Michigan Auto Dealer Insurance: What a Car Dealership Actually Needs

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Michigan auto dealer insurance is built on an auto dealers policy that combines liability for your plated vehicles and premises, physical damage on inventory (dealers open lot), garagekeepers for customers' cars, and dealer errors and omissions — plus the $25,000 surety bond the Secretary of State requires. For an established dealer, liability should start at $1 million, with an umbrella above it.

What the State of Michigan requires to license a dealer

Dealer licensing runs through the Secretary of State under the Michigan Vehicle Code. Two insurance-related items are required, and it is worth being precise about both because they are widely misstated.

• A $25,000 surety bond. MCL 257.248 requires it of new dealers, used dealers and brokers. It pays buyers, sellers, lenders or the state for losses from the dealer's fraud or misrepresentation, and for unpaid sales or use tax — but only after a court judgment or a final Secretary of State order. It is not insurance for the dealer. If the surety pays, it will look to you to pay it back.
• Proof of fleet no-fault coverage. For new (Class A) and used (Class B) dealers, the Secretary of State requires an ACORD 25 certificate showing Michigan no-fault coverage on "any vehicle" or "all owned vehicles," in the exact business name. That is auto no-fault security, including auto liability on your vehicles. It does not require general or premises liability to get licensed.

One detail that trips dealers up: the Secretary of State's own dealer application packet still refers to "20/40/10" liability limits. That has been out of date since July 2, 2020. Michigan's default auto liability limits are now $250,000/$500,000 for bodily injury, and even with a signed election they cannot go below $50,000/$100,000. For an established dealership we recommend at least $1 million of auto liability and $1 million per occurrence / $1 million aggregate on general liability, for the reason in the next section.

Who pays when a customer crashes on a test drive?

Michigan law lets a prospective buyer drive a dealer-plated vehicle for demonstration for up to 72 hours (MCL 257.244). Customers assume their own auto policy handles anything that goes wrong. On the liability side, Michigan courts have said otherwise.

• Liability: the dealer's policy goes first. In Auto-Owners Insurance Co v Martin (2009), a customer test-driving a used-car dealer's vehicle caused a crash. The dealer's policy tried to exclude customers who had their own insurance. The Court of Appeals held that exclusion void and, because the policy did not clearly cap customers at the state minimum, held the dealer's insurer primary up to its full $1 million limit, with the customer's insurer excess. The decision rests on earlier Michigan Supreme Court rulings that a vehicle owner's insurer must provide primary coverage for permissive drivers; those rulings also allow a policy to limit that primary coverage to the statutory minimum if it says so clearly. Some dealer forms do expressly limit customers, so ask whether yours does and whether a full-limits-for-customers endorsement is attached. These decisions all predate the 2019 no-fault reform.
• Injuries to the driver: PIP follows the person. Personal injury protection comes from the driver's own household auto policy. Since the 2019 reform, a test driver with no household policy goes to the Michigan Assigned Claims Plan — not to the dealer's insurer, as a lot of older content still says.

Put those together and a single serious test-drive crash can put your dealership's own liability limit in play first. That is the practical argument for a $1 million limit and a commercial umbrella above it. See our commercial umbrella page.

The dealers policy: what each part does

Dealers are commonly written on ISO's Auto Dealers Coverage Form (CA 00 25), which replaced the old Garage Coverage Form in ISO's 2013 commercial auto revision, or on a carrier's own dealer form built the same way. It bundles several coverages that each have their own traps.

Physical damage on inventory (dealers open lot)

Your inventory is typically insured on a reporting basis: you report values monthly or quarterly, and the carrier can penalize a loss payment if your reports were short. Limits apply per location, with a separate limit for vehicles in transit. Collision is excluded for a vehicle driven or hauled from its purchase or distribution point to a destination more than 50 road miles away unless you add Dealers Driveaway Collision coverage (CA 25 02). Loss of market value and expected profit are excluded. For a Michigan lot, hail is the loss that tests this coverage — check your deductible and whether it applies per vehicle or per occurrence.

