It’s 8:00 PM, Sunday night. Your top salesperson just closed what looks like the last deal of the day and the customer is headed to finance.
It was a skinny deal, but you took it because you knew it would put your team over the goal line for bonuses this month. You recline and put your feet up on the desk. The view from the sales tower is not what a sales manager typically wants to see. The showroom is empty; the lot is dark. But you don’t mind because your team had a great weekend and you’ve got bragging rights now that you’ve hit bonus. Then the phone rings. "The customer 'thinks' she has insurance, but is not sure," your annoyed finance writer tells you.
Now what? Your customer knows the name of the insurance company, but that's about it. It's Sunday night, so good luck trying to track down an agent. That leaves you with three options:
- Deliver the vehicle and hope everything works out; or
- Play it safe and not deliver the vehicle and hope your customer comes back with proof of insurance; or
- Throw a binder on the deal, deliver the vehicle, and not rely on hope to make business decisions.
Depending upon how skinny the deal is or whether you can get the customer to pay for the "binder," number three is probably going to be the best option. But here’s a question. What are the compliance issues associated with "throwing a binder on the deal"? In fact, what exactly is a "binder"?
Let's answer the second question first. A binder, as used in dealerships, is basically temporary car insurance [see Insurance Code § 382.5]. But, technically, it’s not the right term to use when describing the types of temporary insurance that most dealers offer customers. Let me explain.
In the traditional insurance world, a "binder" is issued in order to provide coverage for the short period of time while underwriting is taking place. The term “underwriting” can mean a lot of things, but in this context, it is just another way of saying "risk assessment." Insurance companies need to assess their risk in order to determine what type of policy to issue and how much to charge for it. In order to assess this risk, insurers must gather information. Such information includes basic biographical information such as age, occupation, and garage/storage address. But, perhaps more importantly, it also includes pulling a driving record. After all, a person with three wrecks and a couple of speeding tickets is probably a higher risk driver than someone who has a clean record.
Because this underwriting takes some time, insurance companies allow customers to be "bound" (by agents) with temporary coverage during the process; thus the insurance "binder" comes into existence. Once the process is complete, the insurance company issues a formal policy that replaces the binder.
Now, in the dealership world, it doesn’t really work that way (at least not very often). Once upon a time, it was fairly common to have a licensed agent come to the dealership, take an application and issue binders to customers who would then go through underwriting. These days, that type of arrangement is less common. Although I haven’t conducted a survey, I would estimate that the majority of California dealers, when faced with uninsured customers, now utilize programs that offer temporary insurance in the form of "certificates of insurance" (COIs) [see Insurance Code § 384]. The way these programs work varies from company to company, but generally involves adding customers to a master insurance policy. COIs are similar to insurance binders insofar as they provide temporary insurance that covers both the customer and the dealership. However, these COIs are temporary by design and typically will not extend beyond 30 days. As such, these COIs require no underwriting and can be issued to just about anyone who can legally purchase a vehicle. For dealerships without proper insurance licenses (or an affiliated insurance agency), this is my recommended method for getting customers temporary insurance.
There are a few companies in California that offer point-of-sale temporary insurance. Much like with all vendors generally (and F&I service providers in particular), dealers are well-advised to carefully vet point-of-sale insurance agencies prior to bringing them into your dealership. As many dealers have discovered the hard way, not all service providers make compliance a priority and some seem to disregard compliance entirely. Included at the end of this article is a checklist that dealers can use when selecting a point-of-sale insurance agency.
Although point-of-sale COI programs are less problematic than other types of insurance programs, they can still result in legal exposure to dealers and dealership personnel if not implemented properly. Thus, the remainder of this article is dedicated to answering the first question posed above (What are the compliance issues associated with point-of-sale insurance?).
Avoiding Insurance License Requirements
Dealers already have to comply with a vast number of laws and regulations enforced by the DMV, BAR, CDFTA (formerly BOE), CalEPA, CalOSHA, FTC and others. Adding the Department of Insurance (DOI) to the list just doesn’t seem like a great idea. Of course, ignoring licensing requirements is an even worse idea. To prevent the DOI from being added to the list of government agencies overseeing your operations, you better make sure your sales and finance personnel are not doing things that would require an insurance license.
Not surprisingly, California law is very broad when it comes to defining activity that requires a license. Insurance Code section 1631 provides:
[A] person shall not solicit, negotiate, or effect contracts of insurance, or act [as an insurance agent or insurance broker] … unless the person holds a valid [insurance] license….
Next, Insurance Code section 1621 provides:
An insurance agent is a person who transacts insurance … on behalf of an … insurance company.
And, finally, Insurance Code section 1623 provides:
An insurance broker is a person who, for compensation and on behalf of another person, transacts insurance … with, but not on behalf of, an [insurance company].
