Summary: The insurance needs of an automobile leasing or rental firm are quite specialized — so much so that a regular business auto coverage form (BAP) usually is not sufficient. Insurance Services Office (ISO) offers a number of endorsements designed specifically for automobile leasing or rental firms that alter the BAP accordingly. The pages that follow examine the purpose and scope of these endorsements.
Topics covered:
Lessor—additional insured and loss payee CA 20 01
Contingent liability coverage CA 20 09
Conversion, embezzlement, or secretion coverage CA 20 10
Excluding autos under lease CA 20 11
Rent-it-there/leave-it-here autos CA 20 12
Schedule of limits for owned autos CA 20 13
Second level coverage CA 20 14
Auto leased with drivers—physical damage coverage CA 20 33
Lessor—Additional Insured and Loss Payee CA 20 01
Endorsement CA 20 01 gives the scheduled lessor additional insured status on the commercial auto forms of the lessee for bodily injury or property damage resulting from the acts or omissions of the named insured (lessee) or any of his employees or agents. The coverages offered are liability and physical damage; the liability coverage is for each accident, while the physical damage coverage is for each covered leased auto. Any leased auto listed on the schedule is considered a covered auto owned by the named insured and the coverages apply until the expiration date shown on the schedule or when the lessor takes possession of the leased auto, whichever occurs first. The loss payable clause on CA 20 01 states that: the insurer will pay, as interest may appear, the named insured and the lessor for loss to a leased auto; the insurance covers the interest of the lessor unless the loss results from fraudulent acts or omissions of the part of the named insured; and if the insurer makes any payment to the lessor, the insurer obtains his or her rights against any other party.
CA 20 01 also notes that cancellation notices will be mailed to the lessor and that the lessor is not liable for payment of the lessee's premium.
Contingent Liability Coverage CA 20 09
The potential danger to the lessor using the exclusion of certain leased autos endorsement is that for one reason or another — material misrepresentation, applicable exclusion, etc. — the lessee's policy will not cover an accident involving a leased auto. This could result in a subsequent action against the lessor. To protect against that possibility, the contingent coverage endorsement (CA 20 09) can be used in lieu of the exclusionary endorsement. Under the contingent approach, the lessor's liability coverage and any required no-fault coverage apply, if two conditions are met:
1. The lessee has furnished the lessor with a certificate of insurance (or a copy of the additional insured endorsement) meeting the insurance requirements of the leasing agreement
2. The lessee's insurance is not collectible at the time of the accident. In this way, the leasing firm does not have to pay the premium for primary coverage on the leased auto, but does have access to its own insurance in the event the lessee's fails.
The limit of liability for contingent coverage differs for the lessee and the lessor. The lessor is covered for the amount shown in the endorsement or the amount required by the leasing agreement, whichever is smaller. The lessee is covered only to the minimum limits required by the applicable financial responsibility or compulsory insurance law.
Contingent coverage is excess over any other collectible insurance except insurance that is specifically stated to be excess over the lessor's policy, such as an umbrella liability policy. If the lessee's policy is cancelled, contingent coverage terminates when the lessor regains custody of the leased auto or thirty days after the effective date of cancellation, whichever is earlier.
Conversion, Embezzlement, or Secretion Coverage CA 20 10
Either comprehensive or specified causes of loss physical damage coverage under the BAP covers theft of a covered auto. In the case of most insureds, the theft exposure — normally theft by an outsider who did not have prior possession of the auto — is adequately represented in the comprehensive or specified perils premium. Not so, usually, in the case of an auto leasing or rental firm. There, a large part of the theft exposure relates to the possibility that a lessee or rentee in possession will abscond with an auto. This type of theft is variously referred to as conversion, embezzlement, or secretion. Because "theft" is a broad term encompassing any unlawful taking of another's property, the BAP's coverage of auto theft might, depending on the circumstances, be construed to cover losses resulting from conversion, embezzlement, or secretion — unless the policy is amended to exclude it.
The first purpose of the conversion, embezzlement, or secretion endorsement (CA 20 10) is to eliminate coverage for these perils from the lessor's policy. The exclusion applies to "loss due to theft, conversion, embezzlement or secretion by any person in possession of a covered auto either (i) under a bailment lease, conditional sale, purchase agreement, mortgage or other encumbrance or (ii) as a rentee or lessee of such covered auto." The exclusion does not eliminate theft coverage for a covered auto under any other circumstances. For example, if a leased or rented auto were stolen by someone other than "any person in possession . . .", the lessor's theft coverage would apply to the loss.
