Chapter 4 | How to Classify Non-Owned and Hired Automobiles
Upon completion of this section, you should be able to:
- Define the terms "Non-Owned" and "Hired Autos."
- Determine the premium base for Non-Owned and Hired Autos.
Quite often, businesses find it necessary to hire, borrow or lease vehicles, for use in their operations. These situations call for special handling by the underwriter, agent and auditor when determining premium charge. Two such situations are the treatment of 1) Non-Owned autos and 2) Hired Autos.
NON-OWNED AUTOS (RULE 89)
Non-owned autos are autos which are not actually owned by the insured, but used in the insured's business in some capacity. A clerical employee using her own car to make daily trips to the post office to pick up and deliver business related mail is construed from the carrier's point of view to be operating a non-owned auto. Even though the employee's own personal policy covering the auto would normally cover the employer as an additional interest, the employer cannot be certain that such coverage is adequate in every circumstance.
Commercial auto Coverage Symbol 9 on the Declarations extends liability coverage only to Non-Owned Autos. Note that, when Coverage Symbol 1 (any auto) appears on the Declarations, coverage is extended automatically for Non-Owned Autos. Coverage can be excess or on a primary basis.
The non-owned autos premium is based on the total number of employees of the insured at all locations. For social service agency risks, the company representative is to determine the total number of volunteers at all locations who regularly use their own autos to transport social service clients in connection with the agency's program.
The company representative can review payroll records, quarterly unemployment tax reports, 1099's or any other document that will establish the number of employees. Non-owned coverage is not a large premium item; most policies provide this coverage at a minimum premium. The accuracy of the policy estimate should be verified since the information sources will have been reviewed to complete other types of audits (workers' compensation or general liability) or are readily available. In most cases this total will be an average of employees by week, month, or quarter since many employers have fluctuating staff levels. An example to illustrate follows:
Total for policy period
|Number of Employees
The average total number of employees in this example is 29. The average number of employees can also be determined by calculating the average based on the beginning and ending number of employees. Note: the method used for determining the average number of employees is based on specific company guidelines. The above are only suggestions; refer to your company for auditing procedures.
There is a different premium charge based on the number of employees in five ranges:
More than 1000
HIRED AUTOS (RULE 90)
Hired Automobiles includes automobiles that are leased, hired, rented, or borrowed by the named insured, except if done so from any employee, partner, or members of their households.
The policy includes Hired Auto information in the Schedule of Hired or Borrowed Covered Auto Coverage and Premium section of Item Four. Coverage can be on an excess or a primary basis. The schedule lists by state the estimated Cost of Hire, rates, and premium. Coverage is activated by Coverage Symbol 8 and can be used by itself or with Coverage Symbols 2, 3, 4, 7, or 9 for liability or physical damage coverage. Physical damage is on a "refer-to-company" basis. If physical damage is provided, it is excess unless the appropriate box in Item Four of the Business Auto Coverage Form Declarations is checked. Once again coverage is automatic when Coverage Symbol One (any auto) is used.
Excess vs. Primary
Different rating instructions apply depending upon which party is responsible for the primary insurance.
- If the insured is responsible for providing primary insurance on all autos hired, leased, loaned or furnished and if the length of the lease is six months or more, classify these autos as if they are owned by the insured. In this situation, the Additional Insured - Lessor Endorsement (CA 20 01) is available and identifies the lessor (vehicle owner/leasing company) as an additional insured on the policy. The otherwise applicable liability rate (as if the auto were owned) is increased by a factor stated in the manual.
- An alternative endorsement, Hired Autos Specified as Covered Autos You Own (CA 99 16) includes hired autos that will be considered owned autos and the owners of such autos are covered as insureds under the policy for liability insurance with respect to that auto only.
- If an employee leases their auto to the employer, the Employee As Lessor endorsement (CA 99 47) makes this leased auto an owned auto under the employer's auto coverage. The employee is then an insured.
- If the lease is for a period less than six months, refer to your company for proper classification.
Audit procedures for specified vehicles (determining the primary and secondary classifications) as discussed previously, apply when a Hired Auto is treated as an owned auto. It is essential to develop all the necessary information to correctly classify the vehicle in question.
If the owner of the Hired Auto is responsible for primary insurance and our insured's coverage is excess, the exposure base is Cost of Hire. The Cost of Hire is defined as the total amount incurred for the hire of automobiles not including charges for services performed by Motor Carriers or property or passengers which are subject to compulsory insurance requirements of any Motor Carrier Law or regulation. The Cost of Hire should be obtained separately for each state where the insured is doing business; the rates apply per $100. Borrowed vehicles, which incur no Cost of Hire are covered at no charge. Rule 90 in the Commercial Lines Manual, Division One - Automobile provides the following in the definition of Cost of Hire:
- Total cost of all automobiles, trailers, semi-trailers, and service-utility trailers.
- Vehicles driven by employees of the insured.
- Vehicles operated by hired drivers with or without the insured's supervision.
- Vehicles loaned to or borrowed by the insured.
- Costs for unregulated owner-operators.
- Automobiles owned or registered in the name of an employee or agent of the named insured who receive an operating allowance for the use of such automobiles.
- Common or contract Motor Carriers subject to compulsory insurance requirements of a public authority regulating Motor Carriers such as the Department of Transportation (formerly, this was the Interstate Commerce Commission (ICC)) or Public Utilities Commission (PUC).
- Public automobiles (other than social service agencies), moving van associations and freight forwarding operations.
- Charges for drivers when the vehicle is hired without a driver.
- Vehicles hired, leased, loaned, furnished or borrowed for the named insured and for which the named insured is responsible for the primary insurance.
When developing the exposure for Hired Auto coverage on the Cost of Hire basis, the auditor must review all expense journals, the general ledger and/or disbursement journal. Since the Cost of Hire is often listed under many different accounts, with a wide variety of titles, an in-depth investigation and analysis is necessary. Most policies provide Hired-Auto coverage at a minimum premium. The accuracy of the policy estimate should be verified since the information sources will have been reviewed to complete other types of audits (workers' compensation or general liability) or are readily available. The minimum charge for Hired Auto is separate from the amount charged for Non-Owned coverage and the advance premium is the earned premium unless there is a substantial change in exposures during the policy period.
Additional Insured - Lessor
This endorsement requires the company representative to treat a specified Hired Auto in the same manner as an owned auto. This endorsement is issued when the insured leases an auto from a leasing concern for a period of a year or more, and the leasing agreement requires the insured to provide primary insurance on that auto. With the attachment of this endorsement, the company representative should determine the actual Cost of Hire for the specified auto, as defined previously.
Hired Autos Specified As Covered Autos You Own
This endorsement requires the company representative to treat a specified Hired Auto in the same manner as an owned auto. The company representative should determine which autos are to be included as covered and assign the appropriate rating factors.
Employee As Lessor Endorsement
When an employee leases their auto to the employer, this endorsement requires the leased auto to be handled like an owned auto. The employee is then considered an insured.