Clearly, the concept of “transacts insurance” is an important one. To avoid falling under one of the definitions above (and thereby triggering licensing requirements), you must ensure that your sales and finance personnel are not transacting insurance. To better understand what it means to “transact insurance,” we once again look to the Insurance Code which provides us with another broad definition. Insurance Code section 35 states:
"Transact" as applied to insurance includes any of the following:
(a) Solicitation. (b) Negotiations preliminary to execution. (c) Execution of a contract of insurance. (d) Transaction of matters subsequent to execution of the contract and arising out of it.
Clear as mud, right? The fact that the definition of "transact" actually includes the word "transaction" is the kind of thing that makes me wish I went to medical school instead of law school. Nevertheless, it stands to reason that the more involved dealership personnel are in the transaction between the insurance agency and the customer, the easier it will be for a court or regulator to conclude that dealership personnel are transacting insurance. Here are some tips you can use to help sales and finance personnel stay out of the insurance transaction:
1. Train your personnel on the proper terminology.
a. Don’t say "sell" when referring to insurance. Because they are not agents working on behalf of an insurance company, sales/finance personnel should never offer to "sell" binders/certificates of insurance. Rather, sales/finance personnel should explain to customers that they may purchase temporary insurance from the licensed agency your dealership works with.
b. Stop using the term "binder." Insurance agents have the authority to “bind” coverage. Unlicensed dealership personnel do not. Instead, use the term "temporary insurance."
Sales: "May I please see your proof of insurance?"
Customer: "Actually, I don’t have insurance right now."
Sales: "No problem. You may purchase temporary insurance from a licensed agency we work with."
2. Don’t discuss coverage issues or other details of the temporary insurance.
Only licensed agents should answer questions related to coverage or other insurance details. When choosing a point-of-sale insurance agency, be sure they have licensed agents available, by phone or otherwise, at any time to answer questions related to the certificate of insurance being offered to your customer.
Customer: "So, this insurance that I’m buying, is that all the insurance I need?"
Finance: "This temporary insurance is what we need to let you take delivery of the vehicle today. Your personal insurance needs should be discussed with a licensed agent."
Customer: "Will this policy cover me if I take my car to Mexico."
Finance: "I don’t know. Let’s contact the agency we work with and find out."
3. Do not collect money from the customer for the COI. The point-of-sale insurance agency you choose should have a mechanism whereby the customer pays the agency directly via credit card or ACH (eCheck).
Note: It is acceptable for the dealership to absorb some or all of the cost of the temporary insurance. But, care must be exercised when doing so. See “Other Best Practices” below.
4. Avoid presenting documents to the customer and/or securing signatures. The best system I have seen allows the customer to use a computer/tablet to review, sign and pay for the certificate of insurance. This eliminates the need for dealership personnel to print out, assemble and present for signing the documents to the customer.
Other Best Practices
1. Make sure you have a written policy related to confirming insurance and temporary insurance coverage. Here are some things to consider while creating your policy:
a. A best practice is to confirm ALL customers have a valid comprehensive/collision insurance policy in place that covers the vehicle you are selling/leasing. A best-case scenario is when the customer is actually able to add the new vehicle to their policy while they are still at the dealership. Of course, this doesn’t happen very often. The best alternative to that is to confirm there is a comp/collision policy in place on another vehicle owned by your customer (or on the trade-in) that includes “acquired vehicle coverage.” Most major insurance companies that issue comp/collision policies automatically cover vehicles that are purchased by the policyholder while the policy is in effect. This coverage is only temporary (typically 30 days). It is important to note, however, that not all insurance policies have acquired vehicle coverage, underscoring the need to confirm this type of coverage.
b. If your company does not require that insurance be confirmed 100% of the time prior to delivery of a vehicle, what are the exceptions and who has the authority to make them?
Note: It is still a very good idea to confirm/require insurance even when there is no lender/lessor involved. In other words, you should still confirm insurance on one-pay deals (i.e., cashier’s check, personal check, credit card). But, it probably isn’t necessary to do so on "true cash" deals (i.e., green money and confirmed wire transfers).
c. Under what circumstances should sales personnel require the customer to purchase temporary insurance? An obvious answer to this question is when the customer has no insurance. What is less clear is whether sales personnel should be required to have customers purchase insurance in circumstances where insurance simply cannot be confirmed. It is easy to imagine a scenario where the customer insists that they have a valid policy with a well-known insurance company, but just doesn’t have any documentary proof of it and sales personnel are unable to confirm a policy is in place. This type of customer may be unwilling to purchase temporary insurance; therefore, sales personnel may have to make a judgment call (or not depending upon how strict your policy is).
