Here's what nobody tells you about starting an auto dealership: you can't even apply for your dealer license until you have the right insurance in place. And I'm not talking about just any business insurance—dealerships need a specialized package that covers everything from the cars on your lot to the customer taking a Camry for a spin. Get it wrong on day one, and you're either paying for coverage you don't need or, worse, exposing yourself to six-figure losses you never saw coming.
The good news? Once you understand the core coverage types and when to add each one, you can build a smart insurance strategy that grows with your business. Let's break down exactly what you need from the moment you open your doors to the point where you're expanding to a second location.
Day One Coverage: What You Must Have Before Opening
Before you can legally operate, you'll need to satisfy your state's Department of Motor Vehicles, your landlord, and probably your lender. That means having three non-negotiable policies in place: garage liability insurance, dealer's open lot coverage, and a dealer bond.
Garage liability insurance is your foundation. This isn't the same as general liability—it's specifically designed for businesses that sell, service, or store vehicles. It covers bodily injury and property damage caused by your operations, whether that's a customer slipping on your showroom floor or an employee backing a trade-in into a light pole. State minimums vary wildly: Florida requires just $25,000, Georgia mandates $125,000, and most lenders won't even talk to you unless you carry at least $1 million per occurrence. Here's the thing—those state minimums are almost criminally low. A single serious accident during a test drive could easily exceed $25,000, and then you're paying the rest out of pocket.
Dealer's Open Lot coverage protects your inventory. Every car sitting on your lot represents capital at risk. One hailstorm, one act of vandalism, one fire, and you could lose your entire investment. DOL insurance covers physical damage to vehicles you own for sale, whether they're parked on the lot, in transit, or at auction. This policy is tied to your floor plan financing—lenders require it because they technically own those cars until you sell them.
You'll also need a dealer bond, which isn't insurance exactly, but it's required by every state. This guarantees you'll follow the rules, pay your taxes, and honor warranties. The bond amount varies by state, typically ranging from $25,000 to $100,000. If you're starting small, that's your day-one checklist: garage liability, dealer's open lot, and your bond. You literally cannot get your license without these three.
Essential Add-Ons: Coverage You'll Need Within the First 90 Days
Once you're operational, you'll quickly realize the bare minimum isn't enough. The first coverage most dealers add is garagekeepers insurance, and it's one of the most commonly confused policies in the industry. Here's the difference: garage liability covers vehicles you own. Garagekeepers covers customer vehicles in your care, custody, or control. That's a customer's car during a test drive, a trade-in you haven't processed yet, or any vehicle in your service bay.
Think of it this way: a customer leaves their car overnight for an oil change. Someone breaks in and steals it. Your garage liability policy won't touch this—that's what garagekeepers is for. Without it, you're personally liable for replacing their vehicle. Garagekeepers typically costs around $40 per month, which is nothing compared to replacing a stolen SUV.
If you're hiring employees—and let's face it, you can't run a dealership solo—you need workers' compensation insurance. It's legally required in almost every state once you have employees. Workers' comp covers medical bills and lost wages if an employee gets hurt on the job, whether it's a mechanic dropping a transmission on their foot or a salesperson tripping in the lot. Expect to pay around $145 per month for a small team, but this varies based on your payroll and the type of work your employees do.
Commercial property insurance is another early add. This covers your building, equipment, computers, furniture—everything that's not a vehicle. If you're leasing, your landlord probably requires this. Even if they don't, you should carry it. A fire could destroy your entire office, all your records, and every tool in your service bays.
Growth Phase Coverage: When to Level Up Your Protection
As your dealership grows, your risks evolve. The moment you start offering in-house financing or handling loan paperwork, you need errors and omissions insurance (also called professional liability). E&O covers mistakes in professional services—think incorrect loan documents, errors in vehicle history reports, or misrepresenting a warranty. A customer discovers you accidentally marked a salvage title as clean? That's an E&O claim, and legal defense alone could cost you $50,000.
Cyber liability insurance becomes critical once you're storing customer data electronically. You've got names, addresses, Social Security numbers, credit card information—all of it's a target. A data breach could expose you to notification costs, credit monitoring services for affected customers, legal fees, and regulatory fines. With data breaches becoming more common, this coverage is quickly moving from optional to essential.
If you're expanding your inventory significantly or adding high-value vehicles to your lot, revisit your dealer's open lot coverage limits. Your policy should match the total value of your inventory at any given time. Some dealers make the mistake of insuring for their average inventory value, but if you stock up before a big sale or acquire several luxury vehicles, you could be seriously underinsured.
Common Mistakes New Dealers Make
The biggest mistake? Buying only the state-required minimum garage liability coverage to save money upfront. Those minimums were set decades ago and have nothing to do with actual risk. A serious accident can easily result in $500,000+ in damages, and if you're only carrying $25,000, you're personally on the hook for the rest. Your business, your home, your personal assets—all at risk.
Another common error is confusing garage liability with garagekeepers coverage. I've seen dealers get burned because they assumed their garage policy covered a customer's car that was damaged on their lot. It doesn't. These are separate policies for separate exposures, and you need both.
Many new dealers also underestimate how their dealer plate allocation works. The number of plates you can get is determined by your garage liability policy. If you cheap out on coverage to save a few hundred dollars a year, you might find yourself unable to get enough plates for your sales team, which directly impacts your ability to sell cars.
Finally, don't wait until after something goes wrong to read your policy exclusions. Most dealer policies exclude flood damage in certain areas, won't cover vehicles driven by unlicensed individuals, and have specific requirements for overnight security. Know what's covered and what's not before you need to file a claim.
How to Get Started: Building Your Insurance Package
Start by contacting an insurance agent who specializes in auto dealerships. This isn't a market where you want to go with your cousin who sells homeowners insurance. Dealership coverage is specialized, and a knowledgeable agent will help you avoid gaps and unnecessary overlap.
Get quotes from at least three carriers, but don't just compare prices. Look at coverage limits, deductibles, and exclusions. A policy that's $1,000 cheaper might have a $10,000 deductible versus a $2,500 deductible. Run the numbers on what you'd actually pay out of pocket in a claim scenario.
Plan for insurance costs to be around 2-3% of your total startup budget. If you're starting small, expect to pay $2,000-$5,000 annually for a comprehensive package. As your inventory grows and you add employees, that number will climb, but so will your revenue. The key is making sure you're never underinsured at any stage of growth.
Opening an auto dealership is complicated enough without getting blindsided by insurance gaps. Get the foundational coverage in place before day one, add essential protections within your first quarter, and reassess your needs every time you hit a growth milestone. Your insurance should evolve with your business—not leave you scrambling after a claim.
