Chapter 1 | Introduction to Commercial Automobile

Educational Objectives
Upon completion of this section, you should be able to:

  1. Identify a Commercial Automobile policy and its contents.
  2. Briefly explain the purpose of the four types of coverage forms that can be added to a Commercial Auto policy.
  3. Identify the sections of the Commercial Lines Manual: Division 1 - Automobile, and provide the general purpose for each of these sections.
  4. Describe the auditor's role regarding Commercial Automobile policies.
  5. Explain the purpose of the coverage forms Declarations for the Business Auto, Truckers, Motor Carriers and Garage Policies.

Introduction
Automobile Insurance is regarded as the most widely purchased form of property and liability insurance coverage. This in part is due to the overwhelming financial liability that could arise in the event of an automobile accident, resulting in bodily injuries to others, as well as the operator of the auto. Additional factors influencing the purchase of automobile insurance include the many compulsory state laws and the possibility of physical damage to the auto itself. Physical damage also provides protection against such losses as theft, fire, and vandalism.

The rates that are used to develop premium for commercial auto policies can be substantial. Because of this, it is essential that the insureds' operations are properly classified. To properly classify these types of operations, certain information must be known about the insured's business, such as:

  • The insured's use of each vehicle,
  • Each vehicle size and type,
  • The principal garaging (location) of each vehicle,
  • The business use and
  • The normal distance traveled (radius of operation).
Since all of these factors can and oftentimes do change during the policy period, the need for a premium audit arises. The premium auditor's responsibility in auditing automobile coverage is to determine the proper classification for each covered automobile. This often amounts to a worthy challenge for even the most experienced auditor: the basis of premium can be difficult to verify, the existence of a new vehicle may be difficult to discover and when records are provided they may be incomplete.

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The Commercial Auto Coverage Part
A commercial automobile is a motor vehicle that is customarily used in the business, profession or occupation of its owner. It can have two, three, four, or more wheels and is designed for travel on public roads. Within this class are many types of vehicles, such as private passenger automobiles, panel and pickup trucks, commercial tractors, trailers and semi-trailers whether or not engaged in interstate commerce.

There are circumstances, however, when some vehicles can be considered as private passenger automobiles rather than commercial automobiles. The criterion lies with the use of such vehicle. For example, a pickup truck owned by an individual and used for transportation to and from work and for pleasure purposes is considered a private passenger automobile. An identical pickup truck used by a gardener or carpenter in their business is considered a commercial vehicle.

Public automobiles, on the other hand, can be of any type motor vehicles, such as private passenger, bus, or delivery sedan, so long as they are used as public or livery conveyances. All such autos, except personal autos of individuals, can be insured under the Commercial Auto Coverage policy.

Although the main emphasis of this manual is to provide direction into the proper classification procedures and premium determination for commercial automobile exposures, this objective cannot be completed unless the reader also has a basic understanding of the policy forms, coverages and endorsements designed to cover these exposures.

The majority of commercial automobile insurance is issued through four policies under this jurisdiction of the Insurance Services Office, Inc.: (1) the Business Auto policy, (2) the Truckers policy, (3) the Motor Carriers policy, and (4) the Garage policy. The eligibility rules, rates, and state exceptions are contained in the automobile division of the ISO Commercial Lines Manual.

The Business Auto policy is used for the widest variety of commercial insurance accounts. Contractors, retail stores, service forms, bus companies and taxicabs would all use this policy form. In fact, all businesses other than truckers, motor carriers and garages would purchase this automobile insurance contract.

The Truckers policy is required for those commercial firms that meet the definition of the term trucker as defined by the Commercial Lines Manual: "A person, firm or corporation in the business of transporting goods, materials or commodities for another." Thus, a contract carrier hauling machinery as well as a national household mover would both qualify for this coverage since they are in the business of hauling goods for others.

As a result of the Motor Carrier Act of 1980 and the reduced regulatory authority of the Interstate Commerce Commission over the past several years, ISO, in late 1993 introduced a policy form similar to the Truckers Coverage Form. This coverage form is the Motor Carriers Coverage Form. The Motor Carriers policy was not introduced to replace the Truckers policy, but rather serves as an alternative to that coverage.