Note: Since sales commissions are typically based on gross profit, sales personnel may be disincentivized to include temporary insurance on a deal when the dealership must absorb the cost of that insurance. As such, in circumstances where the customer refuses (or is unable) to pay for temporary insurance, dealers may want to consider removing the cost of any temporary insurance absorbed by the dealership when calculating sales commissions. Regardless of how this issue is handled, though, dealers are well-advised to consult with employment counsel about how to address this issue in sales personnel pay plans.
d. Include some educational material in your policy. Specifically, remind sales personnel that California law does NOT require dealers to confirm insurance prior to the sale/lease of a vehicle. I know this sounds strange, particularly since California law does require that all driven vehicles have "minimum financial responsibility" (i.e., liability insurance) and further requires all drivers to carry evidence of such [Insurance Code § 11580.1(b); Vehicle Code §§ 16056(a), 16020, 16021]. But, those obligations are imposed on the owner/driver of the vehicle, not on dealers/sellers.
There are two reasons dealers confirm insurance:
(1) To protect the dealership during the (hopefully short) window of time between vehicle delivery and assignment/funding of the contract. Remember, until you are funded on a retail installment sale contract, the vehicle that your customer is driving around is the only collateral you have to secure payment under that contract. If that collateral is destroyed in an accident and there are no insurance proceeds, the dealership will be out the entire cost of the vehicle and may only have recourse against the customer (who probably doesn’t have a whole lot of extra cash lying around to pay you back); and
(2) Dealers are contractually required to confirm insurance as per finance companies’ written agreements and funding guidelines. Failure to do so may (and often does) result in lenders' refusal to fund deals or their forcing dealers to buy back contracts.
2. Never add the cost of the temporary insurance to the selling price of the vehicle.
Clearly, dealers would prefer to have customers pay for their own insurance. However, we all know there are instances where the customer only has enough cash to make the down payment and doesn’t have any more room on a credit card. In these instances, a dealer has three options:
a. Deliver the vehicle without any insurance; [REALLY BAD IDEA]
b. Not deliver the vehicle and potentially lose a deal; or
c. Pay for the temporary insurance for the customer.
If a dealer chooses option c, it is absolutely essential that the cost of the insurance be taken out of the gross of the deal. If there is any indication that the selling price of the vehicle was raised to accommodate the cost of the insurance, this creates a nondisclosure issue, will result in the customer being overcharged sales tax and license fees (potentially), and could render the contract unenforceable. Similarly, the cost of the insurance cannot be included in any other line item (e.g., accessories, service contracts, etc.).
Dealers often ask why they can’t use line 3 ("Amount Paid to Insurance Companies") of the LAW 553-CA-ARB for the cost of the insurance. The answer is threefold: (1) Doing so could trigger licensing requirements as the dealer is now very much involved in the transaction and is arguably "selling" the insurance; (2) Using line 3 triggers completion of the Statement of Insurance located on the top right side of the contract. Most DMS systems are programmed to print "N/A" throughout this section and do not accommodate completion of this section; and (3) Even if you are able to properly complete the Statement of Insurance, you may have difficulty getting lenders to purchase a contract with that section completed. [Note: Regardless of whether the Statement of Insurance section is completed, 10 CCR § 2114 requires that both the buyer(s) and dealership representative sign this section.]
3. Choose the right point of sale insurance agency.
As mentioned above, the more involved sales/finance personnel are with the temporary insurance transaction, the easier it will be for a regulatory agency, court or a plaintiff's attorney to make the case that the dealer is transacting insurance. This is one of the main reasons why it is so important to choose the right company. A conscientious insurance agency will have both technological and human resources available to remove dealership personnel from the insurance transaction as much as possible (if not entirely).
What to look for in an agency (checklist):
- Properly Licensed — Check with the Department of Insurance to confirm the agency and the agents you work with are properly licensed and to look for formal enforcement actions.
- Operational Reputation — Who do your local/state dealer associations recommend? Who do the top dealers use? Is the company known for great customer service? Remember, in the event of a claim, your customers will be in contact with the representatives of this insurance agency. Bad service from an insurance agency that you introduced your customer to may result in a low CSI score.
- Availability of Agents — Make sure licensed agents are available at night and on weekends to answer coverage and other policy-related questions.
- Type of Policy Offered — Be sure that the agency offers full coverage policies (comprehensive/collision/liability). It used to be fairly common to place a “physical damage binder” on a vehicle in order to deliver it to an uninsured customer. This practice protects the collateral, but does not provide liability insurance for your customer. Although still legal, problems may arise if the customer is not aware of the fact that they have no liability coverage and will be violating California law by driving away.
- DMS/System Integration — Your customers probably spend too much time in finance as it is. Ideally, you want the point-of-sale insurance process to be quick and easy and not require finance personnel to have to enter the same customer data multiple times. Of course, before permitting DMS integration, you’ll want to ensure the agency maintains appropriate safeguards to protect your customers’ information.
- Financial Reputation — What is the financial strength of the insurance company that is backing the agency? How long have they been doing business in California? Will they be around to cover any claims?
- Cost — We all know the old adage that you get what you pay for. This is just as true in the insurance world. Be wary of very inexpensive programs. Schlocky agencies may offer cheap policies (perhaps without liability coverage) that don’t provide adequate protection for your dealership or your customer.