CONSIDERING THE RISKS OF WHO IS INSURED ON BUSINESS AUTO
The commercial auto policy, commonly known as business auto, is one of the most popular commercial insurance products sold in the United States due to the frequency of accidents involving commercial autos. It is now one of the most important protections for businesses and other organizations because of the target it has become in terms of liability litigation. Law firms make claims against these policies for many reasons. For example:
Knowing who is insured, how the language of the policy creates traps, and what producers and risk managers can do to help, can make a world of difference at claims time.
Big harm means big judgments. Commercial vehicles can cause tremendous injury or damage due to their sheer mass. A 30,000-pound truck that hits a private passenger auto can do a lot of harm. I asked a close friend who directs the process of hydraulically fracturing oil and gas wells in the field how much sand is used in the fracking process for a well? He replied, “150 million pounds for ten wells.” Incredulously, I asked him how much sand comes on one truck. He said 30,000 pounds. Let’s do the math.
It takes 500 trucks full of sand to frack one well. That many trucks going down the road to well sites, with a just-in-time mentality for delivery from the closest sand site, will put a strain on the truck driver supply and driver quality. Imagine those 500 18-wheelers lined up waiting to unload and you will understand the reason for the increase in claims in the last 15 years in highly active fracking fields across the country like the Eagle Ford and the Permian Basin in Texas and the Bakken in North Dakota.
Organizations and businesses are not individuals. Plaintiff attorneys know this. A business can be portrayed as an impersonal wealthy entity. Individuals are more often seen as a person, someone with whom jurors can identify. The less empathic a juror is toward the defendant, the easier it is for them to justify a large award.
The role of insurance producers and risk managers is to carefully consider a variety of factors in the way they insure and manage these risks. The business auto policy is instructive about some of those considerations, particularly who the insured may want to include as an insured and who they may not.
Subtle traps in business auto policies
The section of the business auto policy that describes who is a n insured is elegantly written. It is not too long and is straightforward. However, there are some subtle traps in the language that can lead to serious implications in the event of a claim. Let us learn how the business auto policy describes an insured, examine what the policy will or should do, and how it can be endorsed.
Who is an Insured? The beginning of the Who Is an Insured section states: “The following are ‘insureds’: a. You for any covered ‘auto’.”
Fair enough. Whoever is listed on the declarations page is an insured, and that is how it should be. Now is a good time to remind the reader that most businesses do not drive autos. They are corporations, or some other non-natural person and do not have a driver’s license. Their potential liability is vicarious. Someone else is driving the auto or truck that the business owns.
The section goes on to say: “b. Anyone else while using with your permission a covered ‘auto’ you own, hire or borrow except:” followed by a list of five exceptions. Notice the qualifiers of part b. “Anyone,” which means anyone, but they must be using the vehicle with the permission of the insured. Here is the first potential problem. Did the person using the auto have permission from the insured?
Who isn’t an Insured? To see the potential of this problem, let’s consider an example. Imagine thatthe named insured is a servicing company in any industry. Assume they have lots of vehicles on the road at any time. The owner/CEO of the business, after years of bad experiences and lessons learned, developed a policy that states employed drivers cannot use company vehicles for personal reasons. Perhaps he put in an exception for stops on the commute to and from work, like stopping at a grocery store on the way home. Assume he put this policy in writing with the understanding that the use of the vehicle outside of policy guidelines justifies termination. It is the owner’s business, and he can make any policy he likes for the use of company trucks.
Then imagine that on one Saturday, one of his more trusted supervisory employees, who drives a company truck, is watching football at home. His wife asks him to run to the store to pick up some items during halftime. He was the last member of the family to get home last night, and his truck is blocking the driveway. Realizing that he is going to have to rearrange cars just to drive to the store, he decides to violate the policy and takes the company truck. He gets in an accident where he is at fault and the other party is severely injured.
Clearly, the employee did not have permission to use the vehicle for personal use, so he is not an insured. If the business auto policy is correctly applied, the policy would not provide him, individually, a defense, and the policy would not pay on his behalf for damages he caused. The driver/employee will not have any protection under his personal auto policy because of its exclusion of liability arising out of the use of a vehicle that is furnished and available for his regular use. That is what the company truck he drives daily is. This employee is not in a good situation as he has no insurance policy to respond to any claim made against him individually. He is on his own.
