Business Auto Policy Declarations
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How the blanks in the Business Auto Policy Declarations are filled in determines the extent of coverage under the policy. The business auto declarations are, therefore, somewhat lengthy, but the declarations are a very important component of the BAP. This is the part of the policy that is unique to a particular named insured. The declarations, often called the “dec” page or “decs,” consist of six items.
Item One—Named Insured, Form of Business
Item One lists the named insured and indicates whether that named insured is a corporation, a partnership, a limited liability company, an individual, or some other type of organization, such as an unincorporated social or fraternal organization.
The insurer’s name and maybe the agent’s or broker’s name are also included in Item One. In addition, the named insured’s mailing address, the policy period, premium for the policy, and perhaps a list of endorsements will be shown. Finally, the decs may provide a space for the authorized representative of the insurer to countersign the policy.
Item Two—Schedule of Coverages and Covered Autos
One of the most important parts of the contract, Item Two contains a schedule of the various coverage’s available under the policy. Next to each coverage is a space for one or more “symbols” to indicate which autos are to be considered “covered autos” for that coverage. The “symbols” used in the BAP are not literally symbols, but rather numbers; however, they are always referred to as symbols. There also is space for the applicable limit of insurance for each coverage. In most cases, a dollar amount will be entered in this space. However, in the case of physical damage coverage, the dollar amount refers not to the limit of insurance but to the amount of the deductible. (The limit of various no-fault coverage’s is shown on the appropriate no-fault endorsement.) Finally, a premium charge is entered in the space for each coverage provided under the policy.
Business Auto Policy Declarations: Explained Coverages listed under Item Two of the declarations include liability, personal injury protection, added personal injury protection, property protection insurance (a form of no-fault coverage applicable only in Michigan), auto medical payments, medical expense and income loss benefits (applicable only in Virginia), uninsured motorists (UM), underinsured motorists (UIM), physical damage comprehensive, specified causes of loss, collision, and towing and labor. A number of the coverage’s listed under Item Two are actually provided by endorsement to the Business Auto Coverage Form and not by the coverage form itself. Liability and the various physical damage coverage’s listed are the only coverage’s fully contained within the coverage form.
Item Two clearly states that the policy provides only those coverage’s for which a premium charge is shown in the premium column and further states that each of the coverage’s will apply only to the autos that are shown (by symbol) as covered autos. Therefore, it is very important that the various coverage’s and symbols be understood and selected with care. A typographical error or the selection of the wrong symbol could result in problems in the event of a claim.
Ten numerical symbols, labeled 1 through 9, and symbol 19, described below, represent the options for “covered auto” status. If none of these symbols fits a particular need of the insured or insurer, the two parties have the option of agreeing to a mutually acceptable description and labeling it symbol 10; the Covered Auto Designation Symbol (CA 99 54) endorsement is designed for that purpose.
Some of the symbols listed below are restricted to a particular type of coverage (e.g., Symbol 5 for no-fault), some are available for any type of coverage (e.g., Symbol 7), and some are intended to be restricted to a certain type of coverage (e.g., Symbol 1 for liability) even though a reading of the policy does not necessarily indicate such restriction. Some insurers may be flexible regarding the use of symbols such as Symbol 1 if the use makes sense and a method of charging for the exposure can be agreed on.
Symbol 1—Any Auto
Symbol 1 is designed to be used only for liability coverage. When it is selected, any auto, whether owned, non-owned, hired, or otherwise, is a “covered” auto. This is the broadest symbol available and is thus preferred by most insureds. For the same reason, an insurer may prefer to avoid the symbol, especially if there is a possibility of its providing coverage without the opportunity of collecting a premium charge commensurate with the exposure. When this symbol is used for liability, no other symbol need be shown for liability coverage.
