Rounding a curve, a car crosses the center line and hits a 70-year-old motorcyclist. Amazingly, the biker isn't killed, but he does suffer severe bodily injury. During the claim investigation, the carrier discovers that the vehicle was not owned by its insured, a corporation. It was owned individually by the driver, the corporation's president's wife. Although the car was scheduled on the business auto policy, the carrier rightfully denied the claim filed against the driver.

Another example: an insurance agent leases his personally owned vehicle to the corporation. After his 19-year-old daughter rear-ends a BMW, the truth of the arrangement was discovered: the agent had given the corporately insured vehicle to his daughter to drive while away at college. This time, the carrier had no choice but pay the claim, though this coverage extension was improper.

Personally owned autos belong on a personal auto policy, but occasionally a commercial insured intentionally or unintentionally includes one or several personally owned autos on its business auto policy. Commercial clients may do this for many reasons.

When a commercial client includes a personally owned auto on the BAP, the agent must ascertain the legitimacy of the vehicle's inclusion on the BAP—sometimes its inclusion is improper or just plain fraud. So, when is the inclusion of a personally owned auto on the BAP legitimate and proper? And what are the steps to do so?

(Im)Proper Assumption

Before addressing legitimacy, one dangerous assumption must be tackled: ownership. Never assume that every vehicle listed on the auto schedule is owned by the insured. Further, don't assume that any auto the insured attempts to add during the policy period is owned by or properly leased to the named insured.

Never include a vehicle on the auto schedule or add any vehicle without asking one simple question, “Who owns the vehicle?" The answer may reveal one or more personally owned vehicles. If so, the agent must either remove them from the BAP or take steps to properly extend protection from the BAP to the auto and its owner.

Once ownership is established, the agent can decide if the inclusion of a personally owned auto on the BAP is legitimate and proper.

Legitimacy of Adding a Vehicle to the BAP

How does the agent establish legitimacy? Ask questions!

Do not add a personally owned auto to the BAP without asking five key exposure questions:

1) Is the vehicle owned by an employee? If “no," do not add the auto to the BAP. If “yes," proceed cautiously.

2) Is the vehicle owner the vehicle's only driver? If “no," list the other drivers. If there are multiple drivers, those drivers must somehow relate to the business for the vehicle to be included on the BAP.

3) What are the employee's duties? If their duties require regular use of a vehicle—more than 50% of the time—adding the vehicle may be legitimate. If this is not the case, the personally owned auto probably should not be added to the BAP.

4) What is the percentage of personal versus commercial use? If personal use is the majority, the vehicle's addition to the BAP is improper and should not occur. This question should be used when a corporate officer is adding a personally owned auto to the BAP.

5) Is the employee closely related to any owner or executive officer? A “yes" response does not make the vehicle's inclusion improper; all other facts previously gathered must be considered before making the final decision.

If adding the personally owned auto to BAP is deemed legitimate and proper, two steps must be taken to confer coverage to the vehicle and the owner:

 1) The creation and execution of a formal lease agreement.

 2) The CA 99 47 – Employee as Lessor endorsement must be attached.

A Formal Lease Agreement

Two or three sentences stating that an employee owns the vehicle and is leasing it to the company does not constitute a formal lease. Because a lease agreement is a legal document subject to contract law and creates dual ownership, the below information should be addressed or provided in the agreement.

1) A description of the vehicle.

2) A description of the individual leasing the car to the company, including name, position in the company and business purpose for adding the vehicle.

3) Agreement by the corporation to provide insurance protection and to what extent, such as full coverage or liability only.

4) Responsibility for loan payments, if any.

5) Clarification regarding who is responsible for maintenance and upkeep.

6) Responsibility for paying property taxes.

7) Non-permitted use of the vehicle, including permitted and nonpermitted drivers. Remember, the BAP is providing 24/7 coverage on the vehicle.

8) The period of the lease agreement, which can be indefinite.

9) Whether financial compensation is required during the lessee, such as mileage, fuel or monthly fees.

10) Who is responsible for paying traffic fines.

11) The requirement that the lessor has a PAP for any other owned vehicles. If no other autos are owned, a named, non-owner policy is necessary to confirm the CA 99 47 is not being used to avoid a PAP. The auto being added to the CA 99 47 would not be on the PAP.

12) Properly notarized signatures. If the contract is not notarized, it is acceptable to have the signatures attested to and dated by a third-party witness.

