7 Reasons to NEVER Extend Business Auto Coverage to an Employee-Owned Auto

First, the Reasons to NEVER Extend BAC Protection to an Individually-Owned Auto

1. The employee’s Personal Auto Policy (PAP) extends coverage for most business uses of a covered auto.
2. Using a BAC rather than a PAP may be a form of insurance fraud (depending on the legitimacy).
3. To extend this coverage, a lease agreement is required. A lease agreement between an employee and his employer is a legal document subject to contract law and thus must be formal in its construction.
4. Dual ownership is created when an employee-owned auto is leased to her employer.
5. Once a lease is in place and the policy has been endorsed, the BAC provides primary coverage for the use of the vehicle 24/7/365 – regardless of use.
6. The insured business entity has NO control over the use of the vehicle (including who is driving it) when it is being used outside of work.
7. Depending on the entity type, the insured may be taking on liability exposures it really does not want.

The Background

Section II (Liability Coverage) of the Business Auto Coverage (BAC) form describes who qualifies as an insured (II.A.1.). Employees using their personally-owned vehicle to conduct business on behalf of the named insured’s business are specifically excluded from coverage.

However, employment relationships and/or job requirements may exist that prompt a business entity (the insured) to attempt to specifically include an employee-owned auto as a covered auto on its BAC. And in so doing, the entity may extend status as an insured in the BAC to the employee/driver for the use of the specified auto (even though owned by the employee). Short of transferring the title to the business, the insured/employer can accomplish these two goals by:

1. Having the employee lease his/her personal auto to the business (making the owner a lessor); and
2. Appropriately endorsing the BAC

Determining the legitimacy of the insured’s desire and need to extend coverage to an employee-owned vehicle and insured status to the owner requires the agent and underwriter to:

• Understand how the employee’s PAP responds to the “business use” of a personally owned auto;
• Determine if sufficient reason exists to extend such insured status to the vehicle and the owner;
• Require an appropriate lease agreement;
• Understand how entity type affects this decision; and
• Attach the appropriate endorsement.

Unless the underwriter is satisfied with the legitimacy of the need, the formality of the lease agreement and understands the risks involved (for the carrier and the insured), he or she should not extend the requested protection.

The PAP Response to Business Use

Four business-use exclusions are found within “Part A – Liability” of ISO’s PAP (this is ISO language, state-mandated forms may differ, be sure to confirm policy language meets guidelines of the subject state). The first is a workers’ compensation exclusion that does not relate to the subject of this article. The three remaining exclusions relate more specifically to the business use exposure that is the subject of this article. These exclusions are:

1. Use of a listed vehicle (a “your covered auto”) as a public or livery conveyance (transporting people or property for a fee). If the vehicle is being used in this manner, it belongs on its own BAC; especially if such use is not part of the business entity’s operations.
2. Use of a “your covered auto” in an auto-related business (selling, servicing, repairing, etc.). However, even this exclusion does not apply to the policy’s “you” or a family member’s use of an auto specifically listed in the policy (a “your covered auto”).
3. Maintaining or using a “your covered auto” in any business (other than an auto-related business). This looks like an absolute business-use exclusion; however, there is a key exception to this exclusion (giving coverage back to the insured). The exclusion does NOT apply to the maintenance or use of: a private passenger auto, pickup or van, or trailers used with any of these three types of vehicles.

In practical application the PAP extends coverage for the business use of a listed auto (a “your covered auto”) when not used to carry people or property for a fee (proved by the Business Use classification available for PAP rating purposes).

If an employee injures a third party with his personal vehicle while conducting operations on behalf of the business entity, the employee’s PAP specifically extends primary liability protection to the employee and to the business entity for which he/she is conducting business. The only limiting factor is the PAP’s limit of liability coverage. (If the PAP’s liability limits are insufficient to cover a loss, and if the BAC’s Liability Coverage is triggered using either Symbol 1 (Any Auto) or Symbol 9 (Nonowned Autos Only), the BAC extends excess liability protection solely to the business entity.This excess protection in the BAC covers the business entity for its vicarious liability arising out of the actions of its employee.)

