Insuring Business-Owned Autos Under a Personal Auto Policy

VU Faculty

Abstract It is very common for customers to want to insure an auto owned by their business under a Personal Auto Policy, primarily because the premium is lower (or the agent suggests it to be more competitive). However, there are some compelling reasons why this might be a bad idea, particularly when serious coverage gaps are created. It is possible to do this, but not in the manner too many agents employ.

Here are several "Ask an Expert" questions recently reviewed by our faculty:

"Quite often, owners of small businesses want to insure their business-owned vehicle which they really personally use on their personal auto policy since the premium is often cheaper. Is there any problem with this? Does the 'Other Legally Responsible Entities' insured take care of the business' exposure and are there any gaps for the business-owner personal insured?"

"One of our agents has a friend who says that his personal auto carrier agreed to add his businesses corporate name as an additional named insured in regards to one vehicle to his  PAP.  The vehicle is owned by the corporation and there is no corporate auto policy. The business is an LLC. I am assuming that the friend is one of the members of the LLC, and found that it was cheaper to add the vehicle to his personal policy rather than write a commercial policy."

"I have a prospect who has a trucking business. She has a Cadillac which is registered in the name of the business but is only used to commute to and from her office and not for any business purposes. She wants me to insure the vehicle under a PAP because the cost would be lower. Since the vehicle is registered in the name of the business, could we write it under a PAP and put the business as an additional insured?"

"I have a commercial client that has two private passenger autos insured under the business auto policy. One vehicle is owned and titled in the corporate name, the other is on a long term lease in the corporate name. The client wants to insured these vehicles under a personal auto policy due to premium savings. With regard to the titles, what needs to be done? I assume a lease agreement between the corporation and the individual? If so, do you have a lease agreement?"

"From time to time we find out that our insured's car insured on a personal auto policy is actually owned by their business (let's say a corporation that the insured is president of). A question arises at claim time: will the insurer deny a bad liability claim?  The insured normally says, 'I didn't think it was an issue,' although they have signed the application that states John Smith is the owner, not Smith Corporation."

"On a personal auto policy, we have the named insured who has purchased the vehicle in a business name for tax purpose. We list the individual as the named insured and the business as an additional insured. In the event of a loss they are both covered under the personal auto. However, under the personal umbrella, only the individual would be covered. What would be the proper way to cover the business as an additional insured above the policy limits? If they do not carry a commercial umbrella, is there another way to cover them? Also, would the personal auto respond if just the business (additional insured) is named in a lawsuit and not the named insured? Could just the additional insured be covered?"

The ISO Personal Auto Program, with a couple of minor exceptions, does not permit insuring a corporation under a PAP. The insured must be a natural person...individual(s) or husband and wife. Some carriers may permit this, though that doesn't mean that it is a good idea when you read the literal wording of the PAP. However, there is a way around this if the insured and agent are convinced the PAP is the appropriate vehicle (no pun intended) for insuring the risk involved.

Below is a consolidated series of responses from the VU faculty regarding the questions listed above.

Don't forget the general coverage issues since the PAP and BAP both have their advantages. For more information, check out the article, "PAP vs. BAP...Which Is the Best?"

From the standpoint of liability coverage, there is no need for an additional insured endorsement for the business's vicarious liability since it is an omnibus insured under the PAP:

B. "Insured" as used in this Part means:
   3. For "your covered auto", any person or
      organization but only with respect to legal
      responsibility for acts or omissions of a
      person for whom coverage is afforded under
      this Part.

However, this makes the business an insured ONLY for legal liability for another insured. What if the business is sued directly as the owner of the auto or for failure to properly maintain the auto? As I understand the policy provision above, there is NO coverage for the business since it is not being held liable for another insured's acts or omissions...it is being held liable for its own direct liability.

Since ISO has no PAP additional insured endorsement for this, you would have to get a company-specific endorsement, have the business shown as a named insured, and/or have the business rely on Symbol 1 coverage under a BAP.

Keep in mind that the business is at the mercy of the PAP for limits and defense. If I were a business owner, I'd want my own policy and control of my own defense. If the defense afforded by the PAP insurer is inadequate, the business could find itself the victim of a large jury verdict with only minimum limits. As a business owner, I'd think that the risk of losing my business to save a few premium dollars would be foolhardy.

