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Business Auto Coverage Games

Author: VU Faculty

A corporate owner or officer wants to insure his personally owned auto on the company's Business Auto Policy. Heck, he wants to insure all the family vehicles under the BAP! Or how about this one...a corporate owner wants to rent a car, loan it to his daughter's boyfriend for the summer, and insure under the corporate BAP. With apologies to Joe South, oh the games people play!

 

It is often amazing what kinds of predicaments insureds get into and then look for insurance to cover their hairbrained schemes. It's even worse when you encounter agency producers who try to work the system to comply with these requests. Below are three situations that came up in our "Ask an Expert" service just the past week.

Question"We have several Business Auto polices with scheduled vehicles that are owned individually by the corporate officers or family members and they many times do not have a personal auto policy. We realize the best way to insure is under a PAP, however, producers continue to add vehicles owned individually to Business Polices thinking they are doing the insured a favor and saving them premium (some have young drivers or bad driving records). What are the best endorsements to add to the policy (if we can get carriers to add) to protect the insured for this exposure as well as protect us from E&O issues? Need asap."

Answer?Sadly, this is a common practice. It has little or nothing to do with insurance and everything to do with financial and tax advantages...allegedly. Unfortunately, it is all too common for non-insurance professionals (or insureds themselves) to come up with these arrangements, then expect insurance to figure it all out. We ran this by our faculty and got the responses below.


Over the course of thirty plus years I have seen this practice spell nothing but BAD NEWS.  Business owners, officers, key employees, and others need well-crafted personal insurance programs no less than their business program.  "Saving" someone a few dollars by placing a personal vehicle in a commercial insurance program can result in a multimillion dollar uninsured loss.  There are dozens of ways for this to occur.  These losses happen all the time.


It always amazes me what corporations do in situations like this.  In an attempt to save money for the owners folks rush out and add personally owned autos to the BAP.  The bottom line is (and I suspect it’s the case here) the individuals, their spouses, and resident family members (kids) have zero auto coverage when they aren’t in the car itself.  That means no liability or physical damage coverage when they rent a car on vacation. That means no coverage of any type when borrowing a friend’s car for personal use.  That means no med-pay and UM coverage as pedestrians.
 
What should happen, and no one wants to hear this, is to write a PAP on the cars and that avoids the whole problem. Heck, let the company pay for gas and insurance…just get a PAP in the household. 
 
Assuming the owners/officers won’t do that (for whatever insane reason) then you have some huge gaps.  The first place you have to go is the “drive other car” endorsement.  That’s tricky and you have to look at the endorsement and make sure you get everyone protected.  The person named and spouse are covered for all of the four available coverages (if they are selected) while family members are covered only for med-pay and UM.  That means the kids (if any) have to be added to DOC for liability and physical damage.  Good luck with that request to the underwriter.  If this is a PIP state then broadened PIP must also be added.
 
The whole issue of insurable interest comes up on physical damage coverage.  Most likely the owner should lease the vehicle to the company to avoid problems come claim time.  The owner is then shown as an additional insured and loss payee. 
 
Keep in mind too that by adding DOC you are giving that person named (and spouse if any and perhaps kids) coverage under the BAP driving at 2:00 a.m. on Saturday returning from the bar as well as on the I-5 freeway in Los Angeles at rush hour.  Should that individual be involved in an accident the good news is DOC responds.  The bad news is the BAP now has a claim on the record, and we’ve already been told that we have young drivers with bad driving records.  As a business owner I don’t want those young bad drivers out there “driving on my insurance.”  I doubt the carrier is going to want this either.
 
I don’t mean to take “pot shots” at this situation, but I’ve never seen a good reason to do something like this. It’s just a bad way to structure an insurance and risk management program.  It’s full of holes and E&O land mines waiting to go off at some future date.