With the deregulation of the trucking industry, private carriers are now competing with the contract and common carriers. These private carriers previously looked to the regulated carriers for hauling and insurance coverage. Now, the private carriers are competing for that business and need a policy that will provide primary insurance coverage. The Motor Carriers policy insurance for those risks that meet the motor carrier definition of, "A person or organization providing transportation by auto in the furtherance of a commercial enterprise."

Both the Truckers policy and the Motor Carriers policy can be thought of as specialized versions of the Business Auto policy. Except for the altered definitions of its insureds for liability coverage and the added feature called trailer interchange insurance which covers the insured's legal liability for damages to non-owned trailers used by the insured, the Truckers and Motor Carriers policies are virtually identical to the Business Auto policy.

The Garage policy is designed for those companies who in their normal business operations have the automobiles of others in their care, custody and control such as automobile dealers, garages, parking lots and service stations. However, effective July 1, 2002, ISO moved the coverage for all non-dealer risks from the garage policy to the general liability policy. The distinguishing feature of the Garage policy is that it not only provides the coverages of the Business Auto policy, but it also provides for the needs associated with the Commercial General Liability policy, i.e., premises/operations and products/completed operations. It can also be modified to protect the automobiles of the customers when they are being serviced by the insured.

Regardless of the coverage form utilized, a Commercial Auto policy is similar in structure to other insurance policies. It is comprised of three basic component parts plus the addition of one or more of the coverage forms previously identified.

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Components of Commercial Auto Coverage Form
  1. Common Policy Declarations - This part provides the general information regarding the policyholder, the coverage forms selected, and the premium chargeable for the policy.
  2. Common Policy Provisions or Conditions - This part states the scope of liability assumed by the company, spell out various policy conditions, and defines certain terms appearing or covered by the policy.
  3. Endorsements - These modify policy conditions and/or coverages.
  4. One or more of the following Coverage Forms (throughout the text we will use the terms "forms" or "policy" interchangeably.):
    • Business Auto - Liability and Physical Damage - This includes most of the business autos seen on the highways today except autos owned by truckers and garages.
    • Truckers - This includes autos owned by concerns which are "in the business of transporting goods, materials or commodities for another."
    • Motor Carriers - A Motor Carrier is defined as a person or organization providing transportation by auto in the furtherance of a commercial enterprise. This includes common carriers, contract carriers, specialized carriers, and exempt carriers. Today, the difference between a trucker and motor carrier is gray and often indistinguishable.
    • Garage - Dealers and Non-Dealers - Dealers are any franchised or non-franchised dealerships; non-dealers are storage garages and public parking places, mobile home trailer dealers, commercial trailer dealers, and tow-truck operators.
An example of this policy structure is shown here for further clarification:

Declarations
Common Policy Declarations



Form
+ Common
Policy
Conditions


Form
+ Business Auto
Motor Carriers,
Garage, or
Truckers
Coverage
Form
= Commercial Auto
Insurance


Policy

Endorsements
As you can see, the standard Commercial Auto Policy will consist of: 1) Common Policy Declarations, 2) Common Policy Conditions, 3) Coverage Form Declarations, 4) One or more of the following Coverage Forms (Business Auto, Garage or Truckers), and 5) Endorsements.

Commercial automobile coverage is designed so it can be one part of a Commercial Package Policy, the same as Commercial General Liability, for example. The coverage forms, however, can also be used to cover the automobile exposures only. When only the automobile coverages are written, the insurer may combine the Common Policy Declarations and the Coverage Form Declarations into a single document.

