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Insuring Hired Autos for Liability and Physical Damage

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Insuring Hired Autos for Liability and Physical Damage

Image courtesy of [Sura Nualpradid] / FreeDigitalPhotos.net

Like many small businesses, your company may utilize rental vehicles. Whether you use them frequently or only once in a while, it is important to ensure they are adequately covered under your commercial auto policy. Hired autos can be covered for liability, physical damage or both.

What is a Hired Auto?

The standard ISO commercial auto policy defines hired autos as only those autos you lease, rent, hire or borrow. The definition excludes any auto you lease, rent, hire or borrow from an employee, partner, member (of a limited liability company), or a member of that person's family. You means the policyholder listed in the declarations. Thus, a vehicle qualifies as a hired auto only if it is leased, rented, hired or borrowed by you, the named insured.

Liability Coverages

When you insure hired autos for liability, the coverage extends to you, the named insured, and to anyone else driving the auto with your permission. For example, suppose that Susan, one of your employees, will represent your company at a convention in another town 250 miles away. Susan has to drive to the convention so your company rents an auto for her from an auto rental agency. Susan inadvertently causes an auto accident on her way to the convention, and the driver of another car is injured. If the injured driver sues Susan and your firm for bodily injury, your hired auto coverage should cover the suit.

When your rent an auto on behalf of your firm, the rental agency will ask you to sign a rental contract. The contract will likely require you to assume liability for bodily injury or property damage sustained by third parties as a result of auto accidents you cause during the term of your rental agreement. This assumption of liability is covered under the standard auto policy with two exceptions. First, there is no coverage for any liability you assume for damage you cause to the rental vehicle itself. (You may elect to insure vehicle damage under hired auto physical damage coverage.) Secondly, there is no coverage for liability you assume under a contract in which you rent a vehicle with a driver.

Hired auto liability coverage applies on an excess basis. That is, your hired auto liability coverage applies after other collectible insurance has been exhausted. (The only exception is a hired trailer; if it's attached to an auto you own, the trailer is covered on a primary basis.) For instance, the rental agency may have been obligated to provide you the state-required minimum liability limit when you rented the vehicle. Your hired auto coverage will apply after that coverage has been used up. Note that your personal auto coverage is unlikely to cover an auto rented in the name of your business.

Physical Damage Coverage

You may elect to insure hired autos (other than those hired with a driver) for physical damage under Comprehensive and/or Collision coverage. A deductible will typically apply. Unlike liability coverage, physical damage coverage on hired autos is covered on a primary basis.

If a vehicle you hire is damaged in an accident, the rental agency will be unable to rent the vehicle to anyone else while the auto is being repaired. As a result, the rental agency may bill you for “loss of use”. Under the standard commercial auto policy, Loss of Use coverage is automatically provided if you purchase physical damage for hired autos. The policy provides up to $20 per day subject to a maximum of $600 (30 days). If the rental agency charges you more than $20 per day, you will be stuck paying the remainder as an out-of-pocket loss. Loss of Use coverage does not apply to autos rented with a driver.

Vehicles Rented in Employee's Name

Suppose that Susan (in the previous example) rents an auto for her business trip. When she fills out the rental agreement Susan lists herself as the renter. While driving to the convention Susan accidentally sideswipes another car. The driver of the opposing vehicle is injured in the accident and sues Susan and your firm. Will the lawsuit be covered under your hired auto coverage?

Technically, an auto hired by an employee is not a hired auto but a non-owned auto. Some insurers may cover the vehicle as a hired auto anyway, but others may be sticklers. If your policy covers non-owned autos then your company should be covered for the suit. However, your insurer may refuse to cover Susan. Under most commercial auto policies, employees are not insureds while driving non-owned autos. Fortunately, employees who rent autos in their name may be covered by an endorsement called Employee-Hired Auto.

Leased Autos

ISO rules distinguish between autos hired for a short term and those hired on a long-term basis. The term hired auto means a vehicle rented or leased for a period of less than six months. Autos rented for six months or more are usually referred to as leased autos. Leased autos are typically added to the policy via an endorsement and covered as if they were owned vehicles. That is, they are covered for liability and physical damage on a primary basis.

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