California Auto Dealer Bond

A California auto dealer bond is a type of surety bond required by the California Department of Motor Vehicles for anyone selling motor vehicles in the state. This bond creates a three party agreement between you (the dealer), your customers, and a surety company.

The bond protects California consumers, sellers, financing agencies, and government entities from financial loss if you engage in fraudulent practices or violate state vehicle code requirements. If someone suffers a monetary loss due to your actions as a dealer, they can file a claim against your bond for compensation.

The cost of your California auto dealer bond depends on the required bond amount and your personal credit score. California requires different bond amounts based on your dealer type:

• Standard dealers: $50,000 bond
• Motorcycle or ATV only dealers: $10,000 bond
• Wholesale only dealers (less than 25 vehicles per year): $10,000 bond

You pay only a small percentage of the total bond amount as your annual premium. This percentage typically ranges from 1% to 10% depending on your credit profile.

Applicants with excellent credit scores (700 or above) receive the best rates, typically between 1% and 3% of the bond amount. Those with good credit (600 to 699) can expect rates between 3% and 5%. Even if your credit score is below 600, you can still get bonded, though your rate will be between 5% and 10% of the bond amount.

Getting your California auto dealer bond is a straightforward process that takes just a few steps:

Step 1: Complete Your Application

Start by filling out a bond application with a licensed surety company. You will need to provide basic information about your dealership, including your business structure, ownership details, and financial information. The surety company will also run a credit check as part of the underwriting process.

Step 2: Receive Your Quote

Once the surety company reviews your application, they will provide you with a quote for your bond premium. This quote will be based on your credit score, business experience, and the required bond amount for your dealer type. Most applicants receive their quote within one business day.

Step 3: Purchase Your Bond

After you accept the quote and pay your premium, the surety company will issue your bond. You will receive the original bond document, which you must then file with the California DMV along with your dealer license application.

Step 4: File Your Bond with the California DMV

California requires you to file your bond using specific forms based on your dealer type:

• Standard dealers: Use Form OL 25
• Motorcycle, ATV, or wholesale only dealers: Use Form OL 25B

Mail your completed bond form to:

California Department of Motor Vehicles Occupational Licensing Branch P.O. Box 932342, MS: L224 Sacramento, CA 94232-3420

California law requires anyone who sells motor vehicles to obtain a dealer license and file a surety bond. Specifically, you need a California auto dealer bond if you are:

• New vehicle dealer: Selling new cars, trucks, or other motor vehicles
• Used vehicle dealer: Selling pre owned motor vehicles
• Motorcycle dealer: Selling motorcycles exclusively
• All terrain vehicle dealer: Selling ATVs exclusively
• Wholesale dealer: Selling vehicles to other dealers
• Remanufacturer: Rebuilding and restoring used vehicles

The bond requirement applies whether you operate from a traditional lot, sell vehicles online, or work as a broker connecting buyers and sellers. If you sell even one vehicle that requires registration with the DMV, you must be licensed and bonded.

California exempts certain entities from the dealer license requirement, including banks, credit unions, public agencies disposing of their own vehicles, and individuals selling their personal vehicles (not engaged in business).

When someone believes they have suffered a financial loss due to your actions as a dealer, they can file a claim against your bond. The claim process works as follows:

Investigation Phase

After receiving a claim, the surety company conducts a thorough investigation to determine if the claim is valid. They review all documentation, interview involved parties, and verify that the alleged violation falls within the bond's coverage. Not all complaints result in valid claims, only those involving fraud, misrepresentation, or violation of California Vehicle Code requirements.

Payment Phase

If the surety company determines the claim is valid, they will pay the claimant up to the full amount of your bond. For a $50,000 bond, the maximum payout for all claims in a year is $50,000. For a $10,000 bond, the maximum is $10,000.

Reimbursement Phase

Here is an important aspect of surety bonds: you are ultimately responsible for any claims paid. The surety company pays the claimant on your behalf, but you must reimburse the surety company for the full amount of the claim, plus any investigation costs and legal fees.

License Suspension

California law requires your bond to remain at full value at all times. If a claim reduces your bond below the required amount, your dealer license is automatically suspended. To reinstate your license, you must either file an additional bond to restore coverage to the full required amount or terminate the outstanding judgment.

California dealer bonds must be renewed annually. Your surety company will contact you before your expiration date to begin the renewal process. Because bond premiums can change based on your credit and financial situation, your renewal rate may be different from your initial rate.

If your credit score has improved or your business has grown stronger financially, you may qualify for a lower renewal rate. Conversely, if your credit has declined or you have had claims against your bond, your renewal rate may increase.

To avoid any gap in coverage that could result in license suspension, start your renewal process at least 30 days before your current bond expires. Most surety companies can process renewals quickly, often within a few days.

Important note for wholesale only dealers: If you sell 25 or more vehicles per year, you need the standard $50,000 bond. However, you can submit Form OL 56 (Exception Application) to the DMV Occupational Licensing Branch to request permission to maintain the $10,000 bond amount. The DMV must approve this exception in writing.

Beyond the surety bond, you'll need:

• Established place of business in California that meets local zoning requirements, with adequate vehicle display space and an enclosed office (desk, chair, telephone, file storage)
• Liability insurance
• Proof of financial responsibility
• Payment of licensing fees

Submit your application to the California DMV Occupational Licensing Branch with:

• Completed license application form
• Dealer bond (Form OL 25 or OL 25B)
• Proof of business location and zoning approval
• Fingerprint clearance for all owners and officers
• Applicable fees

The DMV may conduct a location inspection before approving your license.

Cash deposit alternative: California allows a $50,000 cash deposit with the DMV in place of a surety bond. Most dealers prefer the bond, since it preserves working capital for inventory and operations.

What happens if I need to cancel my California dealer bond?

You or your surety company can cancel your bond by providing written notice to the California DMV. However, the bond must remain in effect for at least 30 days after the DMV receives the cancellation notice. If you cancel your bond without having a replacement bond in place, the DMV will suspend your dealer license immediately.

Can I use the same bond for multiple dealer locations?

No. California requires a separate dealer license and bond for each location where you conduct business. If you operate dealerships in three different cities, you need three separate licenses and three separate bonds.

What happens to my bond if my license is suspended or revoked?

Your bond must remain in effect even after license suspension or revocation. Claims can still be filed against your bond for actions that occurred while you were licensed. The bond typically must remain active for three years after you cease operations to cover any claims that arise from your previous business activities.

What if I only sell a few vehicles per year?

California law presumes you are engaged in the dealer business if you sell, offer to sell, or display for sale three or more vehicles in a 12 month period. Even if you only sell a few vehicles, you must obtain a dealer license and bond. The only exception is if you are selling your personal vehicles and are not engaged in business.

What insurance do I need besides the dealer bond?

California requires dealer liability insurance with minimum coverage of $1,000,000 combined single limit for garage operations. This insurance is separate from your bond and protects against bodily injury and property damage claims arising from your dealership operations.