Business Use Of Employee’s Autos – An Insurance Perspective

Introduction

I get asked certain insurance questions regularly. One such involves employee use of personal vehicles on company time. It’s a confusing topic filled with opportunities for misunderstanding.

Most personal vehicles are insured using a “personal auto policy”. Most businesses that own vehicles utilize a “business auto policy”. The following discussion is based on the above assumptions.

The Employee’s Insurance 

Most personal auto insurance policies will provide protection for vehicles titled to individuals and used for a business purpose. The only exception is “livery” — carrying goods or people for a fee.

Note:

-Using the vehicle for livery will invalidate coverage under many personal auto policies.

-Share the ride expenses and mileage reimbursement does not jeopardize coverage.

-Delivery services including package delivery services, pizza delivery, and flower delivery are considered livery — coverage is excluded.

-General business use of a vehicle (picking up supplies, visiting customers, attending conferences) is not a coverage issue under most policies.

The insurance purchased on a specific vehicle is always “primary”. The policy covering a vehicle pays first before any other policy. If an accident occurs while an employee is operating their car on an errand for the employer the employee’s personal insurance is the primary coverage and should be looked at to provide protection.

Employees should check with their own insurance carriers to be sure of their coverage. Explain to the agent or insurer the business circumstances in which the vehicle will be used. Full disclosure of business use will prevent coverage problems once a claim occurs. Most insurance companies will not increase premiums for occasional business use. Salespeople using their cars primarily for business may find that there premiums are increased.

The Employer’s Insurance

The liability section of the Business Auto Policy provides protection for bodily injury and property damage for which the insured company is liable. Under common law employers are responsible for the actions of their employees. Employers must be sure that their policies provide coverage for “non-owned” and “hired” autos. The company is then protected if an employee causes and accident. If an employer does not own any vehicles “hired and non-owned” auto liability insurance is needed to provide the coverage outlined above.

The standard business auto policy provides no coverage for the employees that are sued even if the accident took place on company time. The intent of the business auto policy is to protect the company (employer) from suit.

Most insurers will add “employees as additional insured” for a small extra premium. Remember, the insurance on a particular vehicle is always primary. Therefore, any accident caused by an employee while driving his or her own car will be paid first by the insurer of that vehicle. If there is not enough coverage under the employee’s policy then the employer’s business auto policy will step in to pay the excess amount if the employer’s policy has been endorsed to include “employees as additional insured.”

Most business auto policies include no coverage for damage to an employee’s car. Coverage can be purchased. However, it is generally not worth the extra cost. It also does not change the fact that employee’s coverage is still primary. Even after buying the extra coverage, the business auto policy will only pay if there is no insurance on the employee’s vehicle.

Case Study

Let’s walk through a few claims to illustrate how coverage will respond.

Mary Smith is driving her 1999 Chevy to the office supply store. She is doing an errand for her employer, ABC Manufacturing Co. Assume she has a personal auto policy with $300,000 of liability coverage and $250 deductible collision protection. Also assume that ABC has a business auto policy with hired and non-owned auto coverage at a limit of $1,000,000.

Example 1 – Mary causes an accident that results in damage to her car and damage to a parked vehicle in the amount of $5,000.

Insurance Response – Mary’s auto insurance pays for the damage to her car less the $250 deductible. Mary’s auto insurance also pays for the damage to the parked car. ABC’s insurance pays nothing.

Example 2 – Mary causes an accident that results in damage to her car and damage to a vehicle stopped at a stop sign. Damage to the other vehicle is $10,000. There are three passengers in the car. All three jump out of the car after the accident gripping their necks in agony. They sue Mary and ABC. The court awards the injured passengers $500,000 from Mary and $750,000 from ABC.

Insurance Response – Mary’s auto insurance pays for the damage to her car less the $250 deductible. Mary’s auto insurance also pays for the damage to the parked car, $10,000. Mary’s insurance will pay her legal expenses and up to $290,000 of the judgment (her $300,000 limit of liability less the $10,000 paid for the damage to the other vehicle) Mary is responsible for the amount of the judgment above her insurance. ABC’s insurance pays their legal fees and the $750,000 award.

Example 3 – Same scenario as above except ABC’s insurance includes “Employees As Additional Insured.”

