The Nuts and Bolts of the Auto Dealer Bond Claim Process

August 17, 2018


If you are a licensed auto dealer, you've surely dealt with obtaining a surety bond as a requirement for your license. Hopefully you haven't dealt with surety bond claims. However, it helps to be informed and prepared in case you do get a bond claim in the future.

Do you know how to proceed if you get a claim on your bond? Let's start with giving you a better understanding of surety bonds, bond claims and their risks. This way, even if you are confronted with a claim, you will not be taken by surprise and you will know how to easily maneuver out of it.

How Bonding Works

To grasp the best way to deal with a surety bond claim, it’s a good idea to remind yourself of the basics of bonding. First of all, a surety bond is protection for your customers. It guarantees your auto dealership will comply with the applicable state laws and regulations, thus ensuring the public’s safety. This includes complying with consumer protection and tax payment laws.

In technical terms, the surety bond is a legal agreement between (a) your business, (b) the state and (c) a surety. Your auto dealership is called the principal and the state requiring the surety bond is the obligee. The surety acts as a guarantee in front of the obligee that the principal will abide by the rules set by the obligee.

Breaking Down the Claim Process

What is a bond claim? Both a customer and a state can file a claim against your business. In either case, the claim is a complaint saying that you have not respected state laws in your dealership operations. Thus, it suggests an intentional violation made by your business in the process of financing, distributing or selling motor vehicles. Only a breach under the statute of the bond is likely to be considered a valid claim.

Claims can result not only from violations but also from misunderstandings with your customers. To protect yourself from claims you don’t think you deserve, it's a good idea to try to work out any disputes with customers amicably, even if they are more demanding than usual.

In case you do get a claim filed against your bond, let's go through the claims process step by step:

Filing and Validation of a claim

The claim is filed with the surety that has written your bond. Then the surety launches an investigation to evaluate the claim. If the claim proves valid, then the surety has to reimburse the claimant for any losses. The penal sum cannot be higher than the amount of your surety bond.

Payment of a claim by the surety

The specific conditions and timing of a payment for a validated claim varies from state to state. In the state of California, for example, the surety has 60 days to evaluate liability. If the principal is found to be liable, the claim should be paid to the claimant within 15 days of acceptance of liability.

Reimbursement by the principal

After payment of the claim by the surety, you as the principal of the surety bond have to reimburse the surety for the penal sum and any other legal fees involved. If you are, say, a wholesale auto dealer in California, the license bond required by the California Department of Motor Vehicles is $10,000. In the case of a validated claim, you will be liable to pay back the surety the penal sum, which will be up to $10,000.

Common reasons for filing claims

There are a few principal situations in which claims are filed against your surety bond. Getting acquainted with them is a good idea, so that you can avoid them more easily. The most common reasons for filing claims include:

  • Not reporting a sale or furnishing motor vehicle titles
  • Not paying for a vehicle or providing a check returned for insufficient funds
  • Not paying lenders
  • Not paying for a trade-in motor vehicle
  • Fraudulent representation of motor vehicles' state during a sale
  • Financial fraud
  • Not meeting warranty obligations
  • Selling stolen motor vehicles
  • Not paying sales taxes, fees or other costs demanded by the state (the obligee)

The Risks

One of the unpleasant risks coming from claims, of course, is a heavy financial obligation. If the claim is successful, you will have to reimburse the surety with the penal sum up to the full amount of the surety bond, on top of the additional legal costs.

A validated claim might also lead to a revocation of your auto dealer license. In case your business' operations are deemed criminal, you might even be investigated and sued.

Another major risk is the shadow that the claim leaves on your bonding history. Records of claims make it more difficult for your business to obtain future surety bonds needed for licensing, as your business will be considered more risky.

All of these negative repercussions make it loud and clear why you need to avoid claims.


The best tip to tackle problems with surety bonds claims is, naturally, to avoid them with care. In this respect, it is important to be well acquainted with the legislation of the state in which your auto dealership operates, as well as with your customers' expectations in terms of the sales process and the warranty clauses. For details on the state legislation concerning your dealership, you can consult your state's Department of Motor Vehicles, which can provide you with the most extensive and up-to-date information.

Remember, if you do have a claim filed against your surety bond, make sure you take reasonable steps in compliance with state legislation. This also includes an appropriate course of action even after a claim has been validated. It pays to comply with the legal ramifications because failure to do so can result in even more serious problems for you and your dealership.

The best thing to do is get specialists involved in your case. Turning to an experienced lawyer or accountant is likely to save you a lot of time and stress. This is equally true for the period of the claim investigation as for the period after a claim has been validated.

With a clear understanding of the way surety bond claims work, even if you come to face such a challenge, you will be prepared to overcome it in the most efficient way possible.

If you still have any questions about the claim process, please leave a comment in the section below.


Felipe Chavez
October 29, 2020

In reply to by admin


Bryan Weiss
May 20, 2020

In reply to by admin

Hi. I am attorney in CA who represents an insurance company that issued a bond to an auto dealer in CA. A customer of the dealer sued both the dealer and the bonding company alleging fraud in the transaction. Your article says under CA, the bonding company has 60 days to determine liability. What is the statute or regulation that says that? I don't have much experience in this area. Thanks.

Eric Weisbrot
May 21, 2020

In reply to by admin

Hey Bryan,

We can't provide legal advice, as we don’t have legal experts in-house. However, the statute which governs the bond should be contained within the bond form. You should seek the bond form and dig in further to the statue to find your answer.

Eric Weisbrot
October 21, 2021

In reply to by admin


You either need to ask the dealer, or contact the department of transportation of the state you're in.

Armad R Bowers
October 20, 2021

In reply to by admin

Why won't anyone answer the question of how you obtain a dealerships surety info?

Eric Weisbrot
October 29, 2020

In reply to by Felipe Chavez

Hey Felipe,

A claim is legitimate if the date of loss occurs during your bond term.

July 9, 2021

In reply to by admin

How does a person who was swindled by an active DL holder find out the name of that person’s surety bond in order to file a claim (Cailifornia)

January 19, 2022

In reply to by admin

Call the California Department of Motor Vehicles, Occupational License Unit.

May 22, 2023

How can I locate Dealer bond insurer information?
I do have the license number of the dealer, but I don't know who is the insurer.
Please let me know :)

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