One other point (and a counterpoint)...ISO has an endorsement, PP 03 19 – Additional Insured - Lessor that could be used. The business could lease the vehicle to the employee/owner who would get a PAP in his/her name and use this endorsement. HOWEVER, the problem is that the endorsement extends additional insured status to the lessor on the same basis that the unendorsed policy does...only legal liability for the acts or omissions of an insured. As a lessor, the business has no greater liability rights than the business does under the unendorsed policy. Like any lessor, the business needs its own insurance. Thus, relying soley on a PAP is not necessarily a very good solution.

The PAP is not a suitable vehicle for insuring an auto owned by a business (corporation, partnership or LLC), particularly when used for business purposes. There are too many references to "persons" to make it clear whether a business has coverage for certain things. For example, the Definitions section says:

C. For purposes of this policy, a private passenger
   type auto, pickup or van shall be deemed to be
   owned by a person if leased:
   1. Under a written agreement to that person;

The conditions sections (Parts E & F) say:

B. A person seeking any coverage must
D. A person seeking Coverage For Damage To Your Auto must also:

The conditions section wording may be a stretch since there are other policy provisions that permit payment to businesses such as rental car companies, but the intent is clear that this policy is designed to cover people, not businesses per se.

The PAP eligibility specifically says only vehicles owned by individuals or husband and wife are eligible. Policy language addresses issues that would be encountered by those individuals. It does not contemplate, other than from a vicarious liability standpoint, coverage for corporate or LLC exposures.

As I see it, there are only two options:  (1) lease the vehicle to the individual and use the Lessor as Additional Insured endorsement, or (2) write a Business Auto Policy and use the Drive Other Car endorsement to extend personal auto coverages beyond the subject vehicle.

Insuring corporately owned autos on a PAP is not unusual, though many companies are reluctant to do it.  The business is an insured for vicarious liability under the PAP even if not named.  Also on the plus side for liability, the PAP doesn't have a fellow employee exclusion, so there is liability coverage for injury to others who work with the insured, though not those who work for the insured.

A MAJOR coverage gap is that any vehicle newly acquired by the LLC wouldn't be covered automatically, as the policy extends automatic coverage to vehicles acquired by "you," the named insured on the declarations. The business would have to be named on the policy to get automatic coverage for acquired autos.

When the corporation isn't added as an additional insured, there is a problem with physical damage coverage. Companies only want to pay for the named insured's financial interest in an auto and resist paying for loss to vehicles they don't own that are insured on their policy. But adding the endorsement clears that up, at least the ones I've seen. Even naming the LLC as a loss payee will fix that from the standpoint of payment.

The biggest problem is the LLC not getting coverages it can only get on a Business Auto Policy. The LLC may need employers non-owned coverage. The LLC probably needs hired auto physical damage for when it rents a car. The LLC should have a BAP with Symbol 1 for liability to give them the breadth of liability coverage they need. And they can only get that when they insure all the autos they own on the BAP.

The language of the ISO PAP creates potential coverage problems, e.g., with references like "owned by a person" that's found in the definition section and "A person seeking any coverage" that's found in Part E (including physical damage claims). The policy grants the greatest coverage to "you" which is the named insured and resident spouse...is the LLC actually named on the Declarations page? If not, there could be a serious gap. The PAP automatically provides liability coverage for organizations legally responsible for an insured, so there's no need to have the LLC as an additional insured for that exposure.

This seems to be a poor decision by all involved due to the language of the form. If this vehicle is owned by and used in a business, it should be insured under a BAP. An alternative would be for the LLC to lease it to the individual (for at least 6 months and in writing) and let him insure it in his name, with the business covered by the lessor endorsement.

You need to talk to your underwriters since this presents problems under the ISO PAP program. First, such vehicles aren't eligible. Second, there is no provision for AIs in the ISO program except for lessors and the contract wording isn't suitable for naming the business directly as an insured. Third, there would be no automatic coverage for acquired vehicles since this coverage only applies to autos owned by "you." There may be other gaps depending on unique circumstances.

