Beware These Commercial Auto Endorsements!

Following up on my recent articles on exclusionary or limiting CGL endorsements (August) and commercial property endorsements (September) to be wary of, this month we’ll examine several commercial auto endorsements. But, in this column, I’ll also talk about an endorsement you might want to consider adding to every business auto policy because its absence might result in a claim denial or at least a dispute.

First is the broad category of “driver exclusion” endorsements, most of which are not ISO forms. Some of these endorsements exclude coverage only to a specifically named driver. Others exclude coverage for specific classes of drivers or for certain types of use, usually nonbusiness related. However, even more dangerous are endorsements that apply to ALL insureds, not just the one(s) that prompted the underwriter to use the endorsement.

As for exclusions applicable to specific individuals, the wording of the exclusion, as always, must be read carefully to determine the extent of the exclusion. For example, consider the following two exclusions:

Named Driver Exclusion

In consideration of the premium charged, it is hereby understood and agreed the coverages as afforded by the policy do not apply when the insured vehicle is being driven by [name of individual]. All other terms and conditions of this policy remain unchanged.

Driver Exclusions

We agree with “you” that such insurance as is afforded by the policy shall not apply with respect to any automobile or its use while such automobile is in the care, custody, or control of, or is being operated by, any individual designated below.

Note that the first exclusion only applies to the named individual while that person is driving the auto. The second exclusion is far broader in that it applies to use and operation and not solely to the designated individual if it’s in that person’s care, custody, or control. Both exclusions arguably apply not only to listed drivers unless, perhaps, a Separation of Insureds type of condition is applicable. The potential extent of these exclusions beyond the listed driver(s) should be clarified by the insurer.

Classes of Drivers & Unscheduled Drivers

Another type of exclusion is triggered by use of a vehicle by one or more classes of drivers. For example:

We do not provide liability coverage for any person:

For bodily injury or property damage caused by your covered auto when it is driven, operated, or used with your permission by a person whom you know:

1. is under the minimum age to obtain a driver’s license;
2. does not have a valid driver’s license;
3. has a suspended driver’s license;
4. has a revoked driver’s license; or
5. has a restricted driver’s license and is operating a vehicle beyond the scope of such restriction.

Finally, some driver exclusions apply to certain kinds of uses by unscheduled drivers or perhaps all drivers. Space doesn’t allow for addressing actual language, but a common type of exclusion in this category applies to “personal use” of an auto. This opens up the potential for ambiguous circumstances ranging from someone including a personal errand within a delivery route or operating a vehicle on a vacation day within a business trip. Needless to say, such endorsements should be avoided whenever possible because of the potential uncertainty of coverage.

Another category of commercial auto endorsements to be wary of involves temporary suspensions of coverage. The ISO form is the CA 02 40 – Suspension of Insurance and its companion, the CA 02 38 – Reinstatement of Insurance. The CA 02 40 suspends the coverage(s) identified in the schedule on the form. This endorsement is often used, for example, as a premium-saving measure by schools whose buses are not used in the summer, by contractors who have vehicles that are unused in the winter, by various types of businesses during economic slow-downs, and so on.

There are also non-ISO proprietary forms available in the marketplace, especially for personal auto policy forms. ISO has no such countrywide form in its PAP program. The obvious main issue with all of these endorsements is that sometimes these excluded vehicles may actually be driven for various, often unexpected or unanticipated, reasons during the suspension period or coverage may fail to be reinstated at the designated time. I’ve personally been involved in two denied claims assisting agents–one involving a five-figure property damage claim and another that involved a death claim.

Employee Hired Autos

The final type of endorsement we have space to review involves the very common situation of an employee renting an auto on a business trip. The ISO endorsement that applies here is the CA 20 54 – Employee Hired Autos. This is not an exclusionary endorsement but rather a “coverage clarification” endorsement that addresses whether an employee renting an auto in his or her own name has liability coverage and/or creates a Symbol 8 or 9 physical damage exposure.

In the ISO CA 00 01 – Business Auto Coverage Form, “Who Is An Insured” for liability coverage usually includes employees for the use of a “covered ‘auto’ you own, hire or borrow.” The word “you” is defined to be the named insured and usually does not include employees.

In addition, what about a physical damage claim? The CA 00 01 says that Symbol 8 applies if “you” rent an auto but Symbol 9 applies if “you” don’t rent an auto. The problem here is that Symbol 8, not Symbol 9, is normally used to extend physical damage coverage to rental cars. If the employee and not the named insured is deemed to be hiring the auto, does that make the exposure a Symbol 9 one for which there is no physical damage coverage?

That is, if an employee rents an auto on a business trip in his or her own name, is that person the one who hires the auto or, since they are likely being reimbursed on their expense report or a company credit card is being used, is the employer effectively hiring the auto?

In other words, who is hiring the auto–the person entering into the rental agreement or the entity paying for it? I’ve always asserted that it’s the latter, but I’ve come across too many claim disputes for coverage to hinge on an opinion rather than an insurance contract.

Therefore, when I worked for the Independent Insurance Agents & Brokers of America, our technical affairs committee asked ISO to provide a solution to this dilemma. Their response was the creation of the CA 20 54 endorsement which I suggest should be attached to auto policies as a matter of course. It is not a perfect solution. For example, what if the employee combines vacation time or other personal use within a business trip? Perhaps we can address that issue in a future article?

Topics Auto Commercial Lines Business Insurance