Just who are insureds anyway?

Just who are insureds anyway?

Malecki, Donald S

It is difficult to understand the rationale for some of the decisions made by people in arranging their auto insurance, particularly those who either own a business or have some business involvement with their autos. Some of the arrangements may be undertaken to obtain tax advantages, but they also can create monumental insurance problems.

Leasing an auto to employer

An example is the case where a wife and her husband had joint ownership in a van. The wife, who was both an employee and a member of the board of a machine tool company, leased the van to the machine tool company. Pursuant to this lease, the machine tool company was required to provide and pay for all liability insurance on the vehicle in an amount not less than that required by the state’s financial responsibility law.

This company therefore purchased a commercial auto policy that was amended with an endorsement titled “Drive Other Car Coverage–Broadened Coverage for Named Individuals.” The wife was listed in the schedule of listed individuals on this endorsement.

The dispute arose after the wife was involved in an accident while driving the van. The insurer providing the commercial auto policy issued to the machine tool company denied coverage because the DOC endorsement excluded the coverage of owner and operator. The endorsement read in part:

B. CHANGES IN LIABILITY COVERAGE

1. Any “auto” you [machine and tool company] don’t own, hire or borrow is a covered “auto” for LIABILITY COVERAGE while being used by an individual named in the Schedule or by his or her spouse while a resident of the same household except:

a. Any “auto” owned by that individual or by any member of his or her household.

The above endorsement rules out coverage when the individual named in the endorsement is also the owner of the vehicle. Since the machine tool company’s commercial umbrella policy was follow form of the underlying auto policy, no coverage applied under the umbrella policy either.

The apparent saving grace in this case of Cincinnati Insurance Company v. Lamonte, et al., 644 N.E.2d 136 (Ct.App.IN 1994) was that the husband and wife had a personal umbrella liability policy. However, this case did not address the issues of this policy nor the result.

Briefly, drive other car coverage is a “perk” coverage afforded to those employees who are provided with a company-owned auto but who do not personally own any auto. This coverage protects the employee personally while operating a auto as a permissive user of an otherwise uninsured or underinsured auto of another.

The question is: If drive other car coverage does not apply to an employee who leases his or her auto to the employer what, if any, document will fill that need? One can rule out the “Individual as Named Insured” endorsement, “Employee as Insured” endorsement, and “Lessor as Insured” endorsement. The first one does not really qualify for the corporate auto policy and the other two endorsements do not quite fit the bill either.

The answer to this somewhat unusual circumstance is the standard ISO endorsement titled “Employee as Lessor” CA 99 47. This endorsement reads:

A. Any “auto” described in the Schedule or in the Declarations will be considered a covered “auto” you own and not a covered “auto” you hire, borrow or lease under the coverage for which it is a covered “auto.”

B. While any covered “auto” described in the Schedule or in the Declarations is leased to you by one of your employees, WHO IS AN INSURED is changed to include that employee as an “insured.”

D/B/A sole proprietorship

For some strange reason, some individuals who are in business for themselves and who use fictitious names for their businesses (e.g., Joe Doe doing business as Dough Company) are under the mistaken impression that there is a distinct legal difference between the company and the sole proprietor. In fact, some of these people have the impression that reference to “company” is the equivalent of “corporation.”

As a general rule, however, an individual cannot conduct business as a corporation without complying with certain legal requirements, not simply by choosing a company name under which to operate. A case in point is Allstate Insurance Company v. Willison, 885 P.2d 342 (Colo.Ct.App. 1994).

The individual in this case was a sole proprietor of a business that bought, sold, traded and serviced RV trailers and motor homes. However, his sole auto coverage was under a personal auto policy.

The problem arose when he acquired ownership to a six-wheel motor home that was titled in the name of the sole proprietorship. While its owner was operating it, he was involved in an accident and sought protection under his personal auto policy. This policy provided coverage for “insured autos” defined to mean (1) autos listed on the declarations page, (2) newly acquired autos provided notice is given within 60 days of such acquisition, (3) substitute autos not owned by the insured, and (4) a nonowned auto used by the named insured with the owner’s permission.