The simplest way is to have the business lease her the vehicle (for maybe $1) under at least a 6-month written lease and have her insure it herself using the lessor's endorsement to cover the business's interest.

The corporation could lease the vehicles back to the individual and then let him write the PAP.  But....my dad's agency does this and it has opened a huge can of words due to strange language found in the additional insured wording with one company. Even if they do this, the corporation still needs a business auto policy with at least hired/non-owned coverage. What they SHOULD have is a business auto policy with Symbol 1 for liability coverage. Here's why:

The corporation is the legal owner of those vehicles. If you write only hired/non-owned, then the BAP doesn't give the company any coverage. It's on owned vehicle and you need Symbol 1 for liability to properly cover that. True, you can add the company as an additional insured under the PAP with some carriers, but it's likely they won't have the limits high enough there. 

I understand the client's desire to save money, but purely from an insurance standpoint it's best to insure those cars on a BAP. As far as a lease goes, I don't have one and would caution against your providing your client one. That's a legal issue and he should get such a document from his corporate lawyer.

It is a big deal. The owner of the auto must show on the policy. Both the liability and physical damage are at risk. If the PAP insurer cannot do it and/or the limits are inadequate, then the business would be foolish to use a PAP and expose its assets to a liability lawsuit. Does the business have any control over the driver's choice of insurers? We all know that claims service can vary significantly from one carrier to another.

Corporately owned private passenger autos are sometimes eligible to be insured on a PAP with some carriers. If the company in question does not allow them and if the insured makes a clear misstatement about ownership in the application, then there could be problems. Even then, many PAP’s don’t allow misstatements in applications, only lying during a loss, as grounds to void coverage. 
 
Unless the interest of the corporation is noted, the company has a basis for denying a physical damage loss to the vehicle by maintaining that the policyholder doesn’t have an insurable interest in the auto since they don’t own it (although that's unlikely to hold up...there are many ways to effect insurable interest).  That’s less likely to be a problem if the insured is the sole owner of the corporation, but it has been used successfully to deny claims where the insured has put cars owned by others on their PAP. 
 
But, the biggest coverage question is what about the needs of the corporation? Although the definition of insured for liability might provide liability protection to the corporation, it doesn’t begin to provide the coverage a corporation might need. The only way for a corporation to do that is with a BAP.

Aside from all the issues discussed previously, there is a potential for a coverage gap for physical damage coverage due to the personal nature of the PAP wording. Physical damage coverage extends to "your covered auto" and "your" is defined to be the named insured and resident spouse. In one Tennessee Court of Appeals case, a separated wife had a claim denial upheld because she was no longer a "you" under that policy edition. In the case of an unnamed business, that would certainly be true in this court.

With regard to the last question, there is no standard answer for covering the business on a personal umbrella. They are all different, so you'd have to review the policy form and talk to the underwriter. It's highly unlikely they will allow the addition of a business.
 
As for insuring the business under the PAP as an additional insured, you don't mention any form numbers so I'm assuming this has been done with a company-specific form since ISO really doesn't have a form for this. There are inherent problems in issuing a personal auto policy on a vehicle owned by a corporation and not the named individual. For example, one problem is with acquired autos...coverage is triggered when "you" become owner. "You" is the named insured and resident spouse, not a business. So, if the vehicle is replaced or an additional vehicle purchased in the name of the business, there is no automatic coverage.
 
Also, many states impose statutory liability on the owner of an auto, in this case the business. The business, under an ISO policy, has vicarious liability coverage even if not named on the policy, but it appears you have named them as an AI, so the key is higher liability limits. Most likely that'll have to occur with a commerical umbrella and it's unlikely that the CUP insurer will accept the personal auto policy as underlying limits.
 
Therefore, it may be necessary to insure the vehicle under a business auto policy (BAP) which, in general, is the better way to insure a corporately-owned auto. The personal auto policy (PAP) just isn't designed to insure a corporation that owns an auto...in fact, under ISO eligibility rules, it isn't permitted. From a coverage standpoint, a PAP may be superior to a BAP for a sole proprietor, but the wording in a PAP is oriented towards individuals and families, not corporations, so it just doesn't work well.

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