Chapter 12: business automobile insurance.
Business automobile insurance is a tool used to insure against losses due to property damage and bodily injury caused by an accident and resulting from the ownership, maintenance, or use of a covered auto. It is designed to cover risks associated with vehicles driven on public roads. Coverage may be purchased for owned, nonowned, and hired autos.
Owned autos are autos that the insured owns or acquires during the policy period. Nonowned autos are those that are used in connection with the insured's business but are not owned, leased, hired, rented, or borrowed by the named insured. Hired autos are those that the named insured leases, hires, rents, or borrows. A business auto policy (BAP) may be used to cover owned or nonowned vehicles such as private passenger autos, service vehicles, trucks, tractor trailers, and trailers--almost any type of vehicle used in a business. But trucking companies, garages, and motor carriers need coverages that are not provided by a business auto policy, so they should be insured on more appropriate forms.
Business auto policies primarily offer two types of protection:
* Physical Damage
Liability insurance pays sums an insured legally must pay as damages because of property damage or bodily injury due to an auto accident. Liability claims always involve a third party. A third party is another entity involved in the loss in addition to the insured and the insurer. For example, an employee driving a company-owned car on the way to a sales call runs a red light and hits another car. The driver of the other car, a third party, suffers whiplash and extensive damage to his vehicle. The employee who caused the accident is responsible for the resulting damages. Liability insurance would respond by covering the monetary damages incurred to treat the injured driver's whiplash and to repair the damage to his car, up to the policy limits. The insurer would also owe the insured a duty to defend if the injured driver filed a lawsuit against the employee who caused the accident.
The duty to defend is broader than the duty to indemnify. The insured does not need to prove that coverage exists in order for the insurer to have a duty to defend. The possibility that the claims of a third party might be covered under a policy is enough to trigger the duty to defend.
Physical Damage Protection
Physical damage protection covers actual direct physical damage to the covered auto. The damage may result from a variety of covered causes, such as collision, fire, theft, or hail. Other causes, such as pollution or war, may result in damage but may be excluded.
Business auto insurance may be used either as a monoline policy or as one coverage part in a multiline or package policy. Autos owned by sole proprietors, partnerships, corporations, unincorporated associations, individuals, not-for-profit organizations, or government agencies may be insured by a business auto policy. As mentioned previously, business auto coverage may also be purchased for nonowned, hired, leased, or rented autos.
Sole proprietors (a business owned by an individual who has not formed a corporation) and partnerships (a business owned by two or more individuals or companies that have joined formally to operate the business) may have only one or two autos that are used for business purposes, while corporations may own a fleet of vehicles. But both may benefit from business auto insurance because it covers losses that can be excluded under an individual's personal auto policy.
The policy is used to cover the costs of losses incurred by business owners and their employees that are caused by the use of a business auto. The policy also allows business to comply with compulsory auto insurance laws imposed by states (which are discussed later in this chapter).
There are many advantages to using business auto insurance as a tool to protect companies that use autos in the course of business activities. They include the following:
* As mentioned earlier, the business auto policy allows businesses to comply with proof of financial responsibility or other compulsory auto insurance laws enacted in each state.
* For auto loans and leases, financial institutions usually require that the vehicle be insured. Business auto insurance can meet that requirement.
* Business auto insurance protects the assets of the business that otherwise would be needed for defense and settlement costs in third-party auto liability claims.
* Business auto insurance offers indemnity for not-for-profit organizations that may not have funds available for defense and settlement costs.
* Insurers will handle any claims, so the business's personnel are free from those duties.
* The cost of business auto premiums may be lower than the cost to defend or settle a lawsuit.
* Business auto premiums are legitimate deductible business expenses.
Business auto insurance does have some disadvantages. These include the following:
* Many exclusions and limitations apply to the business auto policy. So not all losses will be covered. Reserves must still be set aside in the event of uncovered losses.
* Policy limits are finite. So any losses that exceed the limits must be paid by the insured.
* Premiums must be paid for business auto insurance whether or not any claims are ever made.
* The insured loses the control of handling and management of its own defense or claims.
The Insurance Services Office, Inc. (ISO) offers a standard business auto coverage form that will be discussed in this section. (ISO is an organization that provides statistical information, actuarial analysis, policy language, and related services for the insurance industry. http://www.iso.com/) Keep in mind that many insurance companies use their own policy forms that may contain features that differ from the ISO standard form.
The BAP is comprised of the following parts:
1. Declarations Form
2. Liability Coverage
3. Physical Damage Coverage
The business auto declarations form is attached to the auto coverage form to provide basic information about the insured and the type of coverage bought by the insured, to indicate what endorsements are attached to the policy, and to show the amount of premium paid for the exposures insured.
