Overview
Non-Owned and Hired Auto Liability: Complex Problem with a Simple Solution
Automobile Liability is part of the contractually required insurance coverage. This auto liability insurance requirement is met with a Commercial Auto Policy written to include symbols 7, 8, and 9. In the absence of any owned vehicle, the coverage should be written using symbols 8 and 9 to provide liability protection arising out of the use of hired and non-owned autos.
Explanation
Xanterra requires automobile liability on every contract because they recognize the risk involved when the people they hire to work on their behalf travel to and from the job-site. While to the layman, this requirement may seem unreasonable, the best practices used throughout the United States in contract risk management practices clearly points to the need for, and enforcement of, this insurance requirement. While the risk profile shows that the frequency is low, the severity potential is high.
Here’s a worst-case example: A vanload of family members is enjoying a visit to one of our National Parks. The family is enjoying the mountainous climb into the Park when a contractor’s truck inadvertently veers into their side of the road, causing the van driver to make a quick steering maneuver to avoid the head-on collision. Unfortunately, the driver is not familiar with the handling limitations of this rented van and in making a sharp turn to avoid the accident, ends up losing control and flipping the van, severely injuring several of the family members.
When the details of this accident are sorted out, the plaintiffs’ attorneys find out there are several potential parties who the courts could hold legally liable for this automobile accident. Those legally liable parties include:
The car rental company- they provided the van and should have provided instructions;
The driver of the contractor’s truck- who controlled (or failed to control) the vehicle that caused the accident;
The owner of the contractor’s truck- who directed the driver to drive the vehicle to the job-site; and,
The legal entity who hired the contractor- who was the reason for their being on the road at the instant the accident occurred.
Now, while the car rental company stands alone and will have to protect and defend themselves, the remainder falls on the shoulder of the contractor. They could be held legally responsible and must pay any judgements arising from this accident on behalf of the driver, themselves as owner, and the vicariously responsible legal entity who hired the contractor. Even if the legal entity who hired the contractor is ultimately found not liable, the cost of their protection and defense until the not-guilty finding is rendered by the court falls on the shoulders of the contractor.
Even when the contractor is not the owner of the vehicle, the legal responsibility of the contractor remains unchanged.
In the example above, let’s give some names to the players to help keep this sorted out. In all cases, the Legal Entity is Xanterra Parks & Resorts, Inc.:
First scenario
Driver of the Contractor’s Truck, and Owner of the Contractor’s Truck: Bill Smith
Contract with Xanterra Parks & Resorts is with Bill Smith
If Bill has a commercial auto policy that extended insurance protection to this owned vehicle, then these three parties will be afforded insurance protection under Bill’s policy.
Second scenario:
Driver of the Contractor’s Truck: Bill Smith
Owner of the Contractor’s Truck: ABC, Inc.
Contract with Xanterra Parks & Resorts is with ABC, Inc.
If ABC, Inc. has a commercial auto policy that extended insurance protection to this owned vehicle, then these three parties will be afforded insurance protection under ABC’s policy.
Third scenario:
Driver of the Contractor’s Truck: Bill Smith
Owner of the Contractor’s Truck: Bill Smith
Contract with Xanterra Parks & Resorts is with ABC, Inc.
In this case, the ultimate responsible party would be ABC, Inc. They put Bill on the road in Bill’s truck and they (ABC, Inc) is the legal entity under contract with Xanterra. If ABC, Inc. has a commercial auto policy that extended insurance protection to non-owned autos, then both ABC and Xanterra will be afforded insurance protection under ABC’s policy. But, note, ABC’s insurance protection would need to include liability arising out of non-owned autos and not just owned autos. Bill’s protection and defense would be provided by Bill’s own auto liability insurance policy.
Fourth scenario:
Driver of rented Contractor’s Truck: Bill Smith
Owner of Truck rented by ABC, Inc.: U-Haul, Inc.
Contract with Xanterra Parks & Resorts is with ABC, Inc.
In this case, the ultimate responsible party would be ABC, Inc. for the same reasons listed above. If ABC, Inc. has a commercial auto policy that extend insurance protection to hired autos, then these parties (except for U-Haul) will be afforded insurance protection under ABC’s policy. Please note, that ABC’s insurance protection would need to include liability arising out of hired autos and not just owned or non-owned autos.
Conclusion
Since only the contractor has control as to what vehicle is used to go to and from the job site, insurance requirements are structured to account for any variation of driver/owner/contract party combination. Therefore, while owned autos may not be present in every automobile liability loss scenario, liability arising out the use of hired and non-owned autos is a real exposure for which insurance must be in place.
In the examples used in this article, ABC, Inc is clearly a separate legal entity and it does not matter if Bill Smith is an owner, employee, or independent contractor of ABC. The insurance coverage needed by ABC even if the corporation does not own any autos is for non-owned and hired auto liability. The same outcome results when ABC, Inc. is instead Smith’s Plumbing, LLC. The LLC sets up a separate legal entity that is not the same as Bill Smith. For more information, see the page that addresses LLCs on this website.