Since the onslaught of the COVID-19 pandemic, auto dealerships across the U.S. have faced closures, staff furloughs and a reduction in inventory values.
The rising cost of liability insurance hasn’t helped.
For U.S. auto dealerships, the most important liability products are: Open Lot, Umbrella and Employment Practices Liability (EPL) insurance. Here’s how each coverage line has been affected and the risks to avoid with each.
Don’t fall prey to these coverage risks.
The best strategy to optimizing coverage is to work with a broker that understands the industry and specializes in auto dealership insurance. Make sure you consider the following traps when securing Open Lot, Umbrella and EPL coverage for auto dealerships.
Open Lot Insurance. As catastrophic, (CAT claims) have increased due to an uptick in severe weather, so have claims against Open Lot insurance.
Traditionally, Open Lot insurance is written with a per-car deductible. In high hazard areas subject to hail or tornados like the midwest, or Florida where hurricanes have caused significant property damage, this could be as high as $5000/car. Such deductibles don’t leave much respite for dealerships after a storm.
One solution for high-risk areas has been to engage a parametric policy, which provides coverage for severe weather. Unlike a traditional liability policy, parametric coverage pays out full policy limits when a weather-related event affecting the dealership reaches a certain threshold, regardless of the damage per vehicle. The policy is triggered when the weather varies from the average, i.e. if there is an occurrence of large hail. Because the policy is related to average weather, its limits and threshold for payout are written to reflect the weather patterns of each region.
Dealerships are now using the parametric insurance payout to subsidize their Open Lot insurance deductible. Other creative solutions include lobbying the underwriter to engage a flat, instead of a per-car, deductible.
COVERAGE RISK #1 – Forgetting freestanding signage, fences and light poles in Open Lot coverage.
If you’re a dealership with an Open Lot, you likely also have a freestanding sign with your logo and dealership name – maybe even two or three, depending on the lot size. The same goes for free-standing light poles — you’ve likely got dozens. Make sure these and any other fixtures are accounted for in your Property Policy or they won’t be covered, even if they’re destroyed in a weather-related claim.
Dealership Umbrella. Reinsurance rates skyrocketed across markets due to COVID-19, social inflation and high claims payouts. The result is rising rates and limit reductions.
COVERAGE RISK #2 – 25% windstorm participation on property coverage.
For auto dealerships in areas where high winds and storms are commonplace, property policies with a subset of Business Interruption (BI) coverage will often include a 25% windstorm participation clause. This means if the dealership is unable to function due to a storm and therefore makes a BI claim, the claim is subjected to a 25% deductible.
For example, on a $1M property policy, the dealership would have a $250,000 deductible. If this seems steep, that’s because it is. Make sure to work with your broker to reduce the deductible or investigate potential alternatives.
EPL Coverage. With the addition of COVID-19 related furloughs, terminations and employment lawsuits, many carriers are increasing premiums at this year’s renewal. While most COVID-19-related EPL cases are dismissed, every case has to be defended. As a result, insurance carriers have started to pull back on terms and increase rates. This means auto dealerships will most likely need to stick with their incumbent carriers and forgo their chances to negotiate on price.
COVERAGE RISK #3 – Packaged, discriminatory-only EPL coverage.
Some insurance carriers will create a policy package for auto dealerships, combining Property, Garage, EPL and Umbrella coverage into a single entity. Often, these packages provide more general limits and basic terms, forgoing critical elements to some of the individual policies. In some cases, an assumed coverage is not actually written into the policy.
For example, it isn’t uncommon to see packages with an EPL policy that covers discrimination only. This means the EPL policy will not cover wage and hour, wrongful termination or harassment — critical scenarios that won’t be picked up by other policies.
Work with your broker to ensure all your policies have full range of coverage, especially when engaging a packaged plan.
Contact your HUB Transportation specialist for more information on optimizing your auto dealership liability coverage.
