Dealer Bond

Motor Vehicle Dealer Bond Definition and Examples

Motor vehicle dealer (MVD) bonds are a type of surety bond required by law to ensure automotive dealers remain legally compliant. Designed to protect the general public, consumers can deal with your company knowing that you’re licensed and following the law.

Like most surety bonds, three parties are involved in this legal contract:

●     Principal: The automotive dealer that needs the bond (you)

●     Obligee: The party that requires you to obtain the bond (typically a government agency)

●     Surety: The company issuing the motor vehicle surety bond, guaranteeing to the obligee that you comply with all requirements

(Quick note: Motor vehicle dealer bonds go by many names, including MVD bond, auto dealer bond, car dealer bond, used car dealer bond, dealer bond, DMV bond, bond for dealer’s license, and motor vehicle bond. They all reference the same type of bond.)

What is an example of an MVD Bond?

A customer purchased a used car from ABC Auto Dealers. However, the dealer (principal) did not do their due diligence and test the car for safety before selling it.

Now, let’s say the customer is hospitalized due to an accident caused by faulty car brakes. The customer files a claim against your MVD bond. The claim is valid and MVD Bonds, Inc. (surety) issues reimbursement of $90,000 to cover the customer’s injuries and damages.

How Does a Motor Vehicle Dealer Bond Work?

When shopping around for MVD bonds, you’ll want to note the bonding capacity, premium, and term.

●     Bonding capacity: Also called bonding amount, this is the highest amount an individual can claim if you’re found doing something you shouldn’t (more on that below). A maximum bonding capacity of $25,000, for example, would cover up to that amount in losses and damages. Capacity requirements depend on the state.

●     Bond premium: The cost of purchasing an MVD bond — typically 1% to 10% of the bond amount.

●     Bond term: How long the MVD bond is active. For most states, terms are one year and would need to be renewed annually.

As mentioned, an MVD bond isn’t meant to protect your interests — surety bonds shield your customers from shady business practices, such as:

●     Misrepresenting the condition of the vehicle

●     Falsifying or omitting details on the repair/accident history of the vehicle

●     Issuing a fraudulent certificate of title

●     Failing to pay the required motor vehicle fees (e.g., title, registration)

●     Selling a car that is clear of the prior owner’s interest and liens

●     Not following the required tax laws

●     Selling a stolen vehicle

●     Not fulfilling a warranty

●     Not reporting the sale of a vehicle

What happens when a claim is filed against the MVD bond?

Let’s say you’re accused of doing something wrong. The claimant (usually the customer) will file a claim against the MVD bond. The surety will conduct an internal investigation, requesting documents from you, including signed contracts, receipts, and correspondence between you and the customer.

If the claim is found false or invalid, you’re safe.

If the surety discovered the claim is true and you were acting less than ethical, the surety company will reimburse the claimant for losses and damages (up to the bonding capacity).

IMPORTANT: Don’t confuse a surety bond with an insurance policy — you’re still financially liable for claim-related losses and damages. Any amount the surety company paid to settle the bond claim is now a debt you owe to the surety company.

So, if the surety reimbursed the customer for $10,0000, you now owe $10,000 to the surety.

How Much Does a Dealer Bond Cost?

Generally, you can expect to pay 1% to 10% of the bond amount. The premium is a one-time fee, paid upfront. Dealers with higher credit scores, extensive business experience, and good financials will generally qualify for lower premiums.

Bond amounts on a surety bond for a motor vehicle dealer can range from $10,000 to $300,000 depending on:

●     State

●     Type of dealership (e.g., new and used dealer, all-terrain vehicle dealer, wholesale dealer)

●     Annual sales volume (e.g., Maine requires a $25,000 MVD bond if you sell 50 vehicles annually or $75,000 if you sell 150 vehicles.)

As mentioned, MVD bonds are typically active for one year, but terms in some states may extend up to three years. When the bond expires, you can pay another premium to renew the bond.

Motor Vehicle Dealer Bonds by State 

Listed below are the general bond amount requirements by state. Keep in mind that these figures are subject to change and can vary by your county.

Requirements for Motor Vehicle Dealer Bonds

Most surety companies will have minimum credit score and time in business requirements. In some cases, the surety may want to verify your business financials by requesting tax returns, cash flow history, and profit and loss statements. The surety may also require that you sign an indemnity agreement — a legally binding contract that holds you financially responsible for costs that arise from an MVD bond claim.

How to Get a Motor Vehicle Dealer Bond

Car dealers often secure MVD bonds through insurance companies or specialized surety bond providers. Many sureties have an online application process with the following steps:

1. Submit an application that includes your personal and business information (e.g., business name and address).
2. Receive a premium quote based on your qualifications.
3. Purchase and receive your bond (or refuse and shop around).

After receiving your MVD bond, you would need to file it with the governing agency requiring the bond.

Whichever company you work with, be sure they’re an experienced surety that can walk you through the bonding process. They should also understand your unique bonding requirements based on your company, industry, and location.

Applying for an MVD Bond

Obtaining an MVD bond is easy when applying with Worldwide Insurance, Inc. Just fill out our initial application form and get an instant quote in minutes. With rates starting as low as 1%, we issue all types of surety bonds in all 50 states. No credit check required and no obligation.

MVD Bond FAQs

Why do I need a surety bond to sell cars and other vehicles?

The state requires MVD bonds to protect consumers from unethical car dealers. If a customer suffers damages or losses because the car dealer neglected a regulation, the customer can file a claim against the bond to get reimbursed.

How much is an auto bond?

The cost of auto bonds can vary by the bond amount, premium, type of dealership, and annual sales volume. Premiums on auto bonds typically range from 1% to 10%. A 5% premium on a $50,000 MVD bond in California, for example, would cost $2,500.

Can I get an MVD bond with bad credit?

Yes, Worldwide Insurance, Inc. works with thousands of business owners — even those with low credit — to help them meet their bonding requirements. If you need an auto dealer bond but have bad credit, we will still work with you.

What type of surety bond do I need?

Visit our list of bonds by state to get a closer idea of your bonding requirements. To learn more about surety bonds in general, check out our free surety bond guide.