Does your business rent vehicles that it uses in its operations? If so, you will likely sign a rental agreement in which you assume liability for third-party injuries or damage that results from your use of the rental vehicle. Fortunately, your assumption of liability should be automatically covered under your commercial auto policy.
Coverage for Rental Car Agreements
The standard business auto policy includes contractual liability coverage. This coverage is provided via an exception to a contractual liability exclusion that appears under auto liability coverage. The policy covers liability you assume under an insured contract, as that term is defined in the policy. The definition encompasses several types of contracts, including the following:
That part of any contract or agreement entered into, as part of your business, pertaining to the rental or lease, by you or any of your "employees", of any "auto".
This means that a typical car rental agreement qualifies as an insured contract. The policy covers any assumption of liability that you or one of your employees enter into when renting or leasing an auto for business purposes. The following example demonstrates how contractual liability coverage might apply to a claim.
Regina Rogers owns Rogers Risk Analysis. She is driving to a conference in a vehicle she has rented from Reliable Rentals. Regina maneuvers around a curve and confronts an unexpected traffic jam. She slams on her brakes but is unable to avoid colliding with the vehicle in front of her. Both vehicles are badly damaged. The driver of the other car (Beth) sustains a broken leg and a skull fracture.
Two months after the accident, Beth sues Regina and Reliable Rentals for bodily injury and property damage. Beth's suit cites Regina's negligent driving as the primary cause of the accident. It also alleges that Reliable Rentals is vicariously liable for the accident because it owns the vehicle.
Regina soon receives a letter from the rental agency informing her that she (or her insurer) is liable for all costs (including defense costs and damages) that result of Beth's accident. When she rented the vehicle, Regina agreed to assume liability and to hold Reliable harmless for all third-party injuries or damage that arose from her use of the rental vehicle. Thus, Regina (not Reliable Rentals) is liable for Beth's injuries and the damage to her vehicle.
Rogers Risk Analysis is insured under a standard business auto policy. Regina sends Reliable's letter and Beth's lawsuit to her commercial auto insurer. The car rental contract Regina signed qualifies as an insured contract under her auto policy. Assuming her auto policy includes liability coverage for hired autos, the claim against Regina should be covered.
Rental Firm Not Vicariously Liable
Besides the contract, there is another reason why Reliable Rentals isn't liable for Beth's accident. A federal law called the Graves Amendment protects car rental agencies from suits based on their vicarious liability as vehicle owners. Passed in 2005, the law bars suits against auto rental companies for injuries or damage that arise out of their customers' use of rental vehicles.
Because of the Graves Amendment, a rental company can't be held accountable for an accident simply because it owns a vehicle driven by a negligent customer. In the Reliable Rental scenario, the law would prohibit Beth from suing Reliable for its vicarious liability as the owner of the rental vehicle.
Exceptions For Negligence and Crimes
The Graves Amendment doesn't protect rental firms from suits based on their negligence or criminal wrongdoing. For example, suppose Beth sues Reliable Rentals, claiming that the accident occurred partly because the rental vehicle's brakes were faulty. If Reliable had maintained the brakes properly, Regina might have been to able to stop in time to avoid the accident.
Beth's claim would likely be permitted under the Graves Amendment because it is based on the rental agency's negligence. Moreover, Regina's auto insurer might be obligated to indemnify and defend Reliable Rentals for the costs associated with the claim. This is because the rental agreement contained a broad hold harmless agreement in favor of the rental company, and the agreement qualifies as an insured contract under Regina's auto policy.
Contractual Liability Exclusions
The definition of insured contract contains two important exclusions. One applies to vehicles rented with a driver while the other applies to damage to rental vehicles.
No Coverage for Vehicles Rented with a Driver
The definition excludes any contract under which you or an employee of yours rents an auto with a driver. That is, if you assume liability in a contract for auto accidents that arise out of a vehicle rented with a driver, your assumption of liability will not be covered.
No Coverage for Damage To the Rental Car
Most rental car agreements impose liability on the rental customer for physical damage to the rental car. If the customer damages the vehicle as a result of an accident, he or she must reimburse the rental company for the cost to repair the vehicle. These costs aren't covered by contractual liability. The definition of insured contract specifically excludes that part of any rental contract that obligates you (or your employee) to pay for property damage to the rental vehicle.
You can insure rental vehicles for physical damage by purchasing hired auto physical damage coverage. Alternatively, you can purchase a loss damage waiver (sometimes called a collision damage waiver) from the rental agency.