A powerful thunderstorm that included hail the size of tennis balls left hundreds of vehicles damaged at car dealerships in the Davison, Michigan, area earlier this summer. The entire inventory at Hank Graff Chevrolet was impacted, the owner said, as hail shattered windshields and sunroofs and dented roofs and hoods while staff inside the building watched the destruction unfold. One pickup truck soft top was reportedly left looking “like a piece of Swiss cheese.”
“Something like that could shut a dealership down for a while,” said Landon Fitzgerald, Underwriter, Commercial Insurance, Burns & Wilcox, Salt Lake City, Utah. “If they have to total those vehicles out, they will have to scramble to accumulate more cars to sell just to stay in business for that month.”
While some hail damage to vehicles can be easily repaired, more extensive damage like this means the dealerships would likely rely on their Dealers Open Lot (DOL) Insurance, also known as Dealers Physical Damage (DPD) Insurance, which is part of Auto Dealers Garage Insurance, to recover from the loss, said Kyle Gustafson, Senior Underwriter, Commercial Insurance, Burns & Wilcox, Kansas City, Kansas.
Those were some pretty large hail pieces. It is not really the kind of damage you can just quickly fix and resell, which is what dealers would typically do.
“Those were some pretty large hail pieces,” Gustafson said. “It is not really the kind of damage you can just quickly fix and resell, which is what dealers would typically do. The cost will all depend on how easily they can repair the cars and get them sold.”
When hail strikes, auto dealers uniquely exposed
In the U.S., property damage caused by hail cost more than $1 billion in 2021, making it one of the costliest types of weather disasters, the Weather Channel reported in April. Even singular hail events can cause massive losses, the outlet noted, including $2.2 billion in damages linked to a 2017 hailstorm in Denver and $2.8 billion in damages from a 2010 hailstorm in Phoenix. In Calgary, Alberta, a hailstorm in June of 2020 caused about $1.3 billion in insurable damages and had extended financial impacts on the community, the Calgary Herald reported last year.
Car dealerships are particularly exposed to the threat of hail, as they typically have limited room for indoor vehicle display and canopies to cover a dealership’s full inventory tend to be cost-prohibitive, Gustafson said. According to Auto Trends Magazine, the average cost of hail damage to a private passenger vehicle is about $2,500. Hail damage can sometimes be severe enough for a car to be considered totaled, Autolist noted in a report earlier this year.
“In the Midwest, hail is the main driver of claims for auto dealerships,” Gustafson explained. “It is the main thing that I worry about as an underwriter in the Midwest and the main thing we underwrite for.”
The reason they have DOL Insurance is to protect the inventory they have for sale until it is sold. It provides the comfort in knowing their livelihood in selling those cars is protected in the event of a loss.
Earlier this year, an April hailstorm in Henderson, Texas, that included “baseball-sized hail” caused at least $1 million in damages to one auto dealership, CBS reported. In this type of situation, a dealership’s DOL Insurance can cover the cost of repairs to damaged vehicles, usually subject to a per-vehicle deductible, Fitzgerald said. Separate from a dealership’s Commercial Property Insurance and Commercial General Liability (CGL) Insurance, DOL Insurance policies can also respond to vehicle damage due to fire, wind, flood and other perils.
“The reason they have DOL Insurance is to protect the inventory they have for sale until it is sold,” Gustafson said. “It provides the comfort in knowing their livelihood in selling those cars is protected in the event of a loss. It covers their investment that they have in all of those vehicles.”
In hail-prone states like Oklahoma and Kansas, which are part of the so-called “Hail Alley” region, “it is a lot harder and more expensive to find DOL Insurance than in places where they may not see as many storms coming through,” he said.
Being a garage underwriter, I always hate when I hear that hail is in the forecast. We are seeing it more now in different locations, not just in the hail zones.
Severe hailstorms seem to be occurring more often in other areas, too, Fitzgerald added. “Being a garage underwriter, I always hate when I hear that hail is in the forecast,” he said. “We are seeing it more now in different locations, not just in the hail zones and the locations where it is more expected.”
Understanding deductibles, insuring to value
When some or all of a dealership’s inventory is damaged in a hailstorm, the per-vehicle deductible found on many DOL Insurance policies may come as a surprise to some owners. “The biggest concern is often the deductibles,” Fitzgerald said. “It is a per-vehicle deductible most of the time, and the policy usually does not have a maximum deductible limit.”
Dealership owners should “consider what type of per-vehicle deductible they can withstand,” he explained. “If there is a $500 wind and hail deductible per vehicle, is the dealership capable of taking that blow? Even if the car is totaled out, they are still responsible for that first $500,” he said. “They also want to make sure that the lot is insured to value, meaning that the value of the total amount of the cars is accurately represented on their policy.”
This figure will need to be updated to increase coverage if the dealership takes on a larger number of vehicles than usual, Gustafson added. “You have to be insured for the number of cars you actually have on the lot — the full value that you have on the lot at any given time,” he said. “Otherwise, you will get a coinsurance penalty.”
These are all details that should be discussed with an insurance broker who specializes in DOL Insurance, Gustafson and Fitzgerald agreed. Dealerships can also find out whether they can purchase coverage for loss of business income, which is not typically included on these policies.
“This [recent storm] was an extreme circumstance,” Gustafson said. “Business income is not usually included, but most of these storms do not completely knock out the dealer’s ability to operate.”
Loss of business income is a coverage “that can be added” but is not automatic, Fitzgerald said. “It is a question worth asking,” he said.
Insurance offers best protection against hail
According to NASA, hailstorms are “much more likely to form” than tornados and can be more damaging than hurricanes. As climate change increases the intensity of severe storms, hail may pose a growing risk to dealerships across the U.S. and Canada.
Hail “is happening everywhere now,” Fitzgerald said, and unfortunately, “there is really not a whole lot of protection against hail other than an adequate insurance policy.”
“Higher-end dealerships are going to park the fancier Mercedes inside of the building to protect them,” he said, but this is not possible for most dealerships. “If they hear the warning, they can try to move the cars, but then you worry about trees falling and other perils,” he said.
There is really not a whole lot of protection against hail other than an adequate insurance policy.
Beyond carrying DOL Insurance, dealership owners can look into fencing options to limit the risk of theft, vandalism and other threats, and they may be encouraged to install certain types of locking gates or implement key management systems for added protection.
“Whether it is theft, wind, wildfire, or earthquake, we are looking at zip codes to see where the insured is and what the historical data shows,” Fitzgerald said. “They should get the appropriate limits for their needs. Also, get a good broker. Not every broker is well-versed in DOL Insurance, and it definitely takes an expert to be able to have that conversation.”
Although auto dealerships have limited options for assessing their risk of a hail-related loss or preventing damage from occurring when weather strikes, they can be proactive in finding out exactly how their insurance policies would respond if their vehicles were damaged by hail. “It is important to know what the deductible structure is and how that policy will respond if something like that occurs,” Gustafson said. “It is important to know what would happen in the event of a claim like this.”