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The CLM: Division One - Automobile
The Insurance Services Office's (ISO) Commercial Automobile Manual and Classification Plan is being used by most insurance companies and is in effect in all but a few states. The aforementioned manual is divided into the following sections:
  • Section I - General Rules (Rules 1-20)
  • Section II - Trucks, Tractors and Trailers (Rules 21-30)
  • Section III - Private Passenger Types (Rules 31-37)
  • Section IV - Public Transportation (Rules 38-47)
  • Section V - Garages (Rules 48-61)
  • Section VI - Special Types (Rules 62-87)
  • Section VII - Common Coverages and Rating Procedures (Rules 88-110)
Section I, General Rules is the section that explains the application of "Division One - Automobile." Included in this section are rules regarding:
  • Rounding Procedure for rates and premium (Rule 7)
  • Policy Cancellation calculations, both pro-rata and short rate (Rule 11); and
  • How to Classify Autos, including instructions to follow when an auto has more than one use (Rule 16).
Section II - Section VI, Classes and Types Rules clarify the eligibility and explain the premium development procedures for vehicles that may require commercial auto insurance. These five major sections provide the type and classification rules for:
  • Trucks, Tractors and Trailers, including a specific rule dealing with Truckers/Motor Carriers (Rule 24);
  • Private Passenger types, which pertain to autos that previously had to be rated according to the Personal Auto Manual. These vehicles are owned by the business but are not used for business purposes;
  • Public Transportation vehicles, such as taxis, limousine services, school, church and urban buses and van pools;
  • Garages, which includes rules for auto dealers; and
  • Special Types, which contains rules dealing with operations and autos that are not rated in the other subsections. Some examples are ambulance services, antique autos, driver training programs, fire departments, funeral directors, golfmobiles, law enforcement agencies, motorcycles, repossessed autos, snowmobiles and special or mobile equipment.
Section III - Common Coverages and Rating Procedures provides rating procedures for the most common coverages that may be endorsed onto the policy. Included in this section are rules pertaining to:
  • Non-Ownership Liability for risks other than garages (Rule 89)
  • Hired Autos, detailing the procedures to follow when the owner of the auto is providing the primary insurance (Rule 90); and
  • Physical Damage Coverage Rating Procedures on an actual cash value or state amount basis.
Manual Page Format. The CA pages of Division One - Automobile are applicable in almost all states. However, as with all manuals that are published for usage on a countrywide basis, state exceptions may exist. Therefore, the underwriter, agent, premium auditor, and audit reviewer is encouraged to become familiar with any state special rules that may apply to the account that is being underwritten or audited. State exception rules would be found on state pages with the letters CA-E. Rating information or loss cost information by state would be found on the CA-R or CA-LC pages while pages noting the different rating territories by state begin with the letters CA-T.

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Premium Determination
The previous section mentioned the Commercial Auto policy contents or set-up; just what information is needed when writing, auditing, or reviewing the policy and audit?

The clarification of policy coverages is the underwriter, agent, and premium auditor's primary concern. Is the policy covering garage dealers, non-dealers, truckers, or is it a business auto policy?

If it is a business auto policy, which autos are covered? Which states are excluded? These questions should be resolved with the insured at the time of securing coverage or before the auditor attempts to review any of the insured's records or operations.

The three sets of coverage symbols in their respective policy provisions sections will help to identify whether the policy is for business autos, truckers, or a garage. Additionally, the symbols show which vehicles are covered by the policy; i.e., "any auto", "owned autos only", "owned private passenger autos only", etc.

After the type of coverage being extended has been established, the underwriter, agent, or premium auditor is then ready to develop and classify the exposure(s).

For example, on a garage dealers policy the following information will need to be developed:
1. The number of employee rating units
  • Less than 20 hours per week
  • 20 hours per week or more
2. The number of non-employee rating units
  • Under 25 years of age (at the inception of the policy)
  • 25 years of age and over
3. The number of assigned autos
  • Private passenger
  • Trucks, tractors, and trailers
4. Pick up or delivery trips for non-franchised dealers
  • 51 - 200 miles
  • over 200 miles
5. Number of Dealer Plates
  • Dealer plate numbers
For a Garage Non-Dealers policy the information needed:
  1. Payroll Amounts
  2. Owned Autos Exposure
  3. Hired Auto Cost
  4. Non-Owned Auto Exposure
For Truckers and Business Auto policies the information needed:
  1. Owned Auto Exposure
  2. Hired Auto Cost
  3. Non-Owned Exposure

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It is important to note that exposure is to be developed for every owned auto which is in the insured's possession during any part of a policy period. Insureds operating seasonal businesses may find this unfair since they do not use some or all of their vehicles during the slow season. In these situations, it may be inconvenient for the insured to unlicense these vehicles to receive premium credit.

Instead a Suspension Endorsement may be issued suspending insurance coverages indicated on the endorsement. Reinstatement Endorsement is to be issued when the suspended insurance coverages are reinstated. Premium credit is to be allowed at audit if the period of suspension is 30 or more consecutive days.

For every auto having exposure during the policy period, determine the point of principal garaging, since the garaging location determines the basic rate for each auto. The basic rates are usually higher in more populous areas than in the less populous locations.

