Non-Owned Autos and What You Need To Know!

by Jeffrey Cavignac, CPCU, ARM, RPLU, CRIS, MLIS – President, Cavignac & Associates
Sally is your receptionist, and she will occasionally run errands for your company in her own car. You pay her the IRS recommended auto reimbursement, but it never crosses your mind to check Sally’s driving record or to see if Sally has insurance, let alone adequate limits of coverage.Sally is driving to Office Depot to pick up supplies, and while texting one of her friends, runs right through a red light, t-boning a small SUV. The SUV is totaled as is Sally’s car, but of much more concern are the injuries suffered by the passenger in the other vehicle. It will cost $25,000 to replace the vehicle and medical bills are estimated at $100,000. As it turns out, Sally had the California State minimum insurance limits — $15,000 for any one person injured and $30,000 if more than one is injured, and $5,000 for property damage! Sally didn’t have any physical damage insurance on her car.

But why is this your problem? You don’t own the vehicle, how can you be held responsible?

The simple answer is a legal concept known as Respondeat Superior, or in layman’s terms, “let the master answer”. Basically this means an employer can be held responsible for the actions of their employees if those actions are performed within the course of their employment.

In this example, Sally’s insurance company will pay policy limits for damage to the other car ($5,000) as well as the bodily injury ($15,000). You will be on the hook for the difference, $20,000 for the car and $85,000 for the bodily injury! You don’t have any coverage for damage to Sally’s car.

Fortunately, most businesses have what is known as Non-Owned Auto (NOA) insurance (you should check and make sure you do) which will protect an employer in a situation like this. It is important to recognize, however, that NOA coverage protects employers from their vicarious liability. It does not protect the employee. Employees need to rely on their own insurance. After all, the vehicle belongs to them, and they are responsible for any liability arising out of their vehicle’s use. It should also be pointed out that NOA only provides liability coverage. It does not cover damage to an employee’s auto. Once again, employees must look to their own policies for physical damage insurance coverage.

If you are an employer, it is prudent risk management to proactively manage this exposure. You might consider including a provision addressing this issue in your employee handbook. Note that the required limits should be evaluated based on each company’s unique circumstances.

Sample Provision*

When it is necessary for a staff member to use his/her own vehicle for business travel, mileage will be reimbursed by the firm at the current IRS rate. Use of personal vehicles for business travel needs to be approved by the employee’s supervisor. It is the supervisor’s responsibility to insure that the staff member driving on company business has (1) a valid driver’s license and an acceptable driving record, and (2) proof of insurance for his/her automobile. Any employee using his/her automobile on behalf of the company should carry minimum bodily injury limits of $250,000 per person, $500,000 for each accident, and property damage limits of $100,000 for each accident. A $500,000 combined single limit will also satisfy this requirement.

Please note that the company does not provide any liability coverage for you. In addition, if you are involved in an accident, the company does not provide any physical damage coverage to your automobile. You must look to your own insurance company for this coverage.

Non-Owned Auto liability coverage is an important element of every employer’s insurance program. A business that does not own vehicles is not exempt from auto liability exposure.