Selecting the correct insurance coverage for a dealership can be challenging, but when the wrong coverage results in paying claims out of pocket, insurance coverage’s importance is highlighted.
Better Vantage Point founder Tom Kline, author of “Tuck the Octopus: A Better Vantage Point for Dealership Risk and Compliance,” said dealers should take regular looks—at least annually—at their insurance coverage.
“It is like a doctor’s annual checkup,” Kline said. “Some insurance companies have higher policy limits under certain sections, but finding the right risk strategy for your dealership is an important thing to consider.”
A recent case involving Blue Compass RV highlighted policy limits’ importance. A Texas store in the dealer chain was building a new facility in February 2022 when the store received an email from someone impersonating the general contractor. The fraudster provided new banking information for payments, and the dealership paid a $1.2 million invoice using that information.
Twin City Fire Insurance Company, the dealership’s insurance provider, determined the claim fell under the policy’s fraud deception provision, which was limited to $100,000 in coverage. Blue Compass sued to access coverage of the entire claim. Last week, a court in the Northern District of Texas ruled in favor of the insurance company.
Kline said fraud is an area where insurance is critical. He said determining the correct policy to provide coverage and the correct level of coverage are important factors for dealerships to consider.
“They are the bad guys, and they will continue to be bad,” he said. “They are good at staying ahead of a dealership’s internal controls. So, unfortunately, this is not an isolated incident.”
Kline said misinterpreting policies and what they cover is a common problem.
“The first thing a dealer needs to do is put all of their coverage on a spreadsheet and go through each line,” he said, “to make sure they are comfortable understanding what the potential losses are and how much the insurance company would cover in the unlikely event that peril actually comes to pass.”
In areas where a dealership is not sufficiently covered, Kline said the company should negotiate with insurance carriers for higher limits. Renewal periods are good times to take a closer look at coverage, but reviews can be performed any time during the year.
“If the insurance company does not have limits that are adequate to satisfy a dealer’s needs, then the dealer should consider shopping and marketing their insurance packages,” Kline said.
Although he said no harm comes from looking at different insurance companies, Kline said moving coverage is not always the best answer.
“It is easier to negotiate with your current insurance company than it is to go to market and get a new one,” he said. “As Steven Stills once said, ‘Love the one you’re with.’”
Kline said outcomes such as the Blue Compass RV decision demonstrate dealerships’ need to be proactive and precise when buying insurance plans.
“Insurance is not sexy and it is not the fun part of the business,” he said, “but it is certainly a vital and critical part of making sure a dealership’s entrepreneurial ventures have the backstop to grow.”
