Does your dealership have the right amount of open lot coverage for your floor plan?
Do you have the right open lot floor plan coverage for your auto dealer business?
What is floor plan coverage? Floor plan coverage is the amount of insurance you need to carry to insure the vehicles that your car dealership owns.
Your floor plan can change by the hour in the auto dealership business. Sales are being made; inventory is being purchased. It is up and down day by day. So, what amount of floor plan coverage do you need?
The easy answer is – the maximum value that you will have in your inventory at any one time.
But what I hear from dealers is that they don’t want to pay for the maximum value when they may never have that or only have that once or twice a year.
In doing that, you might end up with thousands of dollars in unpaid claim. Versus paying a few more dollars for the proper insurance limit.
Can you be penalyzed for not having enough floor plan insurance coverage?
Most insurance policies for car dealerships have some level of requirement that your coverage limit for the lot be a minimum of 80%-100% of the total limit at the time of loss or you will suffer a penalty.
Let me try to illustrate how this coinsurance percentage affects you at the time of a claim. You have a vehicle that was stolen from your lot that cost $25,000 and your floor plan coverage lot limit is $100,000.
When adjusting the claim, the company is going to ask you to provide the floor plan for the vehicles in inventory at the time of the loss. Let’s say on this day you had $200000 in total vehicles.
Well, if you had 100% coinsurance requirement and you had $100,000 limit but your inventory was $200,000 at the time of the loss. Then you were only 50% insured to value not 100% insured to value.
So how does this affect the amount the company will pay for the $25,000 stolen vehicle?
Since you were only 50% insured to value ($100,000 limit of coverage/$200,000 inventory limit) then the company will only pay you $25,000 for your vehicle divided by 50%, which would be $12,500 less any applicable deductible.
This could have been avoided if the dealer had purchased $200,000 for their floor plan limit. Then the insured would have been paid the full value of the vehicle $25,000 less any applicable deductible. This would have resulted in an additional $12,500 of payment at time of loss.
What else to consider
Many dealership policies not only have a total lot limit but also a maximum per vehicle limit. Again, this limit needs to be the maximum value of any vehicle that you will ever have in your inventory.
If most of your vehicles are $20,000 in value, but sometimes you may have a $50,000 vehicle value, then you need to have a $50,000 per vehicle limit.
Let’s assume that you have a $200,000 lot limit and a $25,000 per car limit. You have a $50,000 vehicle total in an accident and on the date of the claim you had $150,000 in inventory.
So, your inventory limit is not an issue since you had $150,000 in inventory and a $200,000 limit. You will not have a lot of penalties on the claim.
But then when we go to the vehicle you have a $50,000 claim and you have a $25,000 vehicle limits and your deductible was $1,000 for collision. Rather than the company paying $50,000 less the $1000 deductible. They will apply the limit for vehicle, and you will be paid $25,000 less the $1000 deductible. So, you end up getting a check for $24,000 rather than $49.000.
I don’t know about you but if I was paid $25000 less for a single claim, I would not be happy.
How do you make sure that this does not happen to you?
When choosing your lot limit, or floor plan coverage, look at how much inventory you would ever be able to have at any one time. Think about the 1 time a year, worst case scenario, not the best case, or the average inventory.
Then think about what is the most you would spend on anyone vehicle. Do you take special orders for vehicles that may be outside of your normal inventory values? Again, think about the one time a year scenario and not your average vehicle value.
Many times, your floor plan company might tell you that your line of credit is $100,000 and they only require 2/3 of that to be your floor plan coverage limit. That might be all that they require. But it does not mean by meeting their requirement that you still could not be subject to a penalty on a claim because you did not meet the insurance company’s requirements.
Also, make sure that you are review your coverage limits regularly. The prices of cars have dramatically increased in the past few years. Your limits might have been sufficient 3 years ago, but now are not sufficient. Do not just renew what you have, make sure that your coverage is still meeting your needs.
Contact Huff Insurance Today
Fill out the quote form or call us at 410-647-1111. Our represeentatives are experienced when it comes to dealing with auto dealers and your floor plan coverage needs.
In fact, Nancy even took a day to go to an auto auction with one of our insured auto dealers. She did ths just to learn how the business works. You can check out her blog on her experience here:
A Day In the Life Of An Auto Dealer