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9 Auto leasing & rental coverage.

When a business concern leases or rents a car, insurance coverage can be purchased through the use of the BAP and the appropriate choice of the covered auto designation symbol. The insured company can choose symbol 1 (any auto) or symbol 8 (hired autos only) to attain liability and physical damage coverage for the leased car. However, the owner of the leased car is not considered an insured under the lessee's BAP. Now, the lessor can (and should) have its own business auto policy to properly protect its interests; but, there are some endorsements that can be attached to the lessee's BAP and the lessor's BAP that address the legitimate concerns of the lessor. There are a number of endorsements designed specifically for the business of automobile leasing or rental. This chapter offers a discussion of those endorsements.

Lessor--Additional Insured and Loss Payee CA 20 01

CA 20 01 modifies the lessee's business auto policy. This endorsement accomplishes several things. The leased auto described in the schedule is considered a covered auto that the named insured (lessee) owns; this, of course, allows for the named insured's BAP to provide primary insurance coverage. CA 20 01 also makes the lessor named in the schedule an additional insured under the named insured's BAP, allowing that lessor to have the benefit of the coverages afforded to each insured under that BAP.CA 20 01 adds a loss payable clause to the BAP in recognition of the fact that at least two entities have an interest in the leased auto. Through the endorsement, the insurer agrees to pay the financial interest of the named insured and the lessor for loss to a leased auto. The interest of the lessor is obvious--it owns the car. Whether the car is already paid for, or, the lessor still is making payments, the lessor has a definite financial interest in the car which needs to be protected. Whatever interest the named insured has in the car is considered also, but the main thrust of this clause is for the interests of the lessor.

The loss payable clause also has a warning for the lessor. If the loss to the car results from fraudulent acts or omissions on the part of the named insured, CA 20 01 declares that the interest of the lessor is not covered. The named insured's BAP voids the coverage form in any case of fraud by the named insured, so this endorsement attempts to apply a similar message to the lessor. Unfortunately, the wording of this clause can make the lessor an innocent victim of the named insured's fraudulent acts; ideally, the lessor has provisions in the leasing agreement with the lessee to protect it in such cases.

CA 20 01 does have some good news for the lessor in the area of policy cancellation. If the insurer or the named insured cancels the BAP, notice will be sent to the lessor. The common policy conditions form only requires cancellation notice to the first named insured; so this clause enables the lessor to know if the insurance policy it believes exists and which it, no doubt, counted on when it agreed to lease the car, still is in force.

Finally, CA 20 01 notes that the lessor is not liable for the payment of the policy premium; the named insured is the responsible party.

Contingent Liability Coverage CA 20 09

This endorsement protects the lessor in case the insurance required by the leasing agreement is not collectible. For example, if the lessee signs a lease with the lessor that requires $100,000/$300,000/$25,000 policy limits, but for some reason, the insurance is not collectible when an accident occurs, CA 20 09 provides liability coverage and any required no-fault insurance. This protects the lessor in case it is sued as the owner of the car involved in the accident and as the "deep pocket" for coverage because the lessee has no insurance money available for the claimants.

CA 20 09 is an endorsement to the lessor's BAP and provides the coverage noted in the previous paragraph. It applies if the lessee or rentee has furnished the lessor with a certificate of insurance or a copy of the auto policy making the lessor an additional insured on the lessee's or rentee's policy, and, as noted, such insurance is not collectible. CA 20 09 provides to the lessor the lesser of the limits of liability required by the leasing agreement or the amount shown in the endorsement's schedule. For the lessee, the limit of insurance available is the minimum limit required by the state financial responsibility law.

If the lessee's or rentee's policy is cancelled, this endorsement ends on the earlier of the following dates: the date the lessor regains custody of the leased auto, or 30 days after the effective date of cancellation. This clause assumes that the lessor has taken steps to make sure it knows of the cancellation. This is only proper since knowledge of the cancellation should be a business requirement on the part of the lessor, and can be handled through endorsement to the lessee's BAP or through the lease contract language.

Conversion, Embezzlement, or Secretion Coverage CA 20 10

This is an endorsement that can be attached to the lessor's business auto policy to protect it from a loss to its owned car through conversion, embezzlement, or secretion. Comprehensive coverage or specified causes of loss coverage does give the insured coverage for loss to a covered auto due to theft. However, with this endorsement, the insurer is trying to distinguish among the different types of theft.

The theft exposure is usually thought of as an outsider who did not have prior possession of the auto stealing that auto--maybe by "hot wiring" the car. However, a large part of the theft exposure for an auto leasing or rental firm is based on the fact that a lessee or rentee has voluntary possession of the car; in other words, the insured lessor has given the lessee permission to take possession of the car and is trusting that the lessee will voluntarily return it. This type of theft creates a more uncontrollable exposure and the normal theft premium from the BAP is not adequate to cover the risk of loss.