Symbol 2—Owned Autos Only
Symbol 2 covers all autos owned at the beginning of the policy period plus any owned autos acquired during the policy period. If Symbol 2 is used for liability coverage, any non-owned trailer attached to an owned power unit is also a covered auto. This symbol often is used to designate UM, UIM, and physical damage collision coverage’s. The symbol may, of course, also be used to activate liability and medical payments.
Symbols 3 and 4—Owned Private Passenger Autos and Owned Autos Other than Private Passenger Autos
Symbols 3 and 4 are similar to Symbol 2 in that they apply only to autos owned by the named insured. Symbol 3 applies to private passenger autos, while Symbol 4 applies to all other types of autos. In addition to autos the insured owns at inception of the policy, either of these symbols affords automatic coverage for autos of the same type acquired during the policy period and also for non-owned trailers. The symbol for private passenger autos frequently is used to designate auto medical payments and physical damage comprehensive coverage, and for towing and labor coverage when that coverage is purchased. The most common use for the symbol for autos other than private passenger autos is for physical damage specified causes of loss coverage.
Symbols 5 and 6—Owned Autos Subject to No-Fault and Owned Autos Subject to a Compulsory Uninsured Motorists Law
Because Symbols 5 and 6 are used to denote mandatory coverage’s (Symbol 5 for no-fault and Symbol 6 for UM), they can only be used in a few states. This is not immediately clear to the person who reads only the title of the Symbol 5 description shown above, but it can be seen by reading the more detailed descriptive paragraph that Symbol 5 refers only to owned autos that are required to have no-fault benefits in the state in which they are licensed or principally garaged. The use of Symbol 6 can also be confusing even though the title of the symbol clearly refers to a compulsory uninsured motorist law. The source of possible confusion lies in the fact that most states’ UM laws begin by stating something to the effect that no policy shall be issued in the state unless coverage is provided for (UM). After that initial wording, some states go on to say that the insured may reject such coverage; while rejection is not an option in other states. It is only in those latter states where Symbol 6 may be used.
Symbol 7—Specifically Described Autos
Symbol 7 provides coverage only for autos that are specifically described in a schedule of covered autos in the policy declarations (Item Three). If this symbol is used for a particular coverage, a newly acquired auto will be included for that coverage only if:
•The insurer already provides that coverage on all autos the named insured owns, or the auto replaces one that previously was owned and insured for the same coverage; and
•The insured informs the insurer within 30 days after acquiring the new auto that coverage is desired on it.
When Symbol 7 is used for liability coverage, liability arising from nonowned trailers attached to a power unit described in Item Three of the declarations is covered.
Symbol 8—Hired Autos Only
Symbol 8 applies coverage only to autos that the insured leases, hires, rents, or borrows. Note that borrowed vehicles are considered hired autos. Some insureds mistakenly believe they have no hired autos exposure because they never rent or lease a vehicle, even though they might have reason to borrow one. Symbol 8 does not include any auto that is leased, hired, rented, or borrowed from an employee of the insured, a partner, a member of a limited liability company, or members of their households. This symbol is designed to activate liability and physical damage coverage.
Certain exclusions and restrictions apply to autos that are leased, hired, rented, or borrowed with a driver. For example, the policy precludes liability assumed under any contract or agreement unless the contract or agreement is an “insured contract,” as defined, or unless the insured would be liable in the absence of the contract or agreement. A contract for the loan, lease, or rental of an auto with a driver is by definition not an insured contract. Thus, while the use of Symbol 8 (or Symbol 1, any auto) for liability coverage affords coverage for the insured’s direct liability for an auto hired with a driver, it does not afford contractual liability in such a situation. There is no endorsement to provide such coverage.
Hired auto physical damage coverage does not apply to any auto leased, hired, rented, or borrowed with a driver. A separate Autos Leased, Hired, Rented or Borrowed with Drivers—Physical Damage Coverage (CA 20 33) endorsement is available to provide physical damage coverage for an auto hired with a driver.
