Author: VU Faculty
In recent months, we have received several "Ask an Expert" questions about insuring autos that are titled in an individual's name under a Business Auto Policy where the named insured is a corporation. Is there any liability or physical damage coverage if this is done? What obligation does the agent have, if any, to determine if a vehicle to be insured is titled in the name of a corporation as opposed to an individual?
Here are several questions received in recent months through our "Ask an Expert" service:
"In reviewing our internal procedures we discussed a possible situation, which could conceivably lead to an E&O exposure. I am hoping that your staff can provide some guidance in avoiding a problem in the future. Our concern involves a commercial account (a corporation) in which the insured requests that we add a vehicle to the corporate auto policy and provide full liability and physical damage etc. coverage. We then proceed to do so.
"A large auto loss subsequently occurs resulting in property damage and physical damage to the vehicle. Unbeknownst to us, the vehicle is titled in the name of the owner of the corporation personally and not in the name of the corporation (Named Insured). Would the insurance carrier deny liability and physicial damage etc. coverage for this vehicle since it was titled in a name other than the Named Insured?
"What obligations do we as an agency have, if any, to determine if a vehicle to be insured is titled in the name of the Named Insured as opposed to an individual? Can the agency be held liable for the loss if the insurance carrier denies coverage? If so, what steps should we take to protect ourselves from an E&O loss?"
"We have a business customer with a Business Auto policy and they have their own personal vehicles on this policy. The personal vehicles are titled in their name and not the corporation. What endorsement can we use to add them as named insured on the Business auto policy for their personal vehicles?"
"I have a two-fold question for you on a situation with one of our clients. The owner of a company has purchased all his vehicles in his personal name and leases them back to the company, then insures them under our Commercial Auto policy in the company name. First, do you have any thoughts on the lease itself, we told him it should be presented to an attorney but he won't do that. I think there were some issues on the transfer of the liability holding up in court. Also, is there any coverage issue that we are missing for this? He just has a very basic statement that the vehicle is leased to the company.
"Second issue is he just purchased a 10-passenger van to donate to his church, it is in his personal name, the church is unable to insure it since it is not in their name. He is unable to change the title/registration since the vehicle was financed. Again he said he will just lease it to them or his company and insure it under his company name, but we have advised him against that. We thought we may write a policy in the name of the church and we would add him as additional insured/lessor. Please let me know what problems this could create that we might be missing."
"We have an insured who has a business auto policy in the corporation name. He has six autos on the policy that are registered in his personal name. The insurance company has added an endorsement to the policy listing our client as an additional insured. The client wants ID cards with his individual name on them. The company will NOT do this. How can this be done on the business auto policy?"
Unfortunately, many insureds do things without any regard to the insurance aspects of the situation. Insuring personally owned autos on corporate BAPs is just one example. Below are some comments from our faculty indicating the pitfalls of this approach, valid uses, along with some alternative suggestions.
This is not an unusual problem. First, you must advise your client that everyone with an interest must be shown on the policy. Then confirm that autos are owned or leased by the named insured. Including this on a checklist and then keeping one copy and giving the named insured another copy is an excellent way to document it.
Since insurance is a highly technical field and the agent is the technical expert, you do have an obligation of explanation and suggestion. Once you have done that, the insured is responsible for his or her decision. Document, Document, Document!!!
First, anyone with a filing fee can sue you for anything. Second, it is best to protect your insured — since that is what you do as an insurance broker — by making sure the coverage he or she needs is what he or she gets to make it more difficult for someone with a filing fee to successfully sue you.
There are LOTS of potential problems with insuring a personally owned auto under a corporate business policy. Too often this is done on the advice of an attorney or accountant (e.g., for tax purposes), neither of whom have a clue as to the insurance ramifications of their recommendations. For example, how is the vehicle insured? Here are the likely possibilities:
Symbol 2 - Owned "Autos" Only
Only those "autos" you own (and for Liability Coverage any "trailers" you don't own while attached to power units you own). This includes those "autos" you acquire ownership of after the policy begins.
Symbol 3 - Owned Private Passenger "Autos" Only
Only the private passenger "autos" you own. This includes those private passenger "autos" you acquire ownership of after the policy begins.
Symbol 4 - Owned "Autos" Other Than Private Passenger "Autos" Only
Only those "autos" you own that are not of the private passenger type (and for Liability Coverage any "trailers" you don't own while attached to power units you own). This includes those "autos" not of the private passenger type you acquire ownership of after the policy begins.
Symbol 7 - Specifically Described "Autos"
Only those "autos" described in Item Three of the Declarations for which a premium charge is shown (and for Liability Coverage any "trailers" you don't own while attached to any power unit described in Item Three).