“Acceptable" lease agreements contain information addressing points 1, 2, 3, 8, 9, 11 and 12. If any of this information is missing, the lease is not acceptable and the personally owned auto should not be scheduled on the policy. “Above Average" leases are those that contain everything found in an “Acceptable" lease plus answer 7 above. A “Superior" lease addresses all 12 points.

These requirements are not intended to put you at odds with your insured. If the carrier doesn't ask for it, the requirement of a formal lease becomes an agency decision. However, remember the exposure now being placed on the BAP carrier. As an agent, you are fulfilling your duties to your carrier. You are also helping your insured by explaining the ramifications of their decision and are trying to help them avoid potential legal problems.

Further, the agent should not write or approve any legal document. Give the insured a checklist of what needs to be included in the lease agreement, and advise them to have an attorney draw up the lease. They may choose to write it themselves, but don't make it the agency's problem or responsibility.

Remember, “leaseback" agreements create dual ownership of the vehicle but make the named insured solely responsible for providing insurance protection. Ultimately, the named insured—the business—is providing coverage to the “leased" auto on a primary basis, 24/7 and regardless how it is being used. This fact places the carrier on the hook for any loss caused by the listed vehicle. Such increased exposure requires a detailed lease, and the BAP carrier is within its rights to ask for such a lease.

With the lease agreement in place, the vehicle owner is contractually protected. But, if the contract's indemnification wording is unclear, it can leave potential legal issues. To assure there are no gaps in protection for the vehicle's owner, the CA 99 47 must be attached.

A Coverage Gap to Consider

Remember the auto and motorcycle accidents highlighted at the beginning of the article? Arguably, the driver of the car was not using the vehicle for the benefit of the company when the accident occurred. Although it was a listed vehicle, the carrier denied the claim against the driver. Below is a paraphrased excerpt from the deposition explaining why the claim was denied:

Lawyer: So, you are telling me that a listed auto is not a covered auto?

Expert witness: No, I'm telling you the person driving the vehicle is not a covered driver. If the company, the named insured, was sued, the policy would provide coverage. However, it's not the company being sued, it's the driver and owner of the vehicle—and she has no coverage under the corporation's business auto policy.

Does the unendorsed BAP support this denial? Yes. The exclusionary wording reads:

Who Is An Insured

The following are “insureds":

 b. Anyone else while using with your permission a covered “auto" you
 own, hire or borrow except:

 (1) The owner or anyone else from whom you hire or borrow a covered “auto."

 (2) Your “employee" if the covered “auto" is owned by that “employee" or a member of his or her household.

Regardless of the owner's employment status, the exceptions excluded her from coverage. By asking the right question, this coverage gap could have been avoided. Knowing to whom a vehicle is titled allows the agent to make necessary recommendations or arrangements.

Could the owner of the vehicle have been protected by the policy? Yes, if the facts indicated that the addition of her personally owned auto was legitimate, a formal lease agreement was in place and the CA 99 47 – Employee as Lessor endorsement had been attached.

The CA 99 47 – Employee as Lessor Endorsement

PAPs are designed to provide primary protection for the vehicle owner and anyone responsible for the actions of the owner—up to and including his employer. To maintain the primacy of the PAP, the BAP specifically excludes from insured status any employees using their personally owned vehicle on behalf of the business. However, use of a formal lease and attachment of the CA 99 47 endorsement fully and unconditionally eliminates the PAP's primacy.

Part A in the CA 99 47 removes any question of ownership or “title." The auto scheduled on the endorsement becomes an owned vehicle under the policy as follows:

A. Any “auto" described in the Schedule will be considered a covered “auto" you own and not a covered “auto" you hire, borrow or lease.

Part B specifically extends insured status to the employee who leases the auto to the employer—even though the endorsement does not require the employee's or owner's name be provided, nor is there a place to provide the information: 

B. While any covered “auto" described in the Schedule is leased to you by one of your “employees," the Who Is An Insured provision under Covered Autos Liability Coverage is changed to include that “employee" as an “insured."

Although the owner's name is not required for the endorsement, the underwriter still requires motor vehicle records. The owner is underwritten like any other driver and possibly more stringently since the carrier is now providing 24/7 coverage while using the scheduled auto.

Chris Boggs is Big “I" executive director of risk management and education.