The insured here maintained he did not own the vehicle (i.e., the sole proprietorship owned it) and that it was not furnished or available for his regular use. The lower court agreed with the insured.

But the higher court overturned that decision and held that the motor home could not be subject to coverage under the personal auto policy as a non-owned auto. The court’s rationale in part was that a sole proprietor is a form of business in which one person owns all of the assets of the business, in contrast to a partnership or corporation.

It therefore followed that the vehicle was owned by the individual using his trade name. Therefore the vehicle was not a “nonowned auto” under his personal auto policy. The court also stated that the individual’s use of the trade name, his policy of not using the vehicle, and the fiction of giving himself permission to use it, do not require any different result.

The sole proprietor should have added the motor home to his personal auto policy or, with the underwriter’s willingness, he could have purchased a business auto policy with an “Individual as Named Insured” endorsement to give the policyholder the equivalent of both business and personal auto coverage.

Newly acquired auto

Sometimes when there is no other alternative for obtaining coverage, some people will maintain that the vehicle is newly acquired in an effort to get the protection sought.

In one case a father and son were “doing business as” under two company names. The business auto policy covered a pickup truck, owned by both of them, which was later deleted from the policy. This pickup truck was subsequently involved in an accident while being operated by the son and coverage was sought under the policy that once covered this vehicle.

The son maintained that since he acquired ownership to that truck, registered it in his own name and reported its acquisition to the insurer within 30 days, the truck was covered under the policy.

The business auto policy stated that when the words “you” and “your” are used in the policy it means “the named insured or name shown in the declarations page.” Thus, by substituting the definition for the word “you” in the newly acquired auto provision, the newly acquired auto refers to both the father and son, which is not the case in question.

In essence, said the court, the son is trying to have a strictly personally owned vehicle covered under the business policy and this is forbidden under the policy.

Legal representative

Although it is not often that a legal representative seeks protection under an auto policy, coverage generally is there if it needs to be. But it is important for legal representatives (and their insurance representatives) to understand that the coverage is limited to the legal representative’s role.

In the case of Zappe v. Trinity Universal Ins. Co., 631 N.E.2d 175 (Ohio App.2 Dist.1993) an executor brought an action against the insurer of the decedent’s auto after an accident involving the auto’s use by the legal representative’s daughter.

Specifically, the son was an executor of his father’s estate. While acting as fiduciary, he entrusted the vehicle to his daughter who was involved in an accident on the way home from school. Coverage was sought for direct and accidental loss to the covered auto caused by collision, and for liability coverage based on the definition of “insured” which includes “any person using the covered auto.”

The insurer of the estate’s auto denied coverage because its use was beyond that within the scope of the legal representative’s responsibility. The policy provision in question read in part:

…if a named insured shown in the Declarations dies, coverage will be provided for:

1….

2. The legal representative of the deceased person as if a named insured shown in the Declarations. This only applies with respect to the representative’s legal responsibility to maintain or use “your covered auto.”

Since the auto at the time of the accident was not related to the executor’s legal responsibility to maintain or use the vehicle of the named insured (decedent), the court stated that “it was beyond comprehension, under the circumstances, that the insurance policy afforded [the daughter] any more coverage under its liability provisions than it provided for her father under the collision provisions.”

Based on some of the insurance problems confronted by people, one wonders whether the advice of an insurance representative can be as all encompassing as to foresee some of the legal entity entanglements that can occur. In many cases, the advice of legal counsel also is required. But it appears that some people think they can solve their own complex, legal problems and “pocket” the savings.

Donald S. Malecki, CPCU, an independent insurance and risk management consultant, is the author and co-author of nine books on insurance and risk management. He serves on the Society of Risk Management Consultants’ board of directors and chairs the legislative committee.

Donald S. Malecki, CPCU, an independent insurance and risk management consultant, is the author and co-author of nine books on insurance and risk management. He serves on the Society of Risk Management Consultants’ board of directors and chairs the legislative committee.

Copyright Rough Notes Co., Inc. Apr 1995

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