The form lists the named insured, mailing address, and policy period. The type of business is specified as well. One of the keys to the design of the business auto policy is the use of symbols to designate what types of autos are covered by the liability and physical damage sections of the policy. The declarations form includes a column for the insured to show the symbols for the covered autos. There are ten such symbols in use with the current BAP. These symbols include such vehicles as "any autos," owned autos, specifically described autos, hired autos, nonowned autos, and those autos that would qualify as mobile equipment (as defined in the BAP) but are subject to a compulsory or financial responsibility law.
As an example, if the insured wants liability coverage for "any auto," symbol 1 is placed in the column next to the liability coverage; if the insured wants collision coverage for specifically described autos only, symbol 7 goes in the column next to the physical damage-collision coverage. Because coverage under the BAP is for covered autos, the insurance carrier must enter the proper symbol on the declarations form to make sure that the correct types of autos are provided the desired coverage. If the correct symbol is not entered, the insured may not receive the desired coverage. A careful review of the coverage symbols used is critical to understanding and confirming the breadth of coverage provided.
The declarations form also contains a schedule of coverages and covered autos. In order to obtain insurance, the insured must supply--among other information--a description of each owned auto, the cost of each, the city and state where each is principally kept, and a classification of each auto's use--private passenger or service, retail, or commercial for truck-type vehicles.
Private passenger autos are used by a business's employees or owners as part of their business activities. Service vehicles are those used for transporting the insured's personnel, equipment, and incidental supplies to or from a job location. Retail vehicles are used to pick up property or deliver property to individual locations. Commercial vehicles are defined as those used to transport property other than vehicles that fall within the service or retail categories.
A summary of premiums, limits, and deductibles for each auto and each coverage is offered. Schedules for hired or borrowed covered auto coverage and nonownership liability are also found on the declarations form, as well as other information used for rating purposes, such as the number of employees or partners in the company.
The liability coverage part of the BAP consists of several sections:
* Insuring Agreement
* A Description of Who Is an Insured
* Coverage Extensions
* Limit of Insurance
The insuring agreement is the heart of the contract between the insurer and the insured. The agreement states what the insurer will cover in the event of a loss. The BAP liability insuring agreement consists of three parts: (1) coverage for bodily injury and property damage resulting from an accident caused by a covered auto; (2) coverage for pollution costs and expenses resulting from an accident caused by a covered auto; and (3) the insurer's duty and right to defend the insured in a lawsuit seeking damages when such accidents occur.
The insuring agreement also defines who is considered an insured under the policy. Those considered insureds under the policy include the named insured; anyone using a covered auto owned, borrowed, or hired by the named insured with the named insured's permission (with exceptions); and anyone liable for the conduct of a described insured, but only to the extent of that liability.
Coverage extensions included in the insuring agreement consist of supplementary payments and out-of-state coverage extensions. These extensions provide coverage in addition to the limit of insurance. For instance, the policy allows up to $2,000 in additional payments for bail bonds that are required due to a covered accident. Supplementary payments are payments to supplement the coverage and are in addition to the limit of insurance. Through the out-of-state coverage extension, the insurance company agrees to increase the limit of insurance for liability coverage to meet those required by a compulsory or financial responsibility law of the jurisdiction where the covered auto is being used. In other words, if an auto titled and insured in one state is involved in an accident in a different state, the BAP automatically will meet the compulsory insurance requirements of the state where the accident happened.
The insuring agreement contains exclusions that curtail the liability coverage. An exclusion eliminates coverage for specified loss exposures. The policy should be read carefully to determine which exclusions apply and in what circumstances. The BAP contains exclusions for a variety of exposures, such as injuries that are expected or intended from the standpoint of the insured.
Of particular interest in the BAP may be the fellow employee exclusion. A fellow employee, for the purposes of auto coverage, is a coworker of an insured who is injured during the course of employment. The exclusion precludes coverage for bodily injury to a fellow employee of the insured that occurs in the course of employment or while performing business-related activities. Workers compensation and employers liability insurance are the proper methods for compensating these types of injuries. For example, an employee of the insured business is driving a covered auto on a business trip. Two coworkers of the driver are in the car. The car is involved in an accident for which the driver is legally liable. The exclusion voids coverage under the business auto policy for a claim that the injured coworkers (fellow employees) might file against the negligent employee-driver.
And note that the BAP does not insure autos involved in professional racing or demolition contests or autos while being prepared for such contests or activities.