In the commercial auto area, it is necessary to verifying the "use" classification. You should remember that it is also easy to overload any one classification. For instance, the "Service" use class for business auto coverage has a lower rating factor than "Retail" or "Commercial". Therefore, the tendency may be to utilize the "Service" use class for exposures where this class is not applicable.

Such improprieties can lead to industry-wide statistical distortions, which in turn can cause lower rated classifications to increase and the high rated classifications to decrease.

After the policy coverages have been reviewed and the exposures properly classified, the one should proceed to prepare a detailed summary of their findings.

The summary should include a verification of all information obtained and correspondence to the agent, underwriter or rating department (if applicable).

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COMMERCIAL AUTO COVERAGE FORMS

Introduction
Having an understanding of the commercial auto exposures and types of contracts available, is a good first step in quality underwriting and auditing. However, the individual must also have a general understanding of the various commercial auto coverage forms and endorsements.

In this section, the provisions of the business auto, truckers, motor carriers and garage coverage forms will be analyzed. The objective of this section is only to provide a general interpretation and to provide a general understanding of the provisions and conditions provided. The individual should be aware of any interpretations his or her company makes that may differ from these.

Coverage Form Declarations
Declarations are used to provide pertinent information about the insured. The type of entity, named insured, coverages afforded and list of endorsements are just a few of the items you will find listed on the declarations page.

