Alleviating employee's liability for hired auto used for business

By Donald S. Malecki, CPCU

Individuals who rent autos for business purposes have been confronted with the perplexing problem of how to keep their own personal auto policies or personal assets from becoming involved in the event of an accident. Some have learned that policy limits can evaporate rather quickly when both the employer and the rental company can share in the applicable limits.

The rental company's ability to seek protection under the individual's auto policy may not be activated until the rental company's insurance limits have been exhausted. However, it does not take much to exhaust those limits, given that rental companies have reduced their limits to levels corresponding to the minimums required by financial responsibility laws.

Employers, on the other hand, can seek primary auto liability protection under their employees' personal auto policies since they are generally viewed as automatic additional insureds. An endorsement is available for those persons who want assurances of being an additional insured, but that status applies even in the absence of an endorsement. Whether employers want to press for primary coverage under their employees' personal auto policy does not usually matter. Insurers seeking to cut their outlay of costs will instigate that alternative for employers.

Some individuals have found out too late that it might have been a good idea also to have a personal umbrella in their personal protection portfolio so that they could rely on additional limits in the event that their auto policy limits are deemed inadequate.

Non-insurance transfer

Individuals might be able to transfer the risk of auto rental accidents by suggesting that their employers contract with a rental firm that would be willing to recognize that the rental contracts are being executed on behalf of the employer, even though they are completed in the individuals' names. Unless an employer maintains a significant volume of auto rental business with one rental agency, however, this is not a realistic suggestion.

Another suggestion has been to direct authorized employees to note on the rental agreement that the rental is on behalf of the employer in those cases where the rental agency insists on preparing the contract in the employee's name. The problem here is how the respective insurance policies of employees and employers will apply in the event of an accident, even if the rental agency would permit this.

A lot has to do with the method of payment. If an employee uses his/her own credit card to rent an auto, the responsibility assumed by the employee under the rental contract will likely affect the employee's personal assets, at least initially. However, if the employee uses a corporate card of some type, then the responsibility assumed by the employee could likely affect the employer's protection portfolio.

Looking to the employer's policy

Over the years, many individuals have lamented that they should not be compelled to rely on their own personal insurance when their activities are business related. "Why," they ask, "should we have to share our auto limits with others, particularly with our employers who are benefiting directly from our use of autos in their business?" From an auto rental standpoint, no stipend is even payable by the employer, unlike those situations where an employee is asked to use his/her own auto for business errands.

Those employees who are able to rent autos under their employers' names may have less worry about impacting their personal assets; they should be covered automatically under their employers' business auto coverages for their potential liability. However business auto coverage is written for an entity, and hired auto coverage is available on an optional basis, except when any auto (Symbol 1) applies. In this latter case, hired auto coverage is automatically included. Its addition, where optional, is almost automatic. When applicable, the hired car coverage is defined to mean "Only those 'autos' you lease, hire, rent or borrow. ..."

Business auto coverage also includes, apart from the named insured employer, anyone else who, with the employer's permission, uses a covered "auto" the employer hires. While reference to "anyone" has some exceptions, employees are not one of them. It is only when an employee owns an auto used on behalf of the employer that coverage is precluded to the employee.

Not all employees are fortunate enough to be able to rent autos in their employers' names. In fact, as a matter of routine, many employees simply rent autos, using their personal charge cards, and then seek reimbursement from their employers. The problem here is that if there is an accident and an employee seeks to rely on his/her employer's business auto coverage, the insurer may balk, arguing that the auto was not hired by the named insured employer.

A solution

In response to the phenomenal demand for rental autos by individuals for business purposes, and the frustrations in handling the risks confronting the personal assets of individuals, The Insurance Services Office (ISO) has introduced an endorsement that should alleviate the complex problem of properly arranging coverage so that employees' first line of protection will fall upon their employers' auto insurance--without argument.

The endorsement, Employee Hired Autos, CA 20 54, is intended to be used in conjunction with the Business Auto Coverage Form, Business Auto Physical Damage, Garage Coverage Form, Motor Carrier Coverage Form, and Truckers Coverage Form.

This endorsement amends the appropriate coverage form with the addition of the following provision applicable to Who Is An Insured:

An "employee" of yours is an "insured" while operating an "auto" hired or rented under a contract or agreement in that "employee's" name, with your permission, while performing duties related to the conduct of your business.

This coverage grant by endorsement is, of course, excess over what is first payable by the rental company. If there is any problem with the rental company, it falls out of the hands of the employee, which is another advantage of this endorsement. However, it does have some limitations that employees need to understand, particularly those employees who desire to combine a trip with business and pleasure. Employees involved in accidents while not engaged in the business affairs of their employers may have to resort to their own insurance.

Some employers are not interested in maintaining physical damage on their autos, owned or hired. They view the spread of risk to be sufficient enough that going without physical damage coverage can realize large savings in the long run. In fact, these employers and even those who maintain physical damage on larger owned vehicles often require employees to forgo the purchase of physical damage waivers from rental companies. (A growing number of state statutes preclude rental companies from requiring such waivers.)

In other cases, business auto coverage often is purchased to include physical damage to autos. When this is the case, the above Employee Hired Auto endorsement also includes physical damage coverage for same individual-related exposure applicable to liability coverage, assuming, of course, that the policy reflects a symbol 8 (hired autos only) for physical damage coverage.

Whether coverage applies on a primary or excess basis will hinge on the business auto coverage form edition. Under the 1990 and later editions, physical damage coverage on hired autos applies on a primary basis.

It is important to note that this new endorsement that automatically covers autos hired by employees in their individual names does not provide physical damage coverage to a leased, hired, rented or borrowed "auto" with a driver. If there is a potential for this kind of an exposure, the business auto coverage form needs to be amended with the standard ISO endorsement titled Autos Leased, Hired, Rented or Borrowed With Drivers--Physical Damage Coverage Endorsement, CA 20 33.

Wherever approved by state insurance departments, these endorsements, particularly the first one, should go a long way toward alleviating the problems confronting individuals who rent autos for business reasons. However, there is still the matter of those businesses that do not own autos but that have hired and non-owned auto exposures. Many of these businesses that purchase businessowners policies automatically obtain hired and non-owned auto coverage. However, without a similar endorsement as is now available with the standard ISO business auto and kindred coverage forms, individuals will still be confronted with where their auto coverage will ultimately lie. *

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, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.