If the BAP named insured is other than the individual, you have a problem.  Most BAP coverage symbols (except 1, 8 and 9) cover autos owned by the named insured.  The "who is an insured" section of the policy says that an employee is not an insured when operating a vehicle owned by the employee or a member of the employee's household.  Your producers are not doing anyone any favors.  My suggestion is that you take them off the BAP and write a PAP which is a broader policy in most cases.  Another idea would be to have the employee lease the vehicle to the business and add the Employee As Lessor (CA 99 47) endorsement.


Use the Employee as Lessor (CA 99 47) to cover the employee for their use of the auto (liab. & phy.dam.). Add the Drive Other Car (CA 99 10) to pick up the nonbusiness use of nonowned autos (make sure the basic policy covers hired autos for physical damage). (I suggest you always buy the physical damage coverage on the rented car from the rental company.) If employees have driving age children, they need to be named on the DOC. If any employees go out of town and rent cars for business use, you should also add the Employee Hired Auto (CA 20 54)


This is done all the time and it always has been penniwise and pound foolish. These are personal autos, owned personally and used largely, maybe exclusively, for personal reasons. They are placed under a BAP for financial (premium and/or taxes) reasons. What's really sad is that most of these corporate officers are financially positioned so that this poor attempt to save a few bucks is quite foolish. The exposure is largely personal and that's how it should be addressed...by a PAP. Pull them off the BAP and insured them on a PAP. If they want reimbursement from the employer, fine, but insure them in a manner that provides the broadest and most proper coverage to those in need of it. This is an education problem, not an insurance or financial problem.


Question"When a vehicle is titled to an officer of the corporation, can it be put on the corporate policy? When titled to an individual, can it be put on a business auto policy if the individual is the sole proprietor?"

 

Answer?This is very similar to the question above with a slight twist. It is also a common example of matching the wrong policy with the wrong exposure. Below are a couple more comments from the VU faculty on this practice.

 


It never ceases to amaze me what some commercial customers do to vehicle titles and insurance all in an effort to save a few bucks on taxes.  I did a four hour class on how the BAP and PAP interact and some of the questions asked and situations presented to me gave me the willies.
 
If a car is titled to an individual then write it on a PAP.  Let the company pay all the costs for gas, maintenance, and insurance....that's what they are trying to accomplish.  If you put the car on the BAP you have a whole can of worms opened on both the BAP and PAP side.  Does the individual have a PAP in the household?  If not he/she will need DOC under the BAP or a named nonowner policy listing all members of the household.  On the BAP side you have the issue of insurable interest for physical damage.
 
If the BAP named insured is an individual the gaps are not as bad, especially if it's a private passenger auto.  Such being the case you attach the Individual Named Insured (INI) to the BAP...at no premium charge.  This has the effect of giving the whole family PAP type coverage for liability and physical damage.  If med-pay and UM are on the policy that coverage is already provided.
 
Bottom line is it's a bad move to put a car titled to a person on a BAP where the named insured is a corporation.  I could (and did in class) talk for hours about some of the possible problems.


A corporate officer on a BAP is essentially an employee.  The "who is an insured" section states that employees aren't insureds when they are driving vehicles owned by the employee or members of the household.  If it's titled in the name of an individual, I would write a PAP or have the employee lease the vehicle to the corporation and add them on an Employee as Lessor endorsement.  If the named insured is an individual sole proprietor then the BAP would provide coverage assuming you write the correct coverage symbol.


Question"One of our insured asked if he rented a vehicle in the name of his corporation and furnished the car to his daughter's boyfriend for the summer, would his business auto policy provide coverage for the corporation and the driver in excess of the $1,000,000 coverage he will be purchasing from the rental company.
 
"Note, it will not be a long term rental as he will be renting for 30 day intervals. While I will not comment on my feelings about the insured's wisdom in entering into this arrangement, I do have to get back to him with a response!!!
 