Sufficient Reason for Moving Coverage to the BAC from the PAP

Although the PAP extends protection for most business uses of a scheduled vehicle, your insured may still desire to include an employee-owned vehicle on its BAC. Even if the insured makes the business decision to add an employee-owned auto to the BAC and extend insured status to the employee who owns the vehicle, proper underwriting must be done to confirm the extension of coverage is legitimate. Coverage shouldn’t be extended just because the insured requested the extension. Information required to make the appropriate decision includes:

• Determination that the vehicle owner (lessor) is an actual “employee” of the insured?
• Investigation of the employee’s duties.
• Understanding how entity type affects the underwriting decision.

Is the Lessor an Employee?

Although a defined term in the BAC, “employee,” is given a very limited and rather non-descriptive definition. The BAC specifies which workers are included as employees (leased but not temporary workers), but it does not define WHO qualifies as an employee.

Because the BAC does not more specifically define the term or concept of “employee,” its common meaning is applied: “one ’employed’ by another usually for wages or salary.” Further, the term “employed” is defined to mean: “to use or get the services of someone to do a particular job.” Within this article, any reference to “employee” applies this combined definition.

With the working definition of “employee” in place, we can decipher who qualifies as an employee. However, there are options surrounding who qualifies as an “employee.” Establishing “employee” status is a function of legal entity type. An employer is always a “person,” either a “natural person” or “legal person.” And anyone working or “employed” by either type of person is an “employee.” Examples of each “person” type include:

• Natural Persons: sole proprietor and partnerships; and
• Legal Persons: corporations and professional associations.

The “outlier” is limited liability companies (LLC). Some states treat them like partnerships and some like corporations. For sake of this discussion we will consider LLCs legal persons.

Lastly, an individual can be either an employee or an employer – but he/she cannot be both. Natural person employers are NOT also employees (neither the sole proprietor nor the partners is/are employees – they are the employers). Conversely, everyone who works for a legal person employer IS an employee (this includes corporate officers and members/managers of an LLC).

If the person leasing the vehicle to the named insured does not meet the definition of an “employee,” insured status should not be extended to the individual and the auto should not be granted status as a covered auto. However, if the person IS an employee, the first hurdle is cleared and further underwriting review is necessary.

What Duties are Performed by the Employee?

Once true “employee” status is verified, the employee’s duties must be ascertained. Extend protection only when the vehicle owner’s duties indicate a reasonable need exists.

• Do the employee’s duties require the “regular” use of an auto? (“Regular” means greater than 50% business use of the vehicle.) If “yes,” then continue the process; if “no,” there is little reason to extend the coverage. For instance, if the employee is an outside salesperson who travels as part of his/her job – the use of the endorsement is reasonable. If the employee is an inside production worker or administrator with little or no driving required as part of his/her duties, the use of the endorsement is not reasonable. (Another option is the CA 99 33 – Employees as Insureds.)
• Is the employee closely related to any of the owners or executive officers (spouse, child, grandchild, nephew, niece, etc.)? A “yes” answer is not an automatic disqualifier. However, if the answer is “yes,” close scrutiny of the duties performed is required. Insureds requesting protection be extended to the auto and the owner (sometimes at the recommendation of the agent) are often trying to avoid the cost and “point-system” associated with a PAP. Review the specifics of the request. The request to add a daughter who is newly graduated from college and going to work as a salesperson in her father’s company may be reasonable. The request to add the son who just got kicked out of college and is helping out around the plant probably isn’t a good candidate for this extension of coverage.