Endorsement CA 20 10 was developed to enable the insurer to charge a premium more in line with the exposure of loss by conversion, embezzlement, or secretion. It begins by adding an exclusion to the physical damage coverage part of the BAP. The exclusion is for loss due to theft, conversion, embezzlement, or secretion by any person in possession of a covered auto under two circumstances: under a bailment lease, conditional sale, purchase agreement, mortgage or other encumbrance; or as a rentee or lessee of such covered auto. So, if the lessee takes possession of the car under a lease agreement and drives off, never to return, the loss to the lessor's car is excluded.

Then, in order to provide the coverage, but at an appropriate premium, CA 20 10 goes on to declare that the exclusion does not apply to covered autos designated in the schedule for which an additional premium is shown. The schedule enables the insured to schedule all its autos or specifically designated autos as covered autos.

The coverage provided by CA 20 10 is for 75% of the actual cash value of the covered auto at the time of the loss, reduced by the amount of any deposit secured by the named insured from the rentee or lessee. If the lessor requires a security deposit from the lessee upfront, it is reasonable that the insurer will take that into consideration when paying a loss to a covered auto; the insured has the money and if this were not recognized in the payment of a loss, the insured would be receiving somewhat of a double payment. However, the reasoning behind the 75% amount is not as clear. Perhaps this is the insurer's way of trying to get the insured to enact strict leasing guidelines that will serve to prevent a conversion or embezzlement type of loss. In other words, make the insured share in the loss, so as to encourage it to use caution and good business sense in its leasing practices which should, in turn, reduce or prevent such losses.

CA 20 10 has a series of duties it requires of the insured if there is a loss. The named insured must promptly notify the police and, as soon as practicable, notify the insurer or its agent. The insured must cooperate in prosecuting any person whose acts result in the loss, whether the insured wants to press charges or not. The insured must submit a proof of loss, if required, and the insured must make every reasonable effort to locate the covered auto. If the insured locates the car, the insured is to take possession of the car, using legal proceedings if required by the insurer. The insurer promises to reimburse the insured for reasonable expenses in locating and recovering the covered auto.

This last duty deserves comment. The insurer is telling the insured that the insured, not the insurer, has the main task of trying to locate the car. Obviously, the insured should check the addresses, phone numbers, and references listed on the lease application for information as to the whereabouts of the car. If the insured wants to hire a private investigator to locate the car, that can be done. If the insured wants to hire professional repossession agents, that is also acceptable. The only limits the insurer is establishing is that the repossession must be by legal proceedings - no breaking into a person's garage or forcing a driver off the road; the expenses of the insured must be reasonable; and, the expenses must be at the request of the insurer or with its consent.

It is sometimes difficult to make a distinction between theft and conversion and embezzlement and secretion. For example, Black's Law Dictionary (Sixth Edition) offers the following definitions. "Theft" is defined as the act of stealing or taking of property without the owner's consent. "Conversion" is the unauthorized assumption and exercise of the right of ownership over goods belonging to another, to the alteration of their condition or the exclusion of the owner's rights. "Embezzlement" means the fraudulent appropriation of property by one lawfully entrusted with its possession. "Secretion" means to conceal or hide away, particularly to put property out of reach of another.

These definitions seem to make the point, noted above, that the conversion, embezzlement, or secretion language of CA 20 10 relates to a situation wherein the lost property has been voluntarily given to the taker. The owner of the property, the insured lessor, has willingly handed that property over to another, the lessee or rentee. Subsequently, that property (the auto) has been kept from the owner. At bottom line, a theft to be sure, but, recognizably a different type of theft.

Excluding Autos Under Lease CA 20 11

This endorsement modifies the lessor's auto policy.

A common provision in auto leasing agreements is that the lessee is to provide primary insurance on the leased auto. This coverage must include liability insurance up to the limits specified in the agreement and no-fault coverage if required by state law. The lessee's BAP insures the leased auto and names the lessor as an additional insured. If the lessor chooses to rely wholly upon the lessee's insurance policy, the lessor's BAP can be amended through endorsement CA 20 11. This endorsement excludes liability coverage and any required no-fault insurance for leased autos; that is, any auto that the named insured lessor leases or rents to another under a lease or rental agreement that requires the lessee or rentee to provide primary insurance for the lessor, is not considered a covered auto for liability or no-fault coverages under the lessor's BAP. This accommodates the provisions of the leasing agreement that require the lessee to provide primary insurance, and allows a reduction in premium for the named insured lessor.

If CA 20 11 is used by the lessor, it would be wise to also attach CA 20 09 (discussed previously) to the BAP. If the primary insurance the lessee is supposed to have is not collectible, CA 20 09 gives the lessor the liability coverage and no-fault coverage needed for a claim. CA 20 11 excludes those coverages, and if an accident occurs and the primary insurance that was supposed to be there is not there, the lessor is facing a potentially large claim for which it has no insurance. CA 20 09 acts as backup coverage for the lessor and can ease a risk management concern and still protect the premium savings realized from the use of CA 20 11.

