Author: Chris Boggs
Rounding a curve, the driver crosses the center line and hits a 70-year-old motorcyclist. Amazingly the biker isn't killed, but unsurprisingly he does suffer severe bodily injury. During the claim investigation, the business auto carrier discovers that the vehicle was not owned by its insured (the corporation), it was owned individually by the driver, the corporate president's wife. Although the car was scheduled on the business auto policy (BAP), the carrier rightfully denied the suit/claim filed against the driver. (More detail is provided later in this article.)
An insurance agent leased his personally-owned vehicle to the corporation. After his 19-year-old daughter rear-ended a BMW, the truth of the arrangement was discovered; the agent gave the now-corporately-insured vehicle to his daughter to drive while away at college. The business auto carrier had no choice but pay the claim, though this coverage extension was improper.
Personally-owned autos belong on a personal auto policy (PAP), but occasionally a commercial insured intentionally or unintentionally includes one or several personally-owned auto(s) on its business auto policy (BAP). Commercial clients may do this for one of many reasons.
When a commercial client intentionally or unintentionally includes a personally-owned auto on the BAP, the agent must ascertain the legitimacy of the vehicle's inclusion on the BAP - sometimes its inclusion is improper (or just plain fraud). The primary goal of this article is to allow agents to answer the question, "When is the inclusion of a personally-owned auto on the BAP legitimate and proper?" Secondarily, this article addresses the steps required to properly add a personally-owned auto to the BAP.
Before addressing legitimacy, one dangerous assumption must be tackled: ownership. Never assume that every vehicle listed on the auto schedule is owned by the insured. Further, don't assume that any auto the insured attempts to add during the policy period is owned by or properly leased to the named insured.
Never include a vehicle on the auto schedule or add any vehicle without asking one simple question, "Who owns the vehicle?" The answer may reveal one or a few personally-owned vehicle(s); if so, the agent must either remove them from the BAP or take steps to properly extend protection from the BAP to the auto(s) and their owners.
Once ownership is established, the agent can decide if the inclusion of a personally-owned auto on the BAP is legitimate and proper.
Legitimacy of Adding a Personally-Owned Vehicle to the BAP
How does the agent establish legitimacy? Ask questions!
Do NOT add a personally-owned auto to the BAP without asking five key exposure questions:
- Is the vehicle owned by an employee? If "no," do not add the auto to the BAP. If "yes," proceed - cautiously.
- Is the vehicle owner the listed vehicle's only driver? If "no," list the other driver(s). If there are multiple drivers, those drivers must somehow relate to the business for inclusion of the vehicle on the BAP to be acceptable.
- What are the employee's duties? If his/her duties require regular use of a vehicle – more than 50 percent of the time - adding the vehicle may be legitimate. If this is not the case, the personally-owned auto probably should not be added to the BAP.
- What is the percentage of personal versus commercial use? If there is a majority of personal use, the vehicle's addition to the BAP is improper and should not occur. (This question should be used when a corporate officer is adding a personally-owned auto to the BAP.)
- Is the employee closely related to any owner or executive officer? A "yes" response does not make the vehicle's inclusion improper; all other facts previously gathered must be considered before making the final decision.
If, based on the answers to these five questions, addition of the personally-owned auto to BAP is deemed legitimate and proper, two steps must be taken to confer coverage to the vehicle and the owner:
- Require the creation and execution of a formal lease agreement; and
- Attach the CA 99 47 - Employee as Lessor endorsement.
A Formal Lease Agreement
Two or three sentences stating that "Employee" owns "Vehicle" and is leasing said vehicle to "Company" does not constitute a formal lease. Because a lease agreement is a legal document subject to contract law and creates dual ownership of the subject automobile, specific information should be addressed or provided in the agreement:
- A description of the vehicle;
- A description of the individual leasing the car to the company (name, position in the company, and business purpose for adding the vehicle);
- Agreement by the corporation to provide insurance protection and to what extent (i.e. "full coverage" or liability only) and to indemnify the vehicle owner;
- Responsibility for loan payments (if any);
- Clarification regarding who is responsible for maintenance and upkeep;
- Responsibility for paying the property taxes;
- Non-permitted use of the vehicle (including permitted and nonpermitted drivers – remember, the BAP carrier is providing 24/7 coverage on the vehicle);
- The period of the lease agreement (can be indefinite);
- Whether financial consideration is required during the lessee (mileage, fuel, monthly fee, etc.);
- Who is responsible for paying traffic fines;
- The requirement that the lessor have a PAP for any other vehicles owned. If no other autos owned by the person, a named, non-owner policy is necessary to confirm the CA 99 47 is not being used to avoid a PAP. (The auto being added to the CA 99 47 would NOT be on the PAP); and
- Properly notarized signatures. (If the contract is not notarized, it is acceptable to have the signatures attested to and dated by a third-party witness.)
