Commercial Auto Coverage

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If your business uses autos, you should purchase commercial auto coverage. A business auto policy protects your company against financial losses that result from auto accidents. It covers lawsuits against your firm by people who have been injured or suffered property damage due to an auto accident for which your company is responsible. It also covers the cost of repairing your damaged vehicles.

Business owners should not rely on a personal auto policy to cover vehicles used for business purposes. Personal policies are designed to cover individuals and their family members. They are not suitable for businesses since they often contain business-related exclusions. Personal policies also lack the flexibility and broad coverage afforded by commercial auto policies.

I. Business Auto Policy (BAP)

Many commercial auto insurers issue policies on standard forms published by ISO. The ISO commercial auto policy is called the Business Auto Policy (BAP). The term policy means a complete insurance contract. A BAP typically consists of an auto coverage form, the auto declarations, and various endorsements. The ISO Business Auto Policy is very versatile. It can be used to insure many different types of businesses, both large and small, in a wide range of industries. A broad selection of endorsements is available so that coverage can modified as needed.

Some insurers utilize their own proprietary commercial auto forms rather than ISO forms. Others use a combination of ISO forms and proprietary endorsements.

II. Business Auto Coverage Form

The backbone of the ISO BAP is the Business Auto Coverage Form. This form contains the key elements of the policy. It consists of five sections discussed below.

Section I, Covered Autos: The first section explains the meaning of "covered autos". Essentially, vehicles are "covered autos" under a particular coverage if you have paid a premium to insure them for that coverage. The BAP utilizes a set of numeric symbols to identify the types of vehicles that are covered. These symbols, called covered auto designation symbols, include the numbers 1 through 9 plus 19. Each symbol represents a category of covered autos. For instance, symbol 1 means "any auto" while symbol 2 means "owned autos only".

The declarations section of your policy indicates the vehicles that are "covered autos" for each coverage you have purchased. For example, suppose you have purchased liability coverage for all types of autos. These include autos your company owns, autos it hires, and autos it doesn't own. You have also purchased physical damage coverage for autos your company owns. Your policy declarations shows symbol 1 (any auto) next to liability coverage, and symbol 2 (owned autos only) next to physical damage coverage.

Section II, Liability Coverage: Section II explains commercial auto liability coverage. This coverage protects your firm against third-party claims resulting from accidents caused by vehicles used in your business. Auto liability coverage is important because auto accidents can generate large lawsuits against your firm. You may need this coverage even if your business doesn't own any vehicles. Rental vehicles and autos owned by employees create risks if they are used in your business. If a rental car or employee-owned vehicle is involved in an accident and the driver is at-fault, your company could be held liable for any injuries sustained by third parties.

Commercial auto liability coverage protects your firm against third-party claims for bodily injury or property damage caused by an accident that results from the use of a covered auto. It also provides some coverage for pollution cleanup costs that stem from an auto accident.

Who Is an Insured: For an auto liability claim to be covered by the BAP, it must result from an accident caused by a covered auto. In addition, the claim must be filed against an insured. The parties that qualify as insureds under liability coverage are described in a paragraph entitled Who Is An Insured. They include the following:

  • You: "You" means the named insured. This is the person or company listed in the declarations.
  • Permissive Users: Anyone else who is driving a covered auto you own, hire or borrow with your permission is an insured. That is, if you allow someone (such as an employee or a company principal) to drive a vehicle you own, rent or borrow, the driver is an insured. These individuals are often called permissive users.
  • Omnibus Insureds: Also an insured is anyone who is liable for your conduct or the conduct of a permissive user. Often referred to as the omnibus clause, this wording covers anyone who may be held legally responsible for an accident caused by a named insured or a permissive user.

    Of the three types of insureds, you are afforded the broadest level of coverage. You are covered for any covered auto. Which autos are “covered” depends on the symbols that appear next to liability coverage in the declarations section of your policy. You are an insured whether or not you are driving the auto when the accident occurs. This is important because employers are vicariously liable for negligent acts of their employees. If you are sued as a result of an auto accident caused by a negligent employee, you should be covered for the claim.