Rent-It-There/Leave-It Here Autos CA 20 12

A normal part of many rental firms' business is receiving one-way rental autos, that is, an auto that a customer rents in one city and drops off at his or her destination in another city. The rented car is not owned by the receiving firm, but a reciprocal business agreement allows it to receive the car, just as one of its cars can be received by another rental firm in another city. This is a convenient business arrangement that benefits auto leasing/rental firms. However, the insurer of an auto rental firm does not intend to cover the owner or the rentee of the auto that its insured is simply receiving and holding for a limited period of time. This intent is accomplished by amending the receiving rental firm's BAP with CA 20 12.

This endorsement declares that the BAP's liability insurance does not apply to the owner or rentee of a rent-it-here/leave-it-there auto not owned by the named insured; a rent-it-here/leave-it-there auto is defined as an auto a rentee rents from someone other than the named insured and leaves with the named insured. CA 20 12 does not diminish the coverage under the BAP for the named insured. If the named insured is named in a lawsuit arising out of the operation of a one-way rental auto that it has received, the named insured will have coverage under its BAP (provided, of course, that the auto qualifies as a covered auto under its BAP). The owner or rentee of the one-way car will have to look to their own respective policies for coverage.

Schedule of Limits for Owned Autos CA 20 13

This endorsement modifies a lessor's BAP.

The typical business entity generally has its auto liability insurance written for one limit of liability on owned, hired or borrowed, and nonowned autos alike. On the declarations form, the limit of insurance for liability coverage is noted and this applies to whichever covered auto symbols the insured has chosen. However, leasing or rental firms often deviate from this practice. For example, a firm may wish to have lower limits on the autos it owns that are used by its employees only, as opposed to higher limits on autos used by rentees and lessees. This is a risk management decision in that the firm can exercise more loss control measures over its own autos and drivers and less control over the autos used by rentees and lessees.

Because the declarations form of the BAP is not suited to showing separate limits of insurance for different autos (if that is what the insured wants), a special schedule of limits endorsement, CA 20 13, is made available to the insured. CA 20 13 allows leasing or rental concerns to schedule different limits of insurance for the following:

1. autos leased or rented to others under an agreement requiring the lessee or rentee to provide direct primary insurance;

2. autos leased or rented under an agreement that does not require the lessee or rentee to provide direct primary insurance; and,

3. autos owned by the named insured and not subject to a leasing or rental agreement.

Each of the first two categories is subdivided as to private passenger autos, commercial autos, and "other." The limit of insurance for each of the categories is on a per accident basis.

Second Level Coverage CA 20 14

This endorsement allows the lessor to arrange insurance coverage under its own auto policy in excess of the limit of insurance that is carried by the lessee, when the lessee is required to provide the primary insurance for a leased or rented car. The lessor can use this endorsement if it feels that perhaps the lessee's primary limits are too low and that some excess insurance can give it peace of mind. By using this endorsement, the lessor insured is saying that, while it is willing to have the lessee provide primary insurance for an auto accident and have the lessor included as an insured on the lessee's policy, it feels the need for excess insurance that will apply to it alone.

CA 20 14 states that the limit of insurance shown in the schedule replaces the limit of insurance shown elsewhere in the policy, or in any lease or rental agreement. The endorsement declares that for the difference between the limit shown in the schedule and the limit shown in any lease or rental agreement, who is an insured does not include the lessee or rentee, the employees, or any person operating an auto with the permission of these people. As an example, the lessee has an auto policy with $50,000 for BI limits; the lessor uses CA 20 14 with limits of $100,000. Even though the lessor is an insured on the lessee's policy and has limits of $50,000 available to it, CA 20 14 allows the lessor to have $100,000 available to it, with $50,000 of that total available to it alone. In other words, the lessor can share the limits on the lessee's policy with the lessee and any other insured, but the lessor has money available to it that is not available to any other insured that may exist under the lessee's policy. CA 20 14 is aimed at preventing any sharing of coverage limits as called for in the other insurance clause of the BAP.

Autos Leased With Drivers--Physical Damage Coverage CA 20 33

The BAP declares in the Other Insurance clause that any auto that is leased, hired, rented, or borrowed with a driver is not a covered auto. The insured contract definition notes that an insured contract does not include that part of any contract that pertains to the loan, lease, or rental of an auto if the auto comes with a driver. CA 20 33 remedies this lack of coverage to a degree. The endorsement states that for hired auto physical damage coverage, any auto that is leased, hired, rented, or borrowed with a driver, and that is designated or described in the endorsement's schedule is deemed a covered auto. The auto is considered a covered auto that the named insured owns.


These endorsements are standard Insurance Services Office (ISO) endorsements that can be used on a countrywide basis. Some states have state-specific endorsements that reflect changes in terms or coverages as required by state law. Furthermore, individual insurers may have company-specific endorsements that reflect their own underwriting philosophy. Agents and brokers should be aware of any specific endorsements and of differences that may exist between them and the standard ISO endorsements.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2004 Gale, Cengage Learning. All rights reserved.

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Publication:Business Auto Coverage Guide, 2nd ed.
Date:Jan 1, 2004
Previous Article:8 Nonownership coverage.
Next Article:10 Drive other car coverage.

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