Insurance Response – Mary’s auto insurance pays for the damage to her car less the $250 deductible. Mary’s auto insurance also pays for the damage to the parked car, $10,000. Mary’s insurance will pay her legal expenses and up to $290,000 of the judgment (her $300,000 limit of liability less the $10,000 paid for the damage to the other vehicle) ABC’s insurance pays for the judgment against Mary in excess of her insurance plus their legal fees and the $750,000 award.

Solution 

When I explain the above in person I get all kinds of comments – all some variation of, “It’s not fair!”

When I was younger, I would try and convince the other person in the conversation that, in fact, the way this works is fair. Now I just nod. The coverage response above is the way the insurance world works, right or wrong, like it or not.

Employers are free to respond in several ways:

-Provide a company car for company errands.

-Offer to pay the deductible for any accident that occurs to a personal vehicle.

-Pay larger mileage rates to compensate for the risk. The current (2009) rate set by the IRS is 55 cents per mile.

I urge the latter solution. A company car may not be feasible. Paying the deductible could lead to disputes over issues such as, was the accident work related? For example, a secretary who stops at the bank to make the company deposit before going to lunch has an accident on the way back to work after lunch. Is this work related?

Paying a reasonable mileage rate and informing employees of the issues is generally, in my opinion, the best solution. It recognizes the realities of the insurance world. The key to all this is to let employees know ahead of time what to expect.

My recommended approach is to send a letter to all employees outlining the way the world works. In that way everyone is operating on the same information.

Here is a sample letter:

Dear Employee,

From time to time it may be necessary for you to drive your personal vehicle on company business. The purpose of this letter is to remind/advise you of our policy regarding such.

All employees using their personal vehicle for approved business travel will be reimbursed for such use at a rate of <$.xx> per mile. This fee is intended to repay you for your expenses in operating the vehicle including the cost of gas, oil, tires, maintenance and the cost of insurance.

We require that all employees who drive personal vehicles on company business carry at least <$x00,000> of liability protection and uninsured motorist coverage. The purchase of “comprehensive” and collision insurance is at your discretion.

In the event of an accident while you are driving on company business you should look to your own insurance to protect you and your vehicle.

Remember, the auto insurance you buy is what will protect you on or off company time. Our company automobile insurance policy provides no coverage for your vehicle.

Should you have any questions regarding this memo please see your supervisor.

Comments And FAQ

This article is by far my most popular post.  About 2/3 of my overall web traffic is on this page.  I’m glad to be of service.

Here are a few questions that come out of the form below.  Go ahead and comment below so I can improve the piece.

 

What Happens If My Employer Does Not Pay Mileage?

The insurance on the car driven is always primary.  If you drive your car on your employer’s business your auto insurance protects you.  Your employer’s insurance protects your employer.  Paying milage does not affect the insurance you have on your car.  My suggestion that employers pay milage goes to the transaction and fairness (IMO).

 

Does An Employer Have to Pay Milage?

Not that I have ever heard.  You make a deal with your employer.  If you don’t like the deal, ask to change it or quit.  Of course, you could talk with an attorney.  My guess is that an employee asking the above question is looking for a reason to quit.

 

How Can I Be Sure My Insurance Covers Me?

Ask your insurance agent.  I’m only giving general advice here. State laws vary.  Different insurers handle things differently.  Check with your agent.

 

I Have An Employee Who Will Not Drive Her Car On Company Business.  What Should I Do?

Fire her or give her a raise.  How the heck would I know?  Deal with your employees as adults.  If they do not meet your standard fire them.  Conversely, you asking me this question tells me the employee probably has some doubts about your ability to manage.  I’d tell them to quit.

 

I Need To Know If The Employer Has The Right To Ask For Our Driving Record Without Any Compensation For Using Our Personal Vehicles?

I urge all my commercial clients to run motor vehicle records on their employees who expose the business to liability.  If you drive to the office supply store and cause an accident your employer could be sued. Of course they must follow privacy laws and your state laws regarding the use of motor vehicle data.  I think your driving record is relevant to your employer.  Someone with four speeding tickets and two accidents in the past year has a problem – a problem I don’t want my client involved in.

A Crash Course in Business Auto Insurance

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