The declarations for all four Commercial Coverage Auto Forms (Business Auto, Motor Carriers, Truckers and Garage) are subdivided into various items. Each policy will be highlighted here to focus on the purpose of the specific items shown in the declarations. 1. Business Auto - Liability and Physical Damage
  • Item One - Indicates the named insured, policy number and form of business, i.e., corporation, partnership, or sole proprietor.
  • Item Two - Schedule of Coverages and Covered Autos - Indicates a series of coverages available under the business auto policy type.
  • Item Three - Schedule of Covered Autos You Own - Lists Owned Autos to be covered by the policy. In addition to vehicle descriptions, the elements of primary and the secondary classifications, the liability and physical damage premiums are also shown.
  • Item Four - Schedule of Hired or Borrowed Covered Auto Coverage and Premiums - Indicates the estimated cost of hired autos, and both liability and physical damage rates and premiums.
  • Items Five - Schedule for Non-Ownership Liability - Indicates Non-Ownership liability exposure and premium.
  • Item Six - Schedule for Gross Receipts or Mileage Basis-Liability Coverage - Public Auto Or Leasing Rental Concerns - Provides exposure amounts, rates, and premiums for auto policies rated on gross receipts or mileage basis.
2. Business Auto - Physical Damage
  • Item One - Indicates the Named Insured, Policy Number and form of Business, i.e., corporation, partnership, or an individual ownership.
  • Item Two - Schedule of Coverages And Covered Autos - Indicates The Physical Damage Coverages available under this type of a Business Auto Policy.
  • Item Three - Schedule of Covered Autos You Own - Lists Owned Autos to be covered by the policy. In addition to vehicle descriptions, the elements of primary and secondary classifications, and the physical damage premiums are also shown.
  • Item Four - Schedule of Hired or Borrowed Covered Auto Coverage and Premiums.
3. Motor Carriers
  • Item One - Indicates the Named Insured, Policy Number and form of Business, i.e., corporation, partnership, or an individual ownership.
  • Item Two - Schedule of Coverage and Covered Autos - Indicates a series of coverages available under the Motor Carrier Coverage Form.
  • Item Three - Schedule of Covered Autos You Own - Lists Owned Autos to be covered by the policy. In addition to vehicle descriptions, the elements of primary and secondary classifications, the liability and physical damage premiums are also shown.
  • Item Four - Schedule of Hired or Borrowed Covered Auto Coverage and Premium - Indicates the estimated cost of hired autos, and both liability and physical damage rates and premiums. Please note of hired autos should be separated between those used in a trucking operation and those which are not. The cost of vehicles hired from other truckers are to be excluded if hauling is done under sub-contracted hauler's permits. If hauling is done under the insured's permit, include 100% of the cost of the hire autos.
  • Item Five - Schedule for Non-Ownership Liability - Indicates non-owned auto exposure (such as an employee who uses his auto for business purpose) and premium.
  • Item Six - Trailer Interchange Coverage - Indicates the rates and premiums for the trucker's trailer interchange operations. Trailer interchange insurance covers the insured's liability for physical damage to trailers the insured is using on exchange from another trucker.
  • Item Seven - Schedule for Gross Receipts Rating Basis - Liability Coverage - Provides gross receipts exposure, rates, and premiums for truckers policies rate on gross receipts basis.
4. Truckers
  • Item One - Indicates the Named Insured, Policy Number and form of Business, i.e., corporation, partnership, or an individual ownership.
  • Item Two - Schedule of Coverage and Covered Autos - Indicates a series of coverages available under the Truckers Coverage Form.
  • Item Three - Schedule of Covered Autos You Own - Lists Owned Autos to be covered by the policy. In addition to vehicle descriptions, the elements of primary and secondary classifications, the liability and physical damage premiums are also shown.
  • Item Four - Schedule of Hired or Borrowed Covered Auto Coverage and Premium - Indicates the estimated cost of hired autos, and both liability and physical damage rates and premiums. The cost of hired autos should be separated between those used in a trucking operation and those which are not. Remember that the cost of vehicles hired from other truckers are to be excluded if hauling is done under subcontracted hauler's permits. If hauling is done under the insured's permit, include 100% of the cost of the hired auto.
  • Item Five - Schedule of Non-Ownership Liability - Indicates non-owned auto exposure (such as an employee who uses his auto for business purpose) and premium.
  • Item Six - Trailer Interchange Coverage - Indicates the rates and premium for the truckers' trailer interchange operations. Trailer interchange insurance covers the insured's liability for physical damage to trailers the insured is using on exchange from another trucker.
  • Item Seven - Schedule for Gross Receipts Rating Basis - Liability Coverage - Provides gross receipts exposure, rates, and premiums for truckers policies rate on gross receipts basis.
5. Garage - Dealers
  • Item One - Indicates the Named Insured, Policy Number and form of Business, i.e., corporation, partnership, or an individual ownership.
  • Item Two - Schedule of Coverages and Covered Autos - Indicates a series of coverages available under the garage dealers and non-dealers policy types.
  • Item Three - Locations Where You Conduct Garage Operations. Indicates the various locations where the insured conducts their business operations.
  • Item Four - Liability Coverage Premiums - shows the various rating factors, rating units and premiums for each location.
  • Item Five - Liability Coverage for Your Customers - Indicates whether or not liability insurance coverage applies to customers using garage owned autos.
  • Item Six - Garagekeepers Coverages and Premium - Indicates the basic Garagekeepers physical damage coverages on customers' autos left in the insured's care for servicing, repair, parking or storage.
  • Item Seven - Physical Damage Coverage - Types of Covered Autos and Interests in These Autos - Premiums - Reporting or Nonreporting Basis - Indicates physical damage coverages on vehicles being held for sale by the dealers, the premium may be determined on a reporting or nonreporting basis.
  • Item Eight - Medical Payments Coverage - indicates medical payments percentages and premiums.
  • Item Nine - Schedule of Covered Autos which are furnished to someone other than a Class I or Class II Operator or which are insured on a specified car basis.
  • Item Ten - Schedule of Covered Autos which are furnished to someone other than a Class I or Class II Operator or which are insured on a specified car basis.
6. Garage - Non Dealers
  • Item One & Two - Refer to Garage Dealers Form
  • Item Three - Locations Where You Conduct Garage Operations
  • Item Four - Liability Coverage - Payroll Rating Basis for Your Premises and Operations and Non-Owned Autos Used in Your Business.
  • Item Five - Garagekeepers Coverages and Premiums - Indicates the basic garagekeepers physical damage coverages on customer's autos left in the insured's care for servicing, repair, parking, or storage.
  • Item Six - Schedule of Hired or Borrowed Covered Auto Coverage and Premiums - Indicates the estimated cost of hired autos, and both liability and physical damage rates and premiums.
  • Item Seven - Schedule of Covered Autos You Own - Lists owned autos to be covered by the policy. In addition to vehicle descriptions, the elements of primary and secondary classifications, the liability and physical damage premiums are also shown.
  • Item Eight - Medical Payments Coverage - Premiums and Operations - Non-owned Autos Used in Your Business. Shows medical payments percentages and premiums for non-owned autos used in the insured's business.
  • Item Nine - Physical Damage Coverage - Autos Held for Sale - Indicates physical damage coverages on equipment being held for sale. The premium may be determined on a reporting or non-reporting basis.

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