If you run your own new- or used-car dealership, you most likely have an auto dealer bond.

You also may believe you don’t need to think about your bond until it’s time to renew it, but that is far from true.

When it comes to avoiding claims or simply getting the best deal on your bond, you need to review the bond basics. Ultimately, neglecting to learn about your bond and allowing any claims to be filed can cost you your business.

The basics of surety bonds aren’t complicated. They work as a kind of legally mandated insurance purchased by your dealership in order to protect your customers. In almost every state, you’re required to purchase an auto dealer surety bond in order to obtain your dealer license.

What exactly is your bond protecting your customers from? A motor-vehicle dealer bond is designed to ensure you follow all of the relevant state regulations for your dealership. If you break one of these regulations and your customer is harmed, they may bring a claim against your bond.

One of the problems can be understanding these regulations, as they vary based on your location and can be difficult to understand. This is where working with a claims advocate and understanding the claims process become essential.

Every discussion of how these claims work has to begin with one thing: avoid them at all costs. That means following the rules, but unfortunately not all claims are fully justified. It’s possible that a customer will bring an unfair claim against your business.

Fair or not, this is where your bonding agency comes into play. While most stop at providing the bond, having an agency that also functions as an advocate can put you in a much better position to protect yourself. It’s in the agency’s interest too to ensure claims are avoided.

Still, what happens if worst comes to worst?

When a claim goes through, the repercussions are serious. Despite the money fronted by your auto dealer bond, you’ll still be fully responsible for paying the full amount of the claim eventually. The bond is simply there to pay the claim in the short term.

Much more serious, however, is the issue of licensing. If you’ve had to pay a claim, it can be nearly impossible to find a company willing to bond you. This can mean either resorting to far costlier alternatives (if they’re available, and often they’re not) or, in the worst-case scenario, not being able to renew your license.

That’s what makes claims a business-killer. Even if you can pay the claim, not being able to renew your auto dealer license means your business is over.

Fortunately, if you follow all of the rules and protect yourself against claims, your auto dealer bond can become even more affordable. While having a claim filed against you hurts your ability to get bonded, not having claims filed over a longer period of time shows bonding agencies you’re reliable, and they will be willing to offer you better rates.

Eric Halsey keeps a close eye on automotive retailing trends for JW Surety Bonds.