Symbol 9—Non-owned Autos Only
Symbol 9 gives “covered auto” status to autos used in connection with the insured’s business if they are not owned, leased, hired, rented, or borrowed by the insured. This symbol includes autos owned by the insured’s employees, partners, members of limited liability companies, or members of their households while such autos are used in the insured’s business or personal affairs. Symbol 9 is intended to be used for liability coverage only.
Symbol 19—Mobile Equipment Subject to Compulsory or Financial Responsibility or Other Motor Vehicle Insurance Law Only
Symbol 19 was added to the 2006 edition of the business auto policy as a means of affording liability coverage under the policy for land vehicles that would ordinarily be classified as mobile equipment except for the fact that they are subject to a motor vehicle law (e.g., compulsory liability, financial responsibility, no-fault, UM/UIM), in the state where they are licensed or principally garaged. At one time such coverage was afforded under a CGL policy, but there was growing concern among CGL insurers about the trend of providing statutorily mandated auto-type coverage under the CGL. This symbol applies only for liability. Symbol 19 is most likely to be used for contractor insureds.
Symbol 19—Mobile Equipment Subject to Compulsory or Financial Responsibility or Other Motor Vehicle Insurance Law Only
Symbol 19 was added to the 2006 edition of the business auto policy as a means of affording liability coverage under the policy for land vehicles that would ordinarily be classified as mobile equipment except for the fact that they are subject to a motor vehicle law (e.g., compulsory liability, financial responsibility, no-fault, UM/UIM), in the state where they are licensed or principally garaged. At one time such coverage was afforded under a CGL policy, but there was growing concern among CGL insurers about the trend of providing statutorily mandated auto-type coverage under the CGL. This symbol applies only for liability. Symbol 19 is most likely to be used for contractor insureds.
Item Three—Schedule of Owned Autos
This declarations item provides a rather lengthy and detailed schedule to record rating and underwriting information (description, cost, territory, radius of operation, business use, vehicle size, loss payee, coverage limits, deductibles, and premiums) about autos the insured owns and insures under the policy. Most insurers use a separate or supplemental schedule for all but the smallest of fleets.
The autos scheduled in Item Three (whether they actually are shown here, shown on a separate schedule attached to the policy, or simply listed on file with the insurer) will be those autos for which coverage applies in the policy according to one of the covered auto designation symbols (e.g., Symbol 1, any auto; Symbol 3, owned private passenger autos only; Symbol 7, specifically described autos) in Item Two that refers to or includes autos the insured owns. If only Symbol 8, hired autos only, or Symbol 9, non-owned autos only, is shown in Item Two, no owned autos will be scheduled in Item Three.
Item Four—Schedule of Hired or Borrowed Auto Coverage and Premiums
This item of the declarations provides space for entering the estimated exposure, rate, and premium for hired or borrowed autos. The exposure base for hired or borrowed auto coverage is cost of hire; premium is calculated by multiplying the rate per each $100 cost of hire. The Item Four schedule has spaces for liability and physical damage, assuming, of course, that Symbol 1, any auto, or Symbol 8, hired autos only, is shown in Item Two for liability coverage and that Symbol 8, hired autos only, is shown in Item Two for physical damage coverage.
The Business Auto Policy Declarations cost of hire is defined in Item Four as the total amount the named insured incurs for the hire of autos not owned. This does not include autos borrowed or rented from the named insured’s partners, employees, or their family members. Also, the term “cost of hire” does not include charges for services performed by motor carriers of property or passengers.
Although no specific reference is made in Item Four as to whether “cost of hire” includes the cost of hiring autos on a long-term (6 months or more) basis during which the named insured provides the primary coverage, the ISO Commercial Lines Manual (CLM) instructs that such autos are to be rated as though they were owned. Therefore, the cost of hiring such autos would not be included in Item Four. Cost of hire would include the cost associated with any short-term auto rental regardless of whether coverage for such auto is primary or excess. In the event coverage is primary, the schedule provides space for a debit factor to increase the premium accordingly.