Formal Lease Required

A third requirement for properly underwriting this requested extension of coverage is confirmation of and a requirement that a formal lease agreement is used. Because a lease agreement is a legal document and thus subject to contract law, a simple paragraph stating that the employee agrees to lease his/her vehicle to the employer/insured is not a formal lease agreement and is not adequate.

These lease agreements create dual ownership of a piece of property –an automobile. Because dual ownership is created (the vehicle is owned by the employee and contractually by the employer), specific information must be included in the lease agreement. An “Acceptable” Formal lease agreement includes (these are the minimum requirements):

1. A description of the vehicle;
2. A description of the individual leasing the car to the company (name, position in the company, and business purpose for adding the vehicle);
3. The period of the lease agreement (can be indefinite);
4. The requirement that the lessor have a PAP for any other vehicles owned; if no other autos owned by the person, a named non-owner policy is acceptable (carrier may want to set specific minimum limits). (This requirement is intended to confirm the CA 99 47 is not being used to avoid a PAP.);
5. Whether or not financial consideration is required from the lessee (mileage, fuel, monthly fee, etc.); and
6. Properly notarized signatures. (If the contract is not notarized, it is acceptable to have the signatures attested to and dated by a third party witness.)

An “Above Average” lease agreement contains all of the above plus addresses:

• Non-permitted use of the vehicle (including permitted drivers – remember, we are covering the vehicle 24/7 and insurance follows the vehicle when the driver is a permitted user).

A “Superior” lease agreements contains the seven requirements above and adds descriptions of:

1. Who is responsible for loan payments (if any);
2. Who is responsible for maintenance and upkeep of the vehicle;
3. Who is responsible for paying the personal property taxes; and
4. Who is responsible for paying traffic fines.

Since the named insured business entity is providing coverage to this “leased” auto on a primary basis (regardless of the use), contractual specificity is required. Insurance follows the vehicle and once the vehicle is specifically added to the policy, the insured’s BAC covers any liability arising from the legal use of the vehicle. If presented with anything less than a minimally acceptable lease, do not extend covered auto protection to the vehicle or insured status to the owner. Fully review the agreement before extending protection.

Legal Entity Type and Why it Matters

The last step in analyzing a request to extend covered auto status to a non-owned auto and insured status to its owner is a review of the legal entity and understanding how the entity type affects the acceptability of the request. Generally, extending the requested protection to “natural person” employers is less desirous than extending such protection to “legal person” employers.

Natural Person Employers

As previously mentioned, a vehicle lease agreement creates dual ownership. If the employer is a natural person employer, such as a sole proprietor or partnership, gaining ownership interest in a vehicle not in the individual’s direct control might create exposures the individuals do not want.

Because of the dual ownership, allowing sole proprietors or partnerships to lease and extend coverage to an employee-owned auto may be detrimental to the insured(s) personally. Obviously the insured’s decision to lease an auto is a business decision; however no carrier should encourage or legitimize the decision by freely offering to extend coverage. By making this tough underwriting decision, you may benefit your insured.

Legal Person Employers

Legal persons have the same rights as natural persons: the right to own property, the right to sell property, the right to enter into contracts, the right to sue, and the right to be sued. Within the right to contract is the right to accept liability for specific individuals and activities. If a legal person employer chooses to enter into an employee-owned auto lease agreement, the underwriter should have little issue in extending the requested coverage – depending upon the acceptability of the other underwriting considerations.

The reason for viewing legal persons more favorably than natural persons relates to personal liability. In natural person employment situations the individuals are taking on the liability when they lease the autos; when the insured is a legal person, the individuals who own the stock are not necessarily accepting personal liability (although closely held corporations may not provide as much of a buffer from individual responsibility).

Extending Coverage

Once all the necessary information has been gathered and reviewed, the underwriter (and the agent) can make an appropriate underwriting decision. If the decision is to extend the requested protection to the vehicle and its owner, the proper endorsement must be attached.