The next part of the liability insuring agreement is the limit of insurance section. This part states the most that the insurer will pay in various situations. If, for example, property damage occurs due to repeated exposure to the same conditions, the damage will be considered the result of one accident. The policy also says that, regardless of the number of covered insureds, autos, premiums paid, claims made, or vehicles involved in the accident, the most the insurer will pay is the limit of insurance shown on the declarations page.
Physical Damage Coverage
The physical damage section of the BAP is made up of the following:
* Coverage Agreements
* Coverage Extension
* Limit of Insurance
* Deductible Provision
The BAP specifies three different ways that the insurer may agree to pay for physical damage to a covered auto or its equipment: comprehensive coverage, specified causes of loss coverage, or collision coverage.
Comprehensive coverage is the insurer's promise to pay for loss to a covered auto or its equipment that results from any cause other than collision with another object or if the auto overturns. For example, hail damage and fire damage are considered under comprehensive coverage. Specified causes of loss coverage provides coverage for causes that are explicitly listed in the policy. Collision coverage applies only to the covered auto's loss due to a collision with another object or if the auto overturns. A covered auto designation symbol must be written in the proper item on the declarations form to activate coverage.
For example, if an insured wants to select comprehensive coverage for all autos, a "1" would be placed on the appropriate line on the declarations form. If an insured wants to select collision coverage for hired autos only, an "8" would be placed in the appropriate line on the declarations form.
Note that under comprehensive coverage, the insured is also covered for glass breakage, loss caused by hitting a bird or animal, and loss caused by falling objects or missiles. Coverage extensions are offered for transportation expenses and loss of use expenses for hired auto physical damage, both on a per diem basis with a maximum amount allowed.
Another part of the physical damage coverage agreement is the insurer's offer to pay for towing and labor costs incurred each time a covered private passenger auto is disabled. But only labor performed at the place of disablement is covered. Suppose an insured parks his covered auto in a customer's parking lot. The car fails to start and the insured calls for a tow. When the truck arrives, the driver states that the car's battery needs a jump, so it will not need to be towed to a garage. The cost of the jump would be covered because the labor was performed at the place of disablement.
The physical damage section, like the liability section, contains exclusions and limit of insurance provisions.
The BAP conditions section includes loss conditions and general conditions. The loss conditions spell out the procedure for getting an appraisal if the parties disagree on the amount of loss; the duties of both the insured and the insurer when an accident, claim, suit, or loss occurs; when a legal action may be brought against the insurer; options from which the insurer may chose to pay for losses; and the terms for transfer of rights of recovery from others to the insurer.
General conditions describes several situations, such as the insurer's obligation if the insured declares bankruptcy or becomes insolvent, how other insurance works in conjunction with the policy, and what the policy period and coverage territory are.
The ISO business auto program also includes a separate form of common policy conditions that must be attached to the policy. These conditions outline what is necessary to cancel the policy, how changes can be made to the policy, the rules governing the insurer's examination of the insured's books, who is responsible for paying premiums, and the transferring of rights and duties under the policy.
The BAP uses words throughout the form that are in quotation marks. These words have particular definitions that are located at the end of the policy. The applicability of insuring agreements, exclusions, and conditions often depends on a word's definition. When a term is undefined in a policy, or if the meaning of defined words is unclear, many insureds turn to the courts for an interpretation.
For example, this is the policy's definition of accident: "includes continuous or repeated exposure to the same conditions resulting in 'bodily injury' or 'property damage.'" Some may agree that an accident could include continuous and repeated exposure to the same conditions but would also argue that an accident is usually considered a sudden occurrence. A court might turn to the accepted, common, dictionary definition of the word: "an unforeseen and an unplanned event; something happening by chance rather than by design."
The important point to understand is that policy definitions may contain meanings for terms that are specific to the contract and not necessarily to the everyday meaning of the word.
Endorsements can be used in several ways to modify the BAP. Additional insureds can be added to the policy, exclusions can be added or modified, or existing coverages can be redefined. For instance, auto medical payments coverage and uninsured/underinsured motorists coverage may be added to the BAP by endorsement. Auto medical payments coverage offers payment to insureds for medical services that are needed because of an auto accident. No liability is required on the part of the insured. Many insureds purchase this coverage for good will purposes so that the insured can get the cost of medical services paid quickly. Many purchase the coverage because state compulsory auto laws require it.
Uninsured and underinsured motorists coverage provides coverage for injuries (and sometimes damage to property) incurred as the result of an accident with an uninsured or underinsured motorist. An uninsured motorist is one who does not carry the amount of liability insurance required by the state in which the vehicle is titled. An underinsured motorist is one who carries less liability insurance than the innocent party who is injured.
