New Owner Review: Commercial Auto

Owner-run fleets drift away from what the auto policy says, and one serious accident can exceed the liability limit, so check seven things in your first weeks. Confirm that the covered auto symbols (the numbers that decide which vehicles count) reach every vehicle you use, the vehicle list and the driver list match reality, rentals and employees' cars are covered, every title is in the right name, physical damage coverage fits each vehicle's value, and the liability limit meets your contracts and your umbrella. This guide is for buyers who want to know whether the seller's auto policy fits the vehicles and drivers they now have.

Which vehicles does the policy actually cover?

A commercial auto policy does not list "all your vehicles" in plain words. Instead, the declarations page puts a number, called a covered auto symbol, next to each coverage: liability, physical damage, medical payments, uninsured motorists. Under the standard Insurance Services Office (ISO) business auto form, the symbols entered there are the only vehicles that count as covered for that coverage. Here is what the common ones mean:

Symbols also decide what happens to vehicles you buy after the policy starts. With symbols 1 through 6 or 19, newly acquired autos of the type described are covered for the rest of the policy period. With symbol 7, a new vehicle is covered only if the policy already covers all owned autos for that coverage or it replaces one that was covered, and you tell the insurer within 30 days. If you plan to grow the fleet, that difference matters. Carrier forms and endorsements can change these rules, so read your own declarations and forms schedule.

If the business hauls goods for others for hire, it is likely insured on a motor carrier or truckers form instead, with different symbols and possibly federal or state filings; ask your broker which form you have.

Does the vehicle schedule match what the business really owns?

Lay the vehicle schedule next to the fixed asset register from the deal and walk the yard. Common findings after a sale:

• Vehicles sold or scrapped but still listed. The business keeps paying for them. See remove the vehicles, drivers and equipment you no longer have.
• Vehicles added but never listed. On a symbol 7 policy, these may have no coverage at all once the reporting window passes.
• Trailers and equipment. Some trailers and mobile equipment are covered automatically for liability under the standard form, others need to be listed. See mobile equipment vs auto.

Check the vehicle identification number (VIN), garaging address and use for each unit, not just the description, and confirm that lienholders and lessors are shown where the loan or lease requires it.

Are rentals and employees' cars covered?

Hired and non-owned auto coverage fills the gap for vehicles the business uses but does not own. Hired autos (symbol 8) are rentals, leases and borrowed vehicles. Non-owned autos (symbol 9) include employees' own cars while used for the business. If an employee causes a serious accident on a work errand, the injured party can sue the business, and without symbol 9 the business may have no auto coverage for that claim. See hired and non-owned auto.

Three details surprise new owners. Under the standard form, coverage for a car you do not own is excess over other collectible insurance, so the employee's personal policy usually pays first. The employee is not an insured under your policy for their own car. And hired auto liability does not pay for damage to the rental itself unless the policy adds hired auto physical damage.

If you or a co-owner drive your own car for the business, the standard form does not cover you as a driver of that car. Your personal auto policy carries that risk, so check that it allows business use. See can I use personal auto insurance for business.

Who is driving, and do they meet the carrier's standards?

Carriers underwrite drivers as much as vehicles. The main tool is the motor vehicle record (MVR), a summary of a driver's convictions and accidents from their state. Many carriers set their own standards for which records are acceptable and may exclude or decline drivers with serious violations. Ask the carrier or your broker for those standards in writing, then pull current records for every driver on the list. Getting and using driving records for employees can require written consent and notices, so ask your employment counsel or HR provider for the right process first.

After an acquisition, driver lists go stale fast: technicians who left, new hires never added, and the seller if they stay on during the transition. Make adding a driver part of hiring. If the business operates commercial motor vehicles (generally vehicles over 10,000 pounds gross vehicle weight rating, among others) in interstate commerce, federal motor carrier safety rules also require the business to obtain and review each driver's record at least once every 12 months. For building a driver program, see fleet telematics and driver standards.

Are the vehicles titled to the right owner?

In an asset purchase, vehicles generally need to be retitled from the seller to your company (your deal counsel can confirm the steps in each state), and that paperwork often lags closing by weeks or months. Many insurers expect the named insured to have an ownership interest in each vehicle, so a mismatch can complicate a claim. The standard business auto form also has no automatic coverage for a newly acquired organization, so your entity has to appear on the policy as a named insured. Vehicles still titled to the seller covers the options in detail.

How much will the policy pay to fix or replace your own vehicles?