To extend coverage, attach the Employer as Lessor (CA 99 47) endorsement. When the CA 99 47 is attached, only three pieces of information are required to complete this form and extend coverage:

1. The Named Insured (not the employee’s name);
2. The effective date of the endorsement; and
3. A description of the “Auto.”

Part A of the CA 99 47 eliminates any question of or possible claim denial related to ownership or “title” of the vehicle. The endorsement makes the listed vehicle an owned vehicle under the policy – because the insured becomes the (theoretical) contractual owner (based on the formality of the lease agreement).

Of particular note is the fact that the CA 99 47 does NOT require the employee’s name be provided to extend coverage to the person, nor is there a place to provide the information. However, the endorsement’s Part B coverage grant states that the “employee” who leases the scheduled auto (scheduled on the endorsement) to the named insured is included as an automatic insured within the BAC’s “Who Is An Insured” definition. Because of this extension, the vehicle owner’s MVR should be obtained and underwritten more closely than other drivers because he/she is now specifically insured (rather than granted insured status simply due to status as an “employee”).

Key Underwriting Questions

To review, seven key underwriting questions must be answered before attachment of the CA 99 47 is allowed:

1. Is the lessor an employee? If “no,” you absolutely do not want to provide the endorsement. If “yes,” proceed.
2. Is the lessor also the driver of the vehicle? If “no,” who is the driver? The driver must be known to be properly underwritten (including obtaining the MVR). If the driver is not the lessor, use of the CA 99 47 should be avoided (unless there is a reasonable explanation of who the driver is).
3. What are the employee’s duties? If the duties require regular use of a vehicle, adding the endorsement is reasonable. Otherwise, there is no reason to add the endorsement and the request should be denied. The CA 99 33 – Employee as Insured may be a viable alternative if the duties do not allow for the use of the Employee as Lessor endorsement.
4. What is the percentage of personal versus commercial use? A “super majority” of personal use may indicate that the endorsement is improper.
5. Is the employee closely related to any owner or executive officer? A “yes” response is not an automatic denial; all other facts must be considered before making the final decision. One key follow-up question: is the relative a full time employee of the corporation?
6. What is the entity type? If the insured is a natural person employer – you may not want to agree to the endorsement. If a legal person employer – OK to proceed.
7. Is there a formal lease agreement containing all the necessary information (as presented previously)? If “no,” do not extend the endorsement. If “yes,” obtain a copy of the agreement and review it for acceptability then proceed with underwriting the exposure.

If the answer to questions “1.,” “2.,” or “7.” is “no,” the endorsement should not be offered. Likewise, if the employee’s duties (as requested in question “3.”) don’t require the regular use of a vehicle, the endorsement should not be offered. Question “4” further clarifies question “3.” If personal use accounts for 40% or more of the vehicles use, attachment of CA 99 47 may be improper (consider the CA 99 33).

Knowing the entity type (question “6.”) may allow the underwriter to help the insured avoid personal liability. Being a natural person employer is not an automatic denial, but the underwriter must proceed with caution.

Question “5.” simply provides possible insight into the desires of the insured and the reason for the request. Being a close relative does not lead to an automatic denial, but it does require weighing the other information before the decision is made to attach the endorsement.

The Carrier’s Underwriting Position

Use of the Employee as Lessor (CA 99 47) endorsement can create exposures the carrier may not want. Remember, the endorsement is extending coverage from the BAC for ANY and EVERY use of the vehicle (24 hours a day). This means at nights and on weekends when a spouse or child could be driving the vehicle.

Before the decision is made to attach the CA 99 47 endorsement, the underwriter must gain detailed information regarding the employee, the use of the vehicle, and the formality of the lease agreement. Only with these facts can a proper underwriting decision be made.

Upcoming Class

This Thursday, the Academy of Insurance hosts a class detailing the requirements introduced in this article and detailing facets not discussed here. Please join us for this important training.

Topics Auto Commercial Lines Business Insurance Underwriting Property