Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Dealers may offer the contracts as principals or as sales agents of manufacturers, distributors,
administrators, insurance companies, or another party. Dealers often offer more than one "brand"
of service contracts with each contract offering different terms and conditions. The dealers may
operate as the principal on some contracts and as an agent on others.
When dealers act as sales agents, they retain a selling commission and remit the balance to the
plan administrator. When dealers act as principals, they may purchase an insurance policy to
cover their liability under the service plan. When the dealer is the principal and covers its risk by
purchasing insurance, there are two transactions: one between the dealer and the customer, and
the second between the dealer and an insurance company.
If the dealer does not purchase insurance, it may enter into an arrangement whereby a portion of
the selling price is deposited into an "escrow" or "trust" account and a small portion of the price is
used to purchase "stop-loss" or "excess loss" insurance.
Regardless of what type of service contract the dealer sells, the contracts are usually memorialized
on documents provided by the administrator or promoter. The terms and conditions of each
contract must be reviewed to determine whether the dealer is the agent or the principal.
An agent is one who sells the product of a third party without assuming the legal obligations of
the products sold. Typically, the agent receives a fee for the sale and necessary administrative
services rendered.
A principal is a party to the contract who assumes the risk of the contract provisions and is
directly responsible for any ensuing liabilities. The principal derives compensation from the profit
built into the cost of the product.
Credit Life Insurance; Credit Accident and Health Insurance
Many consumers finance the purchase of a vehicle and purchase Credit Life Insurance and/or
Credit Accident and Health Insurance (also known as Credit Life and Disability Insurance). If the
buyer dies before the loan is paid off, Credit Life Insurance benefits pay off the remaining balance.
Thus, Credit Life Insurance is decreasing term insurance.
Credit Accident and Health Insurance pays the buyer’s monthly loan payment when the buyer is
disabled, as defined in the insurance certificate, after a specified waiting period, if any. The
payments continue as specified in the insurance policy, usually as long as the buyer is disabled.
States have regulations concerning the sale of credit life and disability insurance that are enforced
by an insurance commissioner. These regulations may affect premiums, commissions, etc. and
usually provide that the insurance must be sold through an insurance company that is authorized
to sell this type of insurance in the state where the dealership is located.
Most dealerships sell both Credit Life and Disability Insurance in conjunction with the sale of
vehicles and it is a significant source of income for the dealership. This income is usually in the
form of commissions (up front) ranging from 30 to 50 percent. Some states place a cap on the
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