It is probably safe to say that most employees do not know whether they are covered by their employer's automobile or their general liability policy. They probably do not even care one way or the other, because they are not likely to get sued if the claimant is seeking the "deep pocket." Besides, employees know that if they are sued for their alleged business-related liability, their employers will come to their rescue.
However, one exception to where an employee might be confronted with a lawsuit is where the employee injures another employee during a job-related activity. Not wanting to cover that exposure, insurers added a so-called "fellow employee" exclusion (now more commonly the co-employee exclusion) at the same time they added employees as insureds.
The rationale for this exclusion is to reinforce the intent that workers compensation insurance is the sole remedy for employment-related injuries. A growing number of insurers nonetheless will delete this co-employee exclusion probably because most states do not permit fellow employee suits. (According to Larson's Workmen's Compensation Desk Edition, Vol. 2, Sec. 72.11, pp. 14-28, Arkansas, Maryland, Missouri and Vermont are the only states that permit co-employee suits, exclusive of gross negligence and intentional tort.)
Most employers, on the other hand, usually want insurance in place to cover the alleged liability of their employees for at least three reasons: The first is to transfer to an insurer the financial consequences of having to protect employees in the event of claim or suit. The second reason is to obtain the cooperation of employees when it becomes necessary to defend legal actions against the employer. The third reason is that providing coverage directly to employees can be viewed as a perk.
If one were to trace the evolution of employees as insureds, one could conclude that the common demand for non-auto liability insurance protecting employees in the event of claim or suit took place within the past 40 years.
Endorsements adding employees as insureds were common in the 1960s, along with a variety of other enhancements to general liability policies. Broad form contractual liability coverage encompassing any written or oral contracts, or limited to designated contracts was available during this period, along with personal injury liability, and premises medical payments.
One of the problems with the earlier endorsements adding employees as insureds was that coverage applied solely to bodily injury and property damage. However, when personal injury liability coverage was added to a liability policy, it again became necessary to add employees as insureds for purposes of expanding coverage beyond bodily injury and property damage.
This was not a widespread problem; it troubled only employers who had serious personal injury liability exposures, such as municipalities having their own law enforcement agencies, department stores with their own security guards, and security enforcement companies.
When a law enforcement officer was sued for an allegation of false arrest or wrongful detention and the liability policy included employees as insureds for bodily injury and property damage only, it became necessary for the law enforcement officer (and the municipality seeking coverage) to argue that the officer was an executive officer of the municipality, since executive officers, unlike employees, were insureds for all coverages.
These kinds of problems eventually disappeared when the standard broad form comprehensive general liability (CGL) endorsement was introduced in 1976. Some insurers also had their own versions of this endorsement which combined many of the commonly sought after monoline endorsements that were necessary prior to this time.
With the broad form CGL endorsement including personal injury liability coverage and employees as insureds, the issues mentioned above dealing with law enforcement officers, for example, became history. When the broad form CGL endorsement was removed from use in 1985, the standard commercial general liability policy automatically included employees as insureds for all of the coverage provided.
Erosion of employees as insureds
Given the reasons why employees are added as insureds, it is doubtful that employees are excluded from CGL policies at the request of employers, since any price savings would be insignificant. To the contrary, the decision to remove employees as insureds usually is an underwriting requirement.
With the introduction of the standard commercial general liability policy provisions in 1985, employees were automatically included as insureds for all coverages. At the same time, insurers introduced the Exclusion-Employees As Insureds endorsement, CG 21 37 so as to remove coverage when desired.
However, it took a while for insurers to discover that this endorsement was not as good as they thought. Insurers thought the common reason for the use of the above exclusion to the CGL policy was to eliminate any coverage for an employer's auto-related liability exposures. What some people did not understand, and that includes some insurance company claims adjusters, is that the CGL policy does provide a certain amount of auto-related liability on an excess basis, despite an exclusion.
Of course, exclusions do not provide coverage. But through limitations placed on exclusions, a certain amount of coverage remains. If one refers to exclusion g. of the standard CGL policy, one will note that coverage is not excluded for an employer's vicarious liability stemming from the use of an employee's auto, even if the employee is not an additional insured. (Coverage also applies on an excess basis for an employer's vicarious liability from an independent contractor's use of a motor vehicle.)
When the Exclusion-Employees As Insureds, CG 21 37 was introduced, insurers thought that with its issuance, the endorsement would preclude all auto-related liability coverage of the employer whose employees were not also included as insureds. Insurers found out their mistake when the courts held that an employer still was covered for its vicarious liability stemming from an employee's use of his/her auto for business purposes, even though the employee was not covered.
So in 1997, another updated version of the above exclusion was introduced so as to eliminate coverage for the employer whose negligent employee is not an insured. However, not all insurers use standard forms.
In fact, in one recent case an insurer learned that its endorsement did not completely eliminate an employer's coverage for an employee's negligent use of an auto.
The case is Union American Insurance Co. v. Maynard, et al., 752 So.2d 1266 (Dist. Ct. App. FL 2000). Briefly, a company's president instructed an employee to take a cement mixer to a Florida city for repairs. After the employee attached the mixer to his own truck and was on the way to the repair shop, he was involved in an accident which resulted in the death of another motorist.
As a result of this accident, suit was filed against the employee, his employer, and its president. The insurer brought a declaratory judgement action seeking to establish that no coverage applied under its CGL policy for the company, because of policy exclusion g., which precluded coverage for:
"Bodily injury" or "property damage" arising out of the ownership, maintenance, use or entrustment to others of any aircraft, "auto" or watercraft owned or operated by or rented or loaned to any insured. Use includes operation and "loading or unloading."
Furthermore, while the CGL policy included employees as insureds under part 2. a. of the Persons Insured provision, an endorsement was attached stating that Part 2.a. of the Who Is An Insured provision (Section II) does not apply.
The trial court ruled against the insurer based on an ambiguity. This decision was affirmed on appeal. The court explained that coverage applies unless the policy excludes it. The auto exclusion g., the court said, applies to bodily injury arising out of the use of an auto "owned or operated by or rented or loaned to any insured." The policy's definition of an "insured" in the Persons Insured provision, it explained, included employees acting within the scope of their employment.
However, the effect of the endorsement, the court said, was to eliminate that portion of the policy including employees within the policy definition of insured. Under the policy as modified by the endorsement, the court stated that the only defined "insureds" were the corporation, its executive officers, and directors.
Given this limitation on the definition, the court went on to say, one reasonable reading of the auto exclusion g. was that the employee's truck was not "owned or operated by or rented or loaned to any insured" within the meaning of the policy. Another potential reading, the court said, was that when the employee used his truck, he in effect loaned it to the employer, an interpretation that would trigger the exclusion's application. But in light of these two reasonable interpretations, an ambiguity is created which must be resolved against the insurer. It was the endorsement, the court said, that created the ambiguity.
Still an important coverage
Some may wonder what the big deal is with this auto excess coverage under the CGL policy, given that primary coverage applies with a commercial auto policy and excess coverage normally follows with an umbrella policy.
What is overlooked is that many entities do not maintain commercial auto policies. They may have a certain degree of hired and non-owned auto coverage by endorsement and nothing else. The CGL policy, therefore, becomes an important supplement for auto-related issues giving rise to an employer's vicarious liability stemming from use of autos by employees or independent contractors. *
The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is
a committee member of the International Insurance Section of the Society of CPCU, is on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.