Symbol 8 - Hired "Autos" Only
Only those "autos" you lease, hire, rent or borrow. This does not include any "auto" you lease, hire, rent, or borrow from any of your "employees", partners (if you are a partnership), members (if you are a limited liability company) or members of their households.
Note that the only symbol that might work is Symbol 7 since it only requires declaring an auto and not ownership per se. Symbol 8 won't work since the business isn't leasing, hiring, renting, or borrowing the auto AND Symbol 8 doesn't include vehicles of employees, partners, etc. All of the other symbols extend coverage only to vehicles "you own." This creates a huge potential coverage gap unless the owner of the vehicle is a named insured on the BAP, along with the business.
RE: Liability (BI/PD) coverage under the BAP. It depends on what symbol is used, but it seems that even if symbol 7 were used, the BAP would respond, since the auto is declared. However, as to "Insureds" under the BAP, the owner is not an insured, whether operating the vehicle or not, because of exceptions #1 and #2 in the permissive user provision (owners not covered).
RE: Physical Damage (comp & collision) coverage. Some insurers (and court cases) have held that the BAP would not respond since the named insured has no insurable interest in the auto, even though it was declared, and a premium collected. This often leads to an E&O claim - see the next comment below.
RE: E&O. An E&O attorney friend had almost the exact same case, although it involved a PAP and not a BAP. The PAP named insured contacted her agent and asked if she could add a Corvette. The agency got the pertinent information, and added the car (apparently it was not financed). Some time later, she called to say that it had been wrecked in a single car accident. The insurer then discovered that the car was actually owned by her live-in boyfriend, who had a terrible driving record, and she had added it to her policy since he was having trouble getting insurance.
After the PAP insurer denied the collision claim, she sued her agent. The agent lost the case and the judge rejected the E&O defense attorney's argument that the only way an agent could prevent such a situation was to require that the insured produce a copy of the vehicle title before insuring it. The judge found that was not an unreasonable step for the agent.
My attorney friend also had a similar E&O case in which a BAP insured came in and informed the agent that his CPA had suggested the the insured incorporate, changing from his current sole proprietorship status. The agent amended the named insured on the BAP to the name of the new corporation. However, that was the only change the agent made. After an auto accident, the agent discovered that the insured had not changed the title to the autos he owned, and the BAP insurer successfully denied the claim. (Possibly the BAP had symbol 2.)
Therefore, as to agency procedures, requiring a copy of the title seems about the only way to avoid these problems. When I bring this case up in seminars, many agents say they already follow this procedure.
If a vehicle is titled in the name of an employee, the BAP says the employee is not an insured and therefore has no coverage. A corporate officer is an employee on a BAP. The best way to handle this situation (for an individually owned auto) is to write the coverage on a PAP, not a BAP. The VU has an article about which might be better from a coverage standpoint.
The insured could also title the vehicle to the corporation or lease the vehicle to the corporation and add the Employee as Lessor endorsement. The agent definitely has an obligation to check the vehicle titling and make sure the coverage is written properly. This is a big E&O exposure.
I could, and in fact have, presented a four-hour class on some of the crazy things that businesses do when it comes to automobiles. This is one such example.
If the auto is on the policy, the company will be hard pressed to deny coverage, but it easily could happen. I think a relatively simple question to ask a customer (whether it be commercial auto or personal auto) is, “Who is this vehicle titled to?” The ACORD personal auto application and auto change request ask this information; the commercial forms don’t. If an agency were to make this simple question part of their “invariable practice” and ask it during vehicle changes issues such as this could be avoided.
I suppose the agency could completely avoid the issue by requiring a copy of the registration or title, but that’s a lot of extra work and some may say it’s unrealistic. Whether it’s realistic would be up to the agency to decide. At the least, ask the question and document it.
First the technical issues. If a personally owned auto is insured for laibility and physical damage on the BAP, the carrier could deny the physical damage claim on the basis of no insurable interest. The liability claim would be covered, but it wouldn't respond for the employee-owner of the vehicle (see Who Is An Insured), only the named insured which could be sticky if he were the president or another big shot. He wouldn't be protected on his own PAP because he surely didn't list the vehicle. So, that's a problem.
Regarding avoiding a potential E&O claim, you could make it a standard inquiry for all customers with a BAP in your office at the point of application or renewal, "Are there any vehicles listed that are not owned by the named insured?"
You could send a reminder letter or email to all your clients pointing out generally the coverage implications if coverage and title do not match and to notify your agency as soon as possible if you have a mismatch.
You could include it in your procedures for every new auto added to a BAP (or PAP for that matter) to inquire as to title and document the customer's response.
