Flood Sends 42 Dealership Cars Down River, a Reminder of Destruction Brought on by Weather

car at dealership covered in hail

Inclement weather can destroy a dealership’s inventory. It happened last week in New Jersey when the Route 46 Chrysler Jeep Dodge dealership saw a flash flood send 42 vehicles down the Peckman River. It happened in July 2017 in Chicago when flooding reached more than 100 cars and caused between $4 million and $5 million in damages at a Ford Lincoln dealership.

And it happened in March, when hundreds of vehicles at Mitch Smith Chevrolet and Tony Serra Nissan in Alabama were damaged by hail; one salesman there estimated the damage could exceed $4 million.

During a recent five-year stretch, insurance claims related to wind and hail damage on a national basis in general accounted for almost 40 percent of all insured losses, averaging approximately $15 billion annually and growing each year, according to the Rocky Mountain Insurance Information Association.

Dealerships can reduce risk through Dealer’s Open Lot Insurance, which includes comprehensive and collision coverage but also provides physical damage protection to a dealer’s vehicles and equipment. Coverage applies to all types of vehicles including cars, trucks, campers, motorcycles and farm equipment. This policy covers those vehicles while they are:

  • Being driven to or from auction;
  • Parked on the dealer lot as inventory;
  • Housed inside the dealer’s service area or showroom; and
  • Test-driven or driven for personal use by an owner or employee.

In addition to weather-related incidents, Dealer’s Open Lot Insurance covers vandalism, which can range from a smashed window to vehicle theft.

Dealer’s Open Lot: It’s a necessity

Dealers have little choice but to purchase Dealer’s Open Lot Insurance because, in most cases, they do not own the vehicles.

“You have to remember that they are financing these vehicles and the bank essentially owns them,” said J. Clay Kadlic, Broker, Burns & Wilcox Brokerage. “They don’t have a choice because the bank will require it.”

“A single storm event, such as a major hailstorm or a flood along a coastal region, could result in damages in the millions of dollars.” – Eric Ellis, Minuteman Adjusters

In recent years, the unpredictability of weather-related incidents has decreased the supply and increased the cost of Dealer’s Open Lot policies. Costs are rising in large part because a damaging hail or wind/rainstorm is unpredictable, Kadlic said. For many years, hailstorms were largely confined to certain states in the Plains or southern U.S., but the damage has been much more widespread in recent years, he added. Dealerships located near the ocean or in a flood plain are at a higher risk.

A major hailstorm or a flood along a coastal region could wipe out an entire lot of vehicles. “A single storm event, such as a major hailstorm or a flood along a coastal region, could result in damages in the millions of dollars,” said Eric Ellis, Property Claim Supervisor, Minuteman Adjusters.

In 2016, there were 5,601 major hailstorms nationwide, according to the National Oceanic and Atmospheric Administration’s database. In 2013-2015, Texas had the most hail loss claims with 394,572, according to a National Insurance Crime Bureau report. Colorado was second with 182,591. The top 10 states represented 66 percent of the total number of hail claims during this time frame.

The largest insured loss event of 2014 was caused by a spate of severe storms with hail from Colorado to Pennsylvania across five days in May, causing insured losses of $2.9 billion.

“Geographical location is the largest determination for the cost of any of these policies,” Kadlic said. “Any underwriter today will want to see a minimum of five years of losses to price a policy. But some of the dealers we’ve worked with have seen their rates increase even without significant claims in the last 10 years, so it really varies.”

Policy costs: Considerations and examples

With the marketplace evolving for Dealer’s Open Lot policies, costs for annual premiums can vary significantly, Kadlic said. Many traditionally include a cap on the amount of out-of-pocket costs a dealer would be responsible for in a worst-case scenario, he added. Caps range from roughly $200,000 to $250,000 and above. However, with many carriers taking a loss on these policies, weather-related aggregate caps on deductibles are being eliminated in many cases, opening up dealers to paying more in deductible costs.

“Costs are rising in large part because a damaging hail or wind/rainstorm is unpredictable.” – Clay Kadlic, Burns & Wilcox Brokerage

“There may be more out-of-pocket costs for the insured if a deductible cap is not available, but it does lessen the blow that carriers will take,” Kadlic said.

Deductibles for the comprehensive and collision as part of the policy typically range from $1,000 to $2,500 per vehicle, Kadlic said.

Costs for Dealer’s Open Lot policies are priced based in part on the average amount of inventory value a dealer has on its lot any given month. Recently one of Kadlic’s clients had a vehicle inventory averaging $87 million in total value with a $2,500 deductible for comprehensive and collision coverage and a $250,000 cap in liability to the insured per incident. The policy costs roughly $560,000 each year for $10 million in coverage. Policies generally are good for one year.

A policy for a much smaller dealership group with a $5 million coverage limit on a lot valued at a $28 million monthly average and no cap can cost around $108,000 annually, Kadlic said.

Working with an agent is key

A Dealer’s Open Lot policy would not cover costs associated with loss of business income, Ellis said. This would be provided by the Business Income (and Extra Expense) Coverage Form that works in tandem with other Commercial Property coverage forms.

“Damage to or loss of inventory alone does not trigger a business income loss based on specific exclusionary language in the commercial property form, however this exclusion does not apply to Extra Expense,” Ellis said. Extra Expense may include costs incurred to minimize the period of interruption of operations or reduce the severity of loss of income. Extra Expense may also include costs incurred such as “the expedited replenishment of inventory and extra advertising expense,” Ellis said. This does not include the cost of the inventory itself.

“Agents will want to know you have a plan in place to respond to a likely catastrophic event. This includes feet on the ground and coordination of repairs,” Ellis said. “Additionally, record keeping is critical to determine co-insurance compliance, value at risk and ownership of your inventory.” Having such a process can slightly reduce policy costs.

In the case of the New Jersey flood, Route 46 Chrysler Jeep Dodge would be liable for the any of its deductibles under its Dealer’s Open Lot policy. If it does not have a cap on the out-of-pocket money lost as a result of vehicle damage, it would be responsible for those costs, too, which is why shopping for the right policy and working directly with a knowledgeable agent is so important.

As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.

This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent if a Dealer’s Open Lot policy is right for you.