Item Five—Schedule for Non-ownership Liability
When Symbol 1—any auto, or Symbol 9—non-owned autos only, is shown in Item Two for liability coverage, then Item Five should indicate how many employees the named insured has. If the named insured is a partnership, the number of partners is also shown in the schedule. If it is a social service agency, the number of volunteers will be required. If coverage is extended to cover the individual liability of employees or volunteers while using their autos in the named insured’s business, the premium will be surcharged for that additional exposure. The Employees as Insureds (CA 99 33) endorsement or Social Service Agencies—Volunteers as Insureds (CA 99 34) endorsement will be attached to the policy in this case.
Item Six—Schedule for Gross Receipts or Mileage Rating
The last item of the declarations provides for an optional simplified determination of premium for auto liability and medical payments coverage. The rating plan is targeted to named insured entities that rent or lease autos without drivers or that operate certain types of public autos (e.g., taxicabs, limousines, and urban, intercity, charter, or sightseeing buses). The named insured must have been in business for at least 15 months, and the fleet must consist of at least three autos to qualify.
The method in which rates are determined for this type of rating is not so different from the process of individually rating each auto the named insured owns and adding appropriate premiums for hired and non-owned auto exposures. In fact, that is exactly how the rating is done, not once but twice. The named insured’s auto exposures as of a date 12 months prior to policy inception (e.g., January 1, 2006, for a January 1, 2007, inception) are rated in the usual manner; then the exposures as of a date 3 months prior to inception (i.e., October 1, 2006, in this example) are rated in the same way. The two premiums are added together and averaged. The average premium is then divided by the actual gross receipts (divided by 100 for a rate per $100 of gross receipts) or mileage developed during the 12-month period (October 1, 2005 to October 1, 2006) ending 3 months prior to the effective date of the policy.
Gross receipts or mileage rating may sound so complicated that one might wonder what the advantages are in the rating plan. In fact, unless the insured buys and sells autos fairly often throughout the year, this type of rating usually would not be advantageous. Although gross receipts or mileage rating is targeted to certain types of insureds, many other insureds are rated on a “composite” rating basis that is handled in essentially the same manner as gross receipts rating but with more flexibility in the choice of exposure base. These types of rating can simplify the audit process if the insured fleet changes very much during the policy period. The important point in choosing the exposure basis on which to apply rates is to choose one that appropriately measures exposure to loss (e.g., receipts, mileage, number of power units).
Completing the Business Auto Declarations
The business auto declarations and the manner in which the items it contains are completed determine to a great extent the effects of the policy provisions set out in the business auto coverage form. For example, the business auto insurer responds to liability claims for damages because of bodily injury or property damage resulting from the ownership, maintenance, or use of a covered auto. The business auto coverage form sets out ten symbols to describe autos that may be covered autos. But the business auto declarations designate the autos that are covered autos.
It is important that the declarations accurately reflect the agreement between the insurer and the insured as to what autos are covered for each type of coverage afforded under the policy. As an example, assume that an insured wants liability coverage for all owned, non-owned, and hired autos; physical damage comprehensive coverage for all owned private passenger autos; physical damage specified causes of loss coverage for the company trucks; and physical damage collision coverage for all owned autos. Symbol 1 should be placed next to liability coverage on the declarations page, Symbol 3 should be placed next to physical damage comprehensive coverage, Symbol 4 should be placed next to physical damage specified causes of loss coverage, and Symbol 2 should be placed next to physical damage collision coverage.
If a symbol other than 1 (any auto) is selected for liability coverage, it is important that the insured set up a system for monitoring the business’s use of autos to avoid unintended gaps in coverage. Such a system should help identify potential liability exposures for vehicles that are not “covered autos” under the policy. Because 100 percent accuracy in such a monitoring system is difficult, and because of the potentially catastrophic nature of liability claims, it is always preferable for insureds if Symbol 1 applies for Business Auto Policy Declarations liability coverage.