If the vehicle is titled in an individual's name, your best bet is to write it on a PAP. The coverage is broader. If you insist on writing it on the BAP, you have three choices:
(1) name the person as a named insured;
(2) change the title to the business name; or
(3) have the vehicle leased to the business and add the "Employee as Lessor" endorsement CA 99 47.
I would still write a PAP instead
Regarding the second question above, even if you do this, where is this person going to get their own coverage for situations such as a rental car on vacation, borrowing a car for an errand, or as a pedestrian needing med-pay and UM? If you do it, you'll need to have them (and family) covered under Drive Other Car coverage on the BAP or a named non-owner policy and that will help only for the nonowned exposure. This is a very dangerous situation.
With regard to the third question above, the concern I have here is your client is the legal owner of two vehicles. As such he is “on the hook” for any damages or injuries caused by those vehicles. In leasing one to the company and giving one to a church, he remains the legal owner, but doesn’t control the insurance protection. He is trusting the company and the church to maintain coverage, in force, at adequate limits. It’s never good to trust someone else to protect you.
Secondly, you said ALL of his vehicles are insured under a BAP for the company. Where does your client, and his family, get their personal auto type protection? For example, if he travels to Las Vegas for vacation and rents a car, where does he find coverage? (Hint: He doesn’t.) He needs to have DOC added to the BAP and needs to have it structured in a manner to protect his entire family. Or, he needs a Named Non-Owner personal policy, but the problem there is you don’t get PIP (in some/many no-fault states) or physical damage…and some companies won’t write that policy if there are autos furnished for regular use in the household.
As much as your client doesn’t want to hear this, he needs to have a car owned by him and covered by a PAP in his household. Short of doing that he has some HUGE coverage gaps out there. When people buy an auto personally and try to cover it on a BAP it’s a time bomb waiting to go off. This is a serious issue that should be corrected immediately.
Here is a sample VU article on this general subject:
Here's another one that addresses a DOC issue:
And here is an article on the reverse situation...insuring a corporately-owned auto under a PAP:
Finally, here is a comparison when an insured has a choice between the PAP and BAP (e.g., a pickup owned by a sole proprietor):
Sometimes this is a legitimate situation where you have an owner with a personal auto who would like to add it to the BAP rather than purchase a separate PAP. In such cases, you can used the Individual Named Insured endorsement, CA 99 17, if the individual is added to the BAP as a named insured along with the corporation.
If the BAP names a person, the ISO rule states that the INI endorsement is to be added and it's "non-premium bearing"...that's ISOese for "free." What triggers the coverage is the BAP listing a private passenger type auto or a pickup truck or van not used for business purposes.
These articles fail to mention problems related to large personal losses applied to commercial accounts. Keeping a personally owed vehicle out of a commercial fleet program can save a firm tens, or hundreds, of thousands of dollars in increased commercial premiums. The same situation applies to personal, particularly children's, use of commercial vehicles.
I agree that personally titled vehicles should be insured on a PAP and business titled vehicles on the BAP; however, it is not as cut and dry as one of your authors would insist. You have to look at the loading and unloading potential exposure since there is a big gap between where PAP ends and GL starts. Leasing the vehicle to the business works neatly if it a true commercial exposure unsuitable for the PAP.
The amusing story is about a piano mover/servicer with a personal direct writer policy and an IIABA independent agent written GL policy. They were moving a piano where it was downhill to the house. The piano got away from them, went through the front doors of the house (through quite literally) past the home owner (thankfully), through the french doors to a balcony, and into the pool a floor below. Coverage was successfully denied by both carriers. I hear the agents split the tab.
It is absolutely a part of our business culture to ask "Who really owns this?" and "Exactly who is on the deed/title." It is so important.
Richard Viall, CPCU, CIC
Viall Insurance Agency
I am writing in reply to the article about the personally owned autos on a corporation’s BAP. There were a couple of references about the personal owner of the vehicle leasing the vehicle back to his/her corporation. I recently inquired to the Massachusetts RMV about this scenario and received their response as follows:
“In order to lease a car to another person or business, you must have a license to do business as a leasing company along with the F.I.D. number for your company. The Registry will not list a person as a lessee unless the lessor is a licensed leasing company. The name on the title and registration will not change, unless the lessor’s name changes. If that happens the lessor will have to re-title and register the car and there will be sales tax. When the car is leased the lessee will also pay sales tax unless the lessor pays the sales tax to the Mass. Department of Revenue for the lessee.”
I don’t know what other states this rule may apply to, but I would imagine that quite a few of them have a similar law. Just an FYI for your file. Thanks.
Field, Eddy & Bulkley, Inc.