    Note that company partners and employees are not insureds while driving vehicles owned by them personally. Such vehicles are considered non-owned autos because they are not owned by you (the named insured).

    The omnibus clause affords automatic coverage for anyone who might be held vicariously liable for an auto accident caused by you or a permissive user. This clause eliminates the need for additional insured endorsements under the BAP. 

    While commercial auto liability insurance affords relatively broad coverage, it does not cover every claim. Certain types of claims are excluded. These are outlined in the liability exclusions section of the auto coverage form.

    Section III, Physical Damage Coverage: Section III of the auto coverage form describes commercial physical damage coverage. To understand this coverage, you must comprehend the difference between physical damage and property damage. Physical damage insurance is a first-party coverage. It covers damage to autos owned by your company. Property damage coverage is a third-party (liability) coverage. It covers damage to other people's property (including autos) that has been damaged in an auto accident for which you or another insured is responsible.

    The BAP offers three types of physical damage coverage:

    • Comprehensive: Covers loss to a covered auto by any cause other than the vehicle's overturn or its collision with another object. Examples of covered causes of loss are theft, hail and vandalism.
    • Specified Causes of Loss: Covers loss caused by any of six types of perils. This coverage is a cheaper alternative to comprehensive coverage.
    • Collision: Covers loss to a covered auto caused by the vehicle's overturn or its collision with another object.

    Section IV, Business Auto Conditions: The Conditions section consists of two parts. The first applies to losses. It explains your obligations under the policy if an accident, claim or loss occurs. It also explains how physical damage losses are assessed and paid. The second set of conditions is more general. For instance, it defines the coverage territory, and explains how your policy will apply when other insurance exists.

    Section V, Definitions: The last section contains the policy definitions. This part of the form explains the meaning of key terms in the policy, like auto and mobile equipment.

    III. Additional Coverages and Amendments

    The Business Auto Coverage Form includes only two coverages: auto liability and physical damage. Other coverages and coverage amendments may be added by an endorsement.

    Additional Coverages: Here are three coverages that are often added to a commercial auto policy. 

    • Uninsured Motorist (UM) and Underinsured Motorist (UIM): UM coverage pays damages you are unable to recover for injuries sustained in an auto accident because the at-fault driver has no liability insurance. UIM coverage pays that portion of damages you are unable to recover for injuries sustained in an auto accident because the at-fault driver has some insurance but not enough to cover all of your losses. UM and UIM are mandatory in some states.
    • No-Fault: Covers medical expenses incurred by an insured driver or passenger as required by state law. No-fault coverage is mandatory in a few states.
    • Auto Medical Payments: Covers medical expenses incurred by insured drivers and passengers (other than employees) of covered autos. Medical Payments coverage is optional (not mandatory).

    Note that a separate UM/UIM endorsement applies in each state. Likewise, a separate no-fault endorsement applies in each state that has enacted no-fault legislation.

    Coverage Amendments: ISO offers a broad array of endorsements that can be used to modify coverage under the Business Auto Policy. Here are some examples:

    • Employees as Insureds: Amends the "who is an insured" section under liability coverage to include employees while driving non-owned autos. The intent is to cover employees while driving autos owned by them personally. 
    • Employee Hired Autos: Amends the "who is an insured" section under liability coverage to include employees while driving autos rented in their name (rather than your company's name).
    • Fellow Employee Coverage: Eliminates the fellow employee exclusion under auto liability coverage.
    • Auto Loan/Lease Gap Coverage: Applies when a covered auto has suffered a total loss, and you own more on the lease or loan than the vehicle is worth. Covers the difference between the balance on your loan or lease and the ACV of the vehicle.

      Many insurers offer "broadening" endorsements that can be added to the standard ISO auto policy. These endorsements typically include coverage enhancements under both liability and physical damage. They are a convenient way to obtain a group of coverages at a reasonable price. Because the endorsements aren't standard, they vary widely from one to the next.