What about the employer? The employer/business owner now has a problem he did not anticipate. One of his valued employees made a bad choice. Can you imagine the stress of going through this claim with an unprotected employee, named in a lawsuit along with his employer? If the owner fires the employee, would he agree to cooperate with the plaintiff’s attorney to be released from any claim?
This is an imaginary scenario based on an actual claim, where the named insured fudged on the facts a little during the investigation. Luckily, in the claim I observed, the insured had not been specific in the writing on their policy. This is a serious issue for risk managers to consider, and one that a producer might be smart to bring up to business owners. A more generic, more verbal, less documented policy could be the right approach. Business owners have every right to do whatever they like with their property, including establishing rules for that property’s use; however, some thought regarding the consequences may be in order. So, what about the list of exceptions?
Business auto policy exceptions
The Who Is an Insured section of the business auto policy continues with five exceptions.
1. The owner or anyone else from whom you hire or borrow a covered “auto.”
This exception does not apply if the covered “auto” is a “trailer” connected to a covered “auto” you own. This exception makes sense. While the business auto policy does provide indemnification coverage for certain situations, auto owners should also have insurance to protect themselves.
2. Your “employee” if the covered “auto” is owned by that “employee” or a member of his or her household.
This tracks with the exception above that states people who own autos should have their own insurance, but it is irritating. If an employee is using their own vehicle in a way that draws the named insured into the claim, then they were using their auto on the insured’s behalf or doing business for the employer. What compounds this is that the personal auto policy of the employee will provide insured status to the business along with the employee. In this case, the employee is sharing their primary liability insurance limits with their employer, but the employer’s auto insurance will not share their excess liability coverage limits with the employee.
There is a way to correct this via the Employees as Insureds (CA 99 33) endorsement, but how many business owners understand the real value of what this endorsement does? Do they understand that the employee’s own auto insurance is protecting them but the business auto policy unendorsed does not do the same?
3. Someone using a covered “auto” while he or she is working in a business of selling, servicing, repairing, parking, or storing “autos” unless that business is yours.
This exception is clear and makes sense. A business that repairs autos should have their own auto insurance, protecting themselves and their employees.
4. Anyone other than your “employees”, partners (if you are a partnership), members (if you are a limited liability company) or a lessee or borrower or any of their “employees”, while moving property to or from a covered “auto.”
This exception makes sense, but it requires an understanding of how the business auto policy works regarding loading and unloading of autos. The business auto policy covers liability arising from the loading and unloading of property. The main point is, if the named insured’s employees are loading or unloading covered autos, they need protection and they have it. But if some other organization’s employees are helping load or unload, they should be protected by their own insurance.
5. A partner (if you are a partnership) or a member (if you are a limited liability company) for a covered “auto” owned by him or her or a member of his or her household.”
This exception is like the one for employees driving their own cars and, until recently, did not have an endorsement to fix the situation. The 2020 revisions to the Insurance Services Office (ISO) commercial auto program includes The Partners or Members as Insureds (CA 05 25) endorsement, making partners or members insureds. Producers who are working with a limited liability company should recommend this and the Employees as Insureds endorsement as well.
The additional insured
Finally, the Who Is an Insured section considers an insured as “c. Anyone liable for the conduct of an ‘insured’ described above but only to the extent of that liability.”
This is the additional insured language that many producers know provides protection for anyone else who can be held liable for the actions of the insured using covered autos. This section is the reason so many insurance educators joke about adding Additional Insured endorsements to the business auto policy. This is where producers can point and say, “It’s already there.” But it is important to understand that people want to see a piece of paper with their name on it. It is a reminder that insurance is complex and that the public simply does not know what we know.
Understanding and carefully considering who is insured on a commercial auto policy is important. Knowing who is insured, how the language of the policy creates traps, and what producers and risk managers can do to help, can make a world of difference at claims time. n
Paul Martin is director of academic content at The National Alliance for Insurance Education & Research headquartered in Austin, Texas. Paul works to develop, maintain, and deliver quality educational programs for the organization. Paul has over three decades in the insurance and risk management industry.
Learn more about this column’s topic in the National Alliance’s Business Auto Policy course.