"Acceptable" lease agreements contain information addressing points 1, 2, 3, 8, 9, 11 and 12. If any of this information is missing, the lease is not acceptable and the personally-owned auto should not be scheduled on the policy. "Above Average" leases are those that contain everything found in an "Acceptable" lease plus answer "7." above. A "Superior" lease addresses all 12 points.
This recommendation/requirement is not intended to put you "at odds with" your insured. If the carrier doesn't ask for it, the requirement of a formal lease becomes and agency decision. However, remember the exposure now being placed on the BAP carrier. As an agent for the carrier, you are fulfilling your duties to your carrier. You are also helping your insured by explaining the ramifications of their decision and are trying to help them avoid potential legal problems.
[Errors and omissions word of caution. The agent should not write or "approve" any legal document. Give the insured a checklist of what needs to be included in the lease agreement and advise them to have an attorney draw up the lease. They may choose to write it themselves, but don't make it the agency's problem or responsibility.]
An Increased Exposure to Consider
Remember, "leaseback" agreements create dual ownership of the vehicle but makes the named insured solely responsible for providing insurance protection. Ultimately, the named insured business is providing coverage to the "leased" auto on a primary basis, 24/7 - regardless how it is being used. This fact places the carrier on the hook for any loss caused by the listed vehicle. Such increased exposure requires a detailed lease; and the BAP carrier is fully within its rights to ask for such a lease.
With the lease agreement in place, the vehicle owner is contractually protected, but depending solely on the contract to protect the driver leaves potential legal issues if the contract's indemnification wording is unclear. To assure there are no gaps in protection for the vehicle's owner, the CA 99 47 must be attached.
A Coverage Gap to Consider
Remember the auto vs. motorcycle accident highlighted at the beginning of the article? The vehicle's owner/driver was arguably using the vehicle for the benefit of the company when the accident occurred. Although it was a listed vehicle, the carrier denied the claim against the driver (the driver was sued, not the corporation). Following is a paraphrased excerpt from the deposition explaining why the claim denial was/is correct. (As a side note, coverage was provided under Symbol 1.)
Lawyer: "So, you are telling me that a listed auto is not a covered auto?"
Expert witness: "No, I'm telling you the person driving the vehicle is not a covered driver. If the company (the named insured) was sued, the policy would provide coverage. However, it's not the company being sued, it's the driver/owner of the vehicle – and she has NO coverage under the corporation's business auto policy."
Does the unendorsed BAP support this denial? Yes, exclusionary wording found in sub-paragraph b. of Who Is An Insured, reads in part:
Who Is An Insured
The following are "insureds":
b. Anyone else while using with your permission a covered "auto" you own, hire or borrow except:
(1) The owner or anyone else from whom you hire or borrow a covered "auto".
(2) Your "employee" if the covered "auto" is owned by that "employee" or a member of his or her household.
Regardless of the owner's/driver's employment status, exceptions b.(1) and b.(2) excluded her from coverage. By asking the right question, this coverage gap could have been avoided. Knowing to whom a vehicle is titled allows the agent to make necessary recommendations or arrangements.
Could the owner/driver of the vehicle have been protected by the policy? Yes, if: 1) the facts indicated that addition of her personally-owned auto was legitimate; 2) a formal lease agreement was in place; and 3) the CA 99 47 – Employee as Lessorendorsement had been attached.
The CA 99 47 – Employee as Lessor Endorsement
Personal auto policies (PAPs) are designed to provide primary protection for the vehicle's owner and anyone responsible for the actions of the owner – up to and including his employer. To maintain the primacy of the PAP, the BAP specifically excludes from insured status any employees using his or her personally-owned vehicle on behalf of the business [II.A.1.b.(2)]. However, use of a formal lease and attachment of the CA 99 47 – Employee as Lessor endorsement fully and unconditionally eliminates the PAP's primacy.
Part A in the CA 99 47 removes any question of ownership or "title." The auto scheduled on the endorsement becomes and an owned vehicle under the policy as follows:
A. Any "auto" described in the Schedule will be considered a covered "auto" you own and not a covered "auto" you hire, borrow or lease.
Part B specifically extends insured status to the employee who leases the auto to the employer - even though the endorsement does not require the employee's/owner's name be provided, nor is there a place to provide the information:
B. While any covered "auto" described in the Schedule is leased to you by one of your "employees", the Who Is An Insured provision under Covered Autos Liability Coverage is changed to include that "employee" as an "insured"
Although the owner's name is not required for the endorsement, the underwriter still requires an MVR. This owner/driver is underwritten like any other driver, and possibly more stringently since the carrier is now providing 24/7/365 coverage for the driver while using the scheduled auto.
Personally-Owned Autos on the BAP
Personally-owned autos belong on a PAP. Thus, to avoid the improper or illegitimate addition of a personally-owned auto on the BAP, the agent must:
- Confirm the owner of every vehicle (not just those being leased back) – don't assume;
- Confirm any request or need to add a personally-owned auto to the BAP is legitimate by asking the key exposure questions;
- Require and closely review the formal lease agreement; and
- Attach the CA 99 47.
Last Updated: August 4, 2017