Physical damage coverage pays to repair or replace your own vehicles: comprehensive for theft, fire, hail and similar losses, and collision for crashes. Under the standard form, the most it pays is the lesser of the vehicle's actual cash value (replacement cost minus depreciation) or the cost to repair or replace it, minus the deductible. See actual cash value vs replacement cost.

Three questions for each vehicle. Does a lender or lessor require physical damage coverage? Is the deductible one the business can absorb several times in a bad year? Is expensive custom equipment, such as upfitted shelving, lifts or tool systems, covered, or does it need an endorsement or an inland marine policy? Tools, stock and other contents carried in a vehicle are generally not covered by auto physical damage; they need inland marine or property coverage. Older, low-value vehicles may not justify physical damage at all, but make that call with numbers, not by default.

Is the liability limit high enough?

Auto liability pays for injuries and damage your drivers cause to other people. The declarations page shows the limit in one of two ways. A combined single limit is one amount per accident for injuries and property damage together. Split limits set separate amounts for each injured person, for all injuries in one accident, and for property damage. A combined single limit is usually easier to match against contracts and an umbrella.

State minimum limits are a legal floor, not a target; one serious accident can cost far more. Check the limit against three things: what your customer contracts and leases require, what your lender asks for, and the minimum auto limit your umbrella requires underneath it. If the auto policy carries less than the umbrella's schedule, the business may have to pay the difference. The umbrella and excess review explains that check.

If you or another owner drive company vehicles and have no personal auto policy, ask about a drive other car endorsement, which can extend the business policy to you when you drive a car you do not own.

What belongs on your commercial auto checklist?

A hypothetical example. A buyer acquires a plumbing company with 12 vans through an asset purchase. The auto policy uses symbol 7 for every coverage. The review finds two vans bought three months before closing that were never added, and no hired or non-owned auto coverage, even though the office manager runs bank and supply errands in her own car and crews rent a box truck a few times a year. The buyer's plan adds four vans in the first year. The broker asks the carrier to change liability to symbol 1, which under the standard form covers vans bought later for liability as soon as they are acquired and also reaches rentals and employees' cars. It also asks for symbol 2 for physical damage on owned vehicles and hired auto physical damage for the rentals. The two missing vans stay parked until the carrier confirms in writing that they have been added. The carrier agrees by endorsement. Premium rises, and the buyer now knows which vehicles are covered and why.

Morrow can review the auto policy, vehicle schedule and driver list you inherited and request quotes where it makes sense; any new terms depend on carrier underwriting.

Keep reading

• Vehicles Still Titled to the Seller or Family: Fixing Title and Insurance
• Fleet Telematics and Driver Standards for Lower Auto Premium
• Remove the Vehicles, Drivers and Equipment You No Longer Have
• New Owner Review: Umbrella and Excess Liability
• New Owner Review: Tools, Equipment and Inland Marine
• All guides for new business owners

Frequently asked questions

Does the seller's commercial auto policy cover the vehicles after I buy the business?

Not automatically. In an asset purchase your new company is a different legal entity, the policy cannot be transferred without the insurer's written consent, and the vehicles generally need to be retitled. In a stock purchase the same company keeps its policy, but you should still tell the carrier and check the vehicle and driver lists.

Are my employees' personal cars covered when they drive for work?

The employee's own auto policy usually responds first. Non-owned auto coverage on your business policy protects the business if it is sued over the accident, usually as excess over the employee's policy. It does not make the employee an insured for their own car.

Do I need hired and non-owned auto coverage if the business owns its vehicles?

Often yes. Owned vehicle coverage does not reach rentals or employees' cars used on business errands. Hired and non-owned auto coverage fills that gap; its cost depends on the carrier and on how much employees drive for the business.

What happens if I buy a new truck in the middle of the policy?

It depends on the covered auto symbols. Under the standard form, symbols such as 1, 2 or 4 pick up newly acquired vehicles of the type described for the rest of the policy period. If the policy covers only listed vehicles (symbol 7), a new truck is covered automatically only if it replaces a covered vehicle or the policy already covers every vehicle you own, and you tell the insurer within 30 days. The safer step is to add it to the policy before it goes into service.

Can a vehicle stay in my personal name and be insured on the business policy?

Some carriers allow it with an endorsement; others require the vehicle to be titled to the business or insured on a personal policy. Ask your broker how your carrier handles it before you rely on it. A vehicle in your own name can also expose you personally, so ask your attorney how titling affects your liability.

References

• Insurance Services Office: Business Auto Coverage Form CA 00 01 (10 13 edition shown; later editions keep the same covered auto symbols)
• IRMI: Motor vehicle record (MVR) definition
• Electronic Code of Federal Regulations: 49 CFR 391.25, Annual inquiry and review of driving record

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.