The second purpose of the exclusion is to enable the lessor to buy back the excluded coverage, on either an "all covered autos" basis or a designated autos basis. Coverage applies to loss to covered autos by theft, conversion, embezzlement, or secretion by any lessee or rentee. The limit of liability, however, is 75 percent of the auto's actual cash value, less the amount of any security deposit made by the lessee or rentee. If the lessor becomes aware of a loss or even a possible loss, it must do all of the following:
1. Promptly notify the police and the insurance company
2. Cooperate in prosecution of the offender.
3. Submit proof of loss as the insurance company requests.
4. Make a reasonable effort to locate the covered auto and take possession of it, using legal proceedings if the insurance company requests. The insurance company agrees to pay reasonable costs of locating and recovering the auto.
Excluding Autos Under Lease CA 20 11
A common provision in auto leasing agreements is that the lessee, not the leasing firm (or lessor), is to provide primary insurance on the leased auto. This coverage must include liability insurance up to limits specified in the agreement. The lessee's policy is arranged to cover the leased auto and the lessor is named as an additional insured. This arrangement is advantageous to the lessor, who is relieved of some or all of the burden of paying for insurance with respect to the leased auto.
If the lessor chooses to rely wholly upon the lessee's insurance, the lessor's auto insurance can be amended with the exclusion of certain leased autos endorsement (CA 20 11), for a commensurate reduction in premium. The endorsement excludes autos that are: leased or rented by the named insured to a lessee or rentee, including any substitute, replacement, or extra auto needed to meet seasonal or other needs, under an agreement requiring the lessee or rentee to provide primary insurance for the named insured, the lessor. The exclusion applies with respect to liability insurance and any required no-fault insurance. With respect to any leased auto, if the lessee's auto policy is cancelled, this exclusionary endorsement will no longer apply to the named insured (lessor) 30 days after the date of such cancellation.
Rent-It-There/Leave-It-Here Autos CA 20 12
A normal part of many rental firms' business is receiving one-way rental autos; e.g., an auto that a customer rents in another city and drops off at his or her destination with the second rental firm, which does not own the auto. The intent of insurers is not to cover the owner or the rentee of the auto in the insurance of the firm accepting the auto. This intent is accomplished by amending the receiving firm's insurance with the rent-it-there/ leave-it-here endorsement (CA 20 12).
The endorsement defines a rent-it-there/leave-it-here auto as "an auto a rentee rents from someone other than you and leaves with you." The endorsement then states that the named insured's liability insurance does not apply to the owner or rentee of a rent-it-there/leave-it-here auto not owned by the named insured. The named insured's coverage, of course, is not diminished by the exclusion. If the named insured is named in a suit arising from the operation of a one-way rental auto it has received, it will have coverage under its policy, provided, of course, that the auto qualifies as a covered auto under its policy.
Schedule of Limits for Owned Autos CA 20 13
The typical commercial insured generally has its auto liability insurance written for one limit of liability on owned, hired or borrowed, and nonowned autos alike. Leasing or rental firms often deviate from this practice. A firm may wish to have higher limits on its commercial business, if the lessees are engaged in hazardous operations, than on its private passenger business. Or, for another example, the firm may wish to have lower limits on the autos used by its own employees, over whom it can exercise loss control measures, than on the autos used by rentees, over whom it can exercise no loss control.
Because the BAP declarations are not suited to showing separate limits for the different classes of rental or leased autos, a special schedule of limits endorsement (CA 20 13) is available for leasing or rental concerns. The endorsement allows the insured to schedule different limits for:
1. Autos leased or rented to others under an agreement requiring the lessee or rentee to provide primary insurance.
2. Autos leased or rented to others under an agreement that does not require the lessee or rentee to provide primary insurance.
3. Autos owned by the named insured and not subject to a leasing agreement or rental agreement.
Each of the first two categories is subdivided as to private passenger autos, commercial autos, and "other," allowing a great deal of variety in specifying limits.
Second Level Coverage CA 20 14
It sometimes happens that the lessor wishes to arrange coverage under its own policy in excess of the amount carried, or supposed to be carried, by the lessee. Another endorsement — second level coverage (CA 20 14) — can be used for this purpose. The endorsement provides a limit of liability that replaces the limit shown elsewhere in the lessor's policy or the limit required in the leasing agreement; the endorsement goes on to state that this is subject to some provisions. For example, for the difference between the limit of insurance shown on the endorsement and the limit shown on any lease or agreement, persons insured are those described in the usual persons insured provision, except for the lessee, any employee or agent of the lessee, or any person operating the auto with permission of those persons. For the difference between the limit of insurance shown on the endorsement and the limit shown elsewhere in the policy, persons renting or leasing the car, their employees or agents, or any other persons operating the auto with their permission are not considered as insureds.
Autos Leased With Drivers—Physical Damage Coverage CA 20 33
The BAP holds that any auto that is leased, hired, rented, or borrowed with a driver is not a covered auto; this endorsement changes that. CA 20 33 states that for hired auto physical damage coverage, any auto that is leased, hired, rented, or borrowed with a driver, and that is designated or described in the endorsement's schedule is deemed a covered auto. The auto is considered a covered auto that the named insured owns.