Fiscal Responsibility and Compulsory Insurance Laws
All states have laws that assure compensation for victims of automobile accidents. Business auto insurance will satisfy the requirements for compulsory insurance in most states. Companies should be aware of the victims compensation laws in states where they do business. Five types of statutes address victim compensation:
* Financial responsibility laws
* Compulsory automobile liability insurance
* Unsatisfied judgment fund laws
* Laws requiring uninsured motorists coverage
* No-fault automobile laws
While statutes vary considerably among states, the purpose of all victim compensation laws is to require owners and operators of automobiles to maintain a degree of solvency to compensate those they may injure by motor vehicles.
In general, the basic elements of these laws in various combinations relate to accidents, to convictions for certain offenses, and to judgments arising out of use of an automobile. Because there are as many variations as there are laws, the operation and objectives of these statutes will be discussed generally.
Financial Responsibility Laws
The term financial responsibility law refers to the statutes in some states that do not require proof of insurance or other responsibility until after a driver's first accident or until conviction of certain offenses, such as driving under the influence.
Compulsory Insurance Laws
Compulsory insurance laws require that every person who registers a motor vehicle in a given state prove or certify that liability insurance is carried equal to at least the state minimum requirements. The enforcement of these laws can be handled in six different ways. Some states use only one method of enforcement; others use a combination.
* Self-certification: When applying for new or renewal license plates, the driver must sign a sworn statement that he has liability insurance in force and will not operate a motor vehicle in the state without such insurance.
* Proof of insurance: Some states require proof of insurance when registering a car.
* At time of motor vehicle inspection: Some states require an annual safety inspection of all vehicles registered.
* Verification by the police: Often, motorists must prove to a policeman at the time of an accident or ticket that they have insurance.
* Cancellation of insurance policy: Some states require insurers to report auto policy cancellations to the department of motor vehicles.
* Random verification by state: Some states require random checking of a given percentage of registrations for proof of financial responsibility.
Several states have established a fund out of which benefits are paid to the victim of an accident involving a driver not meeting the financial responsibility requirements or an unknown motor vehicle (the victim for one reason or another does not have access to uninsured motorists coverage and recoveries). These funds are created with contributions from motor vehicle registrants, insurance companies, or both. When an accident occurs and the negligent party cannot pay the damages, the injured party may seek recovery from the unsatisfied judgment fund. There are unsatisfied judgment funds in several states but their continued existence is always subject to the political currents and financial conditions that arise in those states.
Generally, the rules for the submission of a claim under the unsatisfied judgment fund are similar to the requirements for asserting a claim under standard uninsured motorists coverage. But since this fund is an entity created by state law, any recovery may be limited by law to the amount required by the individual state's financial responsibility limits. The fund is not considered the insurer of the driver responsible for the accident.
Judgments and the Laws
Under these financial responsibility and compulsory insurance laws, treatment of judgments arising out of auto accidents differs from treatment of accidents. The party against whom a judgment is returned may have to pay it before license and registration are restored and may also have to supply proof of financial responsibility as to future accidents. This treatment could apply to judgments in any state, not merely to judgments where the debtor is licensed. Judgments are deemed satisfied, regardless of amounts involved, when amounts equivalent to required liability limits per person and per accident have been paid.
There are exceptions to the rule that judgments must be paid before reinstatement of driving and registration privileges, but proof of financial responsibility for the future, where required, is not waived. In some states, if the person to whom the judgment is payable consents, driving privileges may be restored, but proof must be given as a prerequisite to restoration.
Uninsured Motorists Coverage Laws
When an insured or his passengers are involved in an accident where the at-fault driver has no auto liability insurance, uninsured motorists coverage steps in to fill the gap. Coverage is usually to the extent of limits required by state auto financial responsibility laws. State laws vary. Some require auto policies to include uninsured motorists coverage. Others allow the coverage to be rejected. Some states have also enacted uninsured motorists coverage laws concerning hit-and-run vehicles. Insureds and agents should be aware of the specific uninsured motorists laws in the states where the company is located, in states where the company does business, and in states where autos are principally garaged.
Some of the states' uninsured motorists coverage laws also apply to underinsured motorists coverage. Underinsured motorists coverage is necessary when the at-fault driver in an accident has auto liability insurance with lesser limits than the insured's. This coverage lies atop uninsured motorists coverage or atop the at-fault driver's low limit automobile liability insurance and provides the insured and passengers with protection equal (usually) to the insured's own automobile liability cover.
No-Fault Automobile Laws
No-fault automobile insurance describes a system under which a person injured in an automobile accident receives compensation for his economic losses caused by the injuries from his own auto insurer. His insurer pays even when another person might be demonstrably at fault and responsible for payment under the liability system.
