longer) after the work is done carry an occurrence date that could easily fall outside the policy coverage term. Claims in this scenario could be declined.
Discontinued Products coverage needs to be considered for all areas of exposure until a prudent timeframe has passed.
Finally, I would urge both Sellers and Purchasers to ensure they have solid Directors and Officers Liability coverage. Dealership transactions do not always go as smoothly planned. Egos get strained and often the Manufacturers can put a ‘’wrench’’ in the deal. Tempers can flare and lawsuits can arise if the deal falls apart. A review of the typical Garage policy will reveal very little (if any) in Defense and/or Indemnity for such suits. D & O is essential coverage for any entity entertaining an acquisition, merger or divestiture.
Insurance can be costly, but not having it or not having enough can be financially devastating.
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 sgibson@dealerriskservices.com and 321-733-6253.