"His business auto policy does have symbol 1 for liability. I have reviewed your article, Does 2+8+9=1? as well as the ISO Business Auto Coverage form while researching this question. It would appear to me from my research, that Symbol 1 would be broad enough to cover this arrangement even though the rental is not connected to the insured's business.
 
"I am sure, however, that the carrier will not be pleased with this arrangement if a claim is ever made. As far as coverage for the operator, it would appear that the 'Who Is An Insured' Provision is broad enough to cover this operator as a permissive user. One area where I did see a potential problem is with regard to contractual liability. Under the BAP form the definition of an insured contract, H(6), indicates 'That part of any contract or agreement entered into, AS PART OF YOUR BUSINESS, pertaining to the rental or lease...of any "auto'.
 
"Based upon this language I do not believe that the insured would have coverage for a contractual indemnity claim brought against him by the rental company should a catastrophic loss occur. Please comment as to whether the Symbol 1, in your opinion, would be broad enough to cover the insured and the operator he is furnishing this admittedly non business related rental to; and your thoughts with regard to the insured having contractual liability coverage in this scenario."

Answer?You have certainly done your homework. There are some things I could say about this abomination, but I'll leave it to the faculty below to give their frank opinions.

 


What is the boy’s age? Will the age of the driver be a violation of the rental contract? Will the boy be listed as a driver by the rental contract? If not, you have voided coverage from the rental agreement. If the corporation rents the vehicle (not the individual who owns the corporation), the contract must be in the name of the corporation, then I think the insurance would have a difficult time denying coverage for a loss to the corporation or the driver who the corporation allows to use the car.
 
Make sure you have hired auto physical damage also. By the way, the Business Auto policy will not pay all the damages the renter agrees to pay in the rental agreement (including diminution of value – loss of market value after the car has been repaired).
 
Your insured could buy a used auto personally and sell it to the young man for a cheap price and make sure the young man buys proper insurance coverage.


Most rental car companies will only rent a car to an individual, not to a business.  There may be exception for pre-arranged corporate accounts, but not for casual rentals.


Assuming the vehicle is used for purely pleasure purposes, it is quite likely that there is no coverage at all.


This doesn't sound like a good idea to me, but....
 
If the corporation is able to rent a vehicle in its name (as opposed to the name of the individual asking the question), then it is a covered auto.  Anyone while using with the named insured's permission a covered auto the named insured owns, hires or borrows is also an insured.  The BAP "other insurance" clause says that for non-owned autos the BAP will be excess over any other collectible insurance.  Is the rental car's insurance provided on a primary or excess basis?  If excess, or excess over the states minimum FR limits, the insured's BAP might have to pay on a pro-rata basis. If the rental company doesn't know about the driver, will that void their coverage? 
 
The definition of "insured contract" includes a rental car contract entered into as part of the business by the named insured or an employee.  However it does not extend to property damage to the rental car.  As you pointed out, this vehicle is not being rented as part of the business.  This could present a problem at time of loss if the rental car company holds the insured responsible for contractually assumed obligations.
 
Does the boyfriend have an auto policy?  If so, let him rent the car.  If he doesn't have a policy you could write a Named Non-Owner Policy in personal lines.  This policy does not provide physical damage coverage.  This would keep the liability exposure off the corporation's policy.  The girlfriend's father could pay for this policy if he desires.


I never cease to be amazed at all the wacky, convoluted predicaments that people get themselves into and expect insurance to bail them out. If this guy wants to rent a car for his daughter's boyfriend to use, let the boyfriend rent the car and have daddy pay for it and the insurance. It sounds like he's trying to get a cheaper deal through his business insurance and possibly tax or other financial advantages as well. I'm sure the insurer would be thrilled to learn about the exposure they are about to undertake...keep in mind that, while you want to serve the interests of your client, you are an agent of the company and should protect their interests as well. I would LOVE to know the insured's motivations for what he wants to do.  :)

 

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 Last Updated:  September 25, 2009

 
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