There are three types of no-fault systems: pure nofault, add-on plans, and modified no-fault plans. Under a pure no-fault plan, the injured person cannot sue for damages at all and collects damages from his own insurer. Add-on plans pay certain benefits to the injured person without regard to fault. Under modified no-fault plans, the injured person may choose to sue for damages if the claim exceeds a certain monetary or verbal threshold.
Insurance Policies and the Laws
The failure of an insurer to pay the damages caused by its insured does not mean suspension of the license to drive. In fact, insurance policies do not serve as anything more than documents through which a driver can prove his required financial responsibility--whether the insurance policy applies to the accident and subsequent claim is not relevant in this case. All that matters is that the driver has a policy with limits of liability equal to or greater than the state-mandated minimum limits.
Auto insurance coverage forms do take note of victim compensation laws. The business auto coverage form states that the declared limits will increase automatically to provide higher limits if such limits are required by compulsory or financial responsibility laws of the particular jurisdiction where the covered auto is being used. Furthermore, the form will provide at least the minimum amounts and types of coverages that are required by law whenever a covered auto is used outside the state in which the auto is principally garaged.
WHERE CAN I FIND OUT MORE ABOUT IT?
1. FC&S(tm) Online, http://www.fcands.com (Cincinnati, OH: The National Underwriter Company, updated monthly).
2. Thamann, David, Business Auto Coverage Guide: Interpretation and Analysis (Cincinnati: The National Underwriter Company, 2004).
QUESTIONS AND ANSWERS
Question--What is the difference between owned, nonowned, and hired autos?
Answer--An owned auto is an auto owned or acquired by the insured during the policy period. A nonowned auto is used in connection with the insured's business but is not owned, rented, leased, hired, or rented by the named insured. A hired auto is one leased, rented, borrowed, or hired by the named insured.
Question--Explain when the insurer has the duty to defend its insured under the BAP.
Answer--The insurer has a duty to defend when a possibility exists for coverage to apply. The insured need not prove that the loss is covered.
Question--What is the difference between liability protection and physical damage protection as it applies to the BAP?
Answer--Liability protection generally pays for damages that the insured becomes legally obligated to pay to a third party because of property damage or bodily injury that he causes. Physical damage protection covers the actual damage to the covered auto.
For example, take an accident in which an insured pickup truck causes an accident. The pickup is badly damaged and declared a total loss. In addition, the car the pickup hit was totaled, and the driver required hospital treatment. Both vehicles were pushed by the force of the collision through a plate glass window in a supermarket. The damage to the pickup falls under the auto physical damage protection. The rest of the injuries and damage--to the other driver, the other car, and supermarket--are subject to liability coverage.
Question--Name the five parts that make up the BAP.
Answer--The BAP consists of a declarations form, liability coverage, physical damage coverage, conditions, and definitions.
Question--What is the difference between comprehensive coverage and collision coverage?
Answer--Comprehensive coverage is the insurer's promise to pay for loss to a covered auto or its equipment that results from any cause other than collision with another object or if the auto overturns. Collision coverage applies only to the covered auto's loss due to a collision with another object or if the auto overturns. A collision does not have to be with another vehicle or a moving object.
Question--What is a compulsory insurance law?
Answer--A compulsory insurance law requires that every person who registers a motor vehicle in a given state prove or certify that he carries liability insurance equal to at least the state minimum requirements.
END OF CHAPTER REVIEW
1. Business auto policies primarily offer two types of protection: liability and physical damage.
2. Physical damage insurance covers actual physical damage to the covered auto.
3. The business auto declarations form contains the definitions for words and phrases that appear in the auto form.
4. Supplementary payments are payments to supplement the coverage and are in addition to the limit of insurance on the auto policy.
5. The business auto policy applies to autos involved in professional racing or demolition contests.
6. There are three different ways that the insurer may agree to pay for physical damage to a covered auto: comprehensive coverage, collision coverage, and other than collision coverage.
7. Part of the physical damage coverage agreement is the offer to pay for towing and labor costs each time a covered auto is disabled.
8. Auto medical payments coverage is automatically included in the business auto policy provisions.
9. An underinsured motorist is one who carries less liability insurance than the innocent party who is injured in an auto accident.
10. There are three types of no-fault auto insurance: pure no-fault, add-on plans, and modified no-fault plans.
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|Publication:||Tools & Techniques of Risk Management for Financial Planners, 2nd ed.|
|Date:||Jan 1, 2007|
|Previous Article:||Chapter 11: commercial property insurance.|
|Next Article:||Chapter 13: business liability issues in insurance.|