Agents Need to Cover Their Exposures by Offering Hired Non-Owned Auto Coverage
Risk managers, insurance agents and brokers have always known that a Symbol 7 on auto liability policies is not very desirable. This symbol essentially means that only the autos scheduled on the policy are covered. If the insured fails to report a new vehicle within the policy’s reporting window — usually 30 days — or if the insured borrows or hires a vehicle, the insured could potentially have an uncovered loss with that vehicle.
There are certain industries where Symbol 7-only coverage is the norm: trucking, couriers, ambulance services and public livery exposures are examples. The reasons vary, but are usually due to these industries’ federal filing requirements and frequent use of independent contractors. Both factors can drastically expand the exposures under an auto policy. To avoid confusion, I will ignore the trucking policy differences (i.e., Symbols 41 and 46), with the understanding that the issues discussed here may be similar for truckers’ policies.
In addition to the issues above, the use of Symbol 7 auto also presents a large errors and omissions (E&O) exposure for the agency or broker. If Symbol 1, or 7, 8, 9 are available and the agent or broker has not offered this to the client, E&O problems may arise. For purposes of this article, we will use the acronym HNOA (hired non-owned auto) to describe Symbol 8 and 9 coverages and exposures.
Unfortunately, we also see operations with no HNOA coverage in place, even though it may be available. Consulting firms are good examples of operations that commonly do not purchase coverage. Often, even very large consulting firms rely on employees to use personal vehicles or rental vehicles (i.e., airport car rentals) for all of their transportation needs. These firms may have no owned autos, but usually will have a contingent exposure.
Employers often reimburse mileage expenses for employees’ use of a personal vehicle for company business, which can add up to hundreds of thousands of dollars per year. For hired units, companies can easily have over $1 million in rental costs per year. For example, 150 employees renting cars every other week for $50 per rental results in $975,000 in rental costs per year (150 employees x 26 weeks x 5 days x $50). That is equivalent to 75 full time units on the road each year, for which the employer has a significant exposure. Unless these insured’s employees are accepting the insurance offered by rental companies, the employer’s uninsured exposure potential is huge. Actually, both the employer and the agent or broker share this exposure.
If rental insurance is not purchased, and the employee causes severe injury to a third party, the injured party’s legal representative will likely sue the rental agency, the employee and the employer. The rental agency’s insurance program will respond, as will the employee’s personal auto policy. In this case, the employer would be the only uninsured party. Even if the employer is able to get out of the lawsuit — via summary judgment, for example — it will still have to pay for legal expense, at a minimum. In the case of severe injuries, it is likely that all parties will be required to contribute to settlement. Again, the employer would have no coverage from which to contribute.
Another common area of large uninsured HNOA exposures is with temporary service providers, such as professional employment organizations (PEOs), temporary employment agencies and home health care nurses. These operations often have no owned autos or a few executive vehicles, but rarely have HNOA coverage. The employees of these firms almost always use personal vehicles to commute to client locations. This creates exposures to vicarious liability for the employer. If the employer has a Symbol 7 only coverage, it has a huge potential exposure.
Many large, sophisticated employers know they have an exposure, but few choose to insure it. Cost is a factor. Costs vary, depending on the controls in place (see table on N18), but can average $250 per full-time employee equivalent to insure.
Some self insure. The rationale behind self insuring is that if a temporary employee causes injury with a personal vehicle, the injured party will go after the employee’s personal auto policy first. If coverage is insufficient or non-existent, the plaintiff’s attorney is unlikely to pursue the employer, who has no coverage in place. The employer is gambling that the lack of coverage will be a deterrent against plaintiff attorneys seeking a deep pocket in the employer.
Quite frankly, that logic is flawed. If a company is large and the injuries serious, the plaintiff’s attorney can and will go after the employer and its assets. The agent or broker who did not offer the additional coverage also has an E&O exposure.
The point is that agents and brokers need to identify the HNOA exposures and offer their clients the HNOA coverage. If the client does not want to spend the money, at least the agent or broker has done their job and, at a minimum, protected against the E&O exposure.
As a guide, here are a few red flags that agents, brokers and risk managers can use to identify serious and significant exposure to HNOA losses. If present, these need to be addressed through insurance or through a risk management process.
- Large number of named insureds.
- Heavy use of independent contractors.
- High volume of car rental costs.
- Many reimbursed miles of employee vehicle use.
- Frequent use of personal vehicles for company business.
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