Garagekeepers for customers' cars

Customer vehicles in your service department or on your lot are not your property, so your inventory coverage does not reach them, and general liability excludes property in your care. Garagekeepers fills that gap. Two choices matter:

• Legal liability or direct. Legal liability garagekeepers pays only if you were legally responsible. Direct coverage pays regardless of fault, which is usually what a customer expects when their car is damaged on your lot.
• Comprehensive or specified causes. Garagekeepers "specified causes of loss" on the dealers form is fire, lightning, explosion, theft, mischief and vandalism. It does not include wind or hail. If a storm hits the service lot, only comprehensive responds.

False pretense

The dealers form excludes loss when you voluntarily hand over a vehicle because of a trick or scheme — a bad check, a forged cashier's check, a fraudulent buyer — and when you buy a vehicle from someone who did not have legal title. False Pretense Coverage (CA 25 03) buys that back, usually with a modest limit that can be increased. If you sell vehicles to walk-in buyers paying with certified funds, this is not optional.

Dealer errors and omissions

The dealers form added an acts, errors or omissions section with its own aggregate limit, for claims like a title defect that leads to a customer's car being seized. It excludes fraudulent, dishonest and intentional acts. That matters because federal odometer law (49 U.S.C. 32710) makes a dealer who acts with intent to defraud liable for three times actual damages or $10,000, whichever is greater. Do not assume your E&O answers an odometer or finance claim; ask what it covers and what it excludes.

Your floor plan lender has a say

Floor plan agreements typically set insurance requirements, including hazard insurance on inventory with the lender named as loss payee, and lenders run regular floor checks. Make sure your inventory limit, deductible and loss payee match what the floor plan agreement requires, because a coverage shortfall on financed inventory becomes your debt.

Frequently Asked Questions

What insurance does a car dealership need in Michigan?

To get licensed, a new or used dealer needs a $25,000 surety bond and proof of fleet Michigan no-fault coverage. To actually protect the business, a dealer needs an auto dealers policy with liability, physical damage on inventory, garagekeepers for customer vehicles, false pretense coverage and dealer errors and omissions, plus workers' compensation and an umbrella. We recommend at least $1 million of liability for an established dealer.

Does Michigan require garage liability insurance for a dealer license?

No. The Secretary of State requires a certificate showing fleet no-fault coverage on any vehicle or all owned vehicles for new and used dealers, plus a $25,000 bond. General or garage liability is not a licensing requirement, but a dealership operating without it is exposed on every customer who walks onto the lot.

Whose insurance pays if a customer crashes on a test drive in Michigan?

For liability to others, Michigan courts have held the dealer's policy is primary, with the customer's insurer excess. In Auto-Owners v Martin (2009), that meant the dealer's full $1 million limit, because the policy did not clearly cap customers at the state minimum; some dealer forms do. For the driver's own injuries, personal injury protection comes from the driver's household auto policy, or the Michigan Assigned Claims Plan if they have none.

Does garagekeepers insurance cover hail damage to customer cars?

Only if you bought comprehensive garagekeepers. Specified causes of loss on the auto dealers form covers fire, lightning, explosion, theft, mischief and vandalism, not wind or hail. Check which option your declarations show.

What is false pretense coverage for auto dealers?

It covers vehicles you lose because you were tricked into handing them over, such as a sale paid with a forged or bad check, and vehicles you bought from a seller without legal title. The standard dealers form excludes those losses, so the coverage has to be added by endorsement (CA 25 03).

The bottom line

The licensing requirements are the smallest part of a dealer's insurance. The coverage that matters is the part nobody checks until the claim: whether your inventory reports are current, whether garagekeepers is comprehensive, whether false pretense is on the policy, and whether your liability limit can absorb a test-drive crash.

We work best with established Michigan dealerships — a licensed lot with inventory on floor plan, a service department or servicing agreement, and a few years of loss runs. Send us your current declarations pages, your schedule of forms, your last inventory report and your last two loss runs, and we will show you where the gaps are before we talk about price. J. Jacobs & Associates has insured Michigan businesses for more than forty years, and as an independent agency we take your dealership to the preferred carriers that want the class instead of the one company a captive agent represents. Call (248) 693-6455 or request a dealer review.