Auto Liability Coverage Contains Two Insuring Agreements

Any business that uses autos needs commercial auto liability insurance. This coverage protects the business against third-party claims that arise out of auto accidents. Claims from vehicle accidents can generate large damages awards against businesses. If a business lacks adequate liability insurance, it may not survive an auto-related lawsuit.

A business may be liable for accidents involving autos it owns as well as vehicles it hires from a rental agency. It may also be responsible for accidents involving vehicles it doesn’t own but uses in its operations. An example is an employee-owned auto that the worker uses to make sales calls.

Liability Insuring Agreements

Auto liability insurance is included under Section II of the standard ISO business auto coverage form. Section II contains two insuring agreements (the insurer’s promise to pay). The first applies to bodily injury and property damage. It covers damages an insured legally must pay because of bodily injury or property damage caused by an accident. The accident must result from the ownership, maintenance or use of a covered auto.

The second insuring agreement affords coverage for the cost of cleaning up pollutants. It covers sums an insured must legally pay as “covered pollution cost or expense” that result from an auto accident. In other words, it covers pollution cleanup costs an insured must pay if the costs result from an auto accident. Again, the accident must result from the ownership, maintenance or use of a covered auto.

Pollution cleanup costs are covered only if they result from an accident that also causes bodily injury or property damage covered by the policy. If an auto accident results in pollution cleanup costs but does not cause bodily injury or property damage, the cleanup costs will not be covered.

Like all insurance, auto liability coverage excludes certain types of claims. The standard policy form contains 13 auto liability exclusions.

Requirements for Coverage

Both of the insuring agreements cited above make reference to an insured. This means that the claim, suit or clean-up demand must be directed at a person or entity that qualifies as an insured under the policy. Otherwise, the claim will not be covered.

The insuring agreements also state that the accident must arise out of the ownership, maintenance or use of a covered auto. The types of autos that qualify as covered autos are determined by numeric symbols listed in the policy declarations. These symbols are called covered auto designation symbols.

If you have purchased liability coverage, a numeric symbol should appear in the declarations next to that coverage. The most commonly used symbols for liability coverage are 1 and 2. Symbol 1 signifies any auto (including hired, owned, and non-owned autos) while symbol 2 means autos owned by the business.

Autos Covered Automatically

If you have purchased auto liability coverage, your coverage automatically includes the types of vehicles described below. These vehicles are covered regardless of the symbol that appears next to liability coverage in the declarations.

• • Small Trailers. Trailers designed for travel on public roads if they have a load capacity of 2000 pounds or less. Such trailers are covered whether you own them or not.
  • Mobile Equipment in Transit. Mobile equipment while being towed or carried by a covered auto. An example is a forklift you are transporting to a job site on a flat-bed truck that qualifies as a covered auto.
  • Temporary Substitutes. A vehicle you borrow as a substitute for a covered auto that is temporarily unusable because it has been damaged, has broken down or is undergoing service or repair.

Out-of-State Extensions

Auto liability coverage includes some built-in protection for out-of-state travel. This protection is important when you travel to a state that has different auto insurance requirements than your home state.

Most states have enacted laws requiring vehicle owners to buy a minimum amount of auto liability insurance. Other states don’t obligate vehicle owners to purchase insurance. Instead, vehicle owners must demonstrate that they have the financial wherewithal to pay damages resulting from an auto accident.

The amount of insurance or financial responsibility required varies from state to state. If you’ve purchased your state’s minimum required limit and then travel to a state that has a higher minimum, your policy will provide the higher limit for the duration of your travel. This provision does not apply if you are a motor carrier.

The automatic extension also applies if you travel to a state that mandates the purchase of no-fault or uninsured and underinsured motorist coverage. Your policy will provide the minimum amount of coverage required by the state in which you are traveling.

Defense Costs

If you or another insured is sued by a third party for injury or damage sustained in an auto accident, your insurer should pay the cost of defending you. The costs of defending an auto liability claim will not reduce your liability limit. The specific costs that are covered are outlined in a section called Supplementary Payments. These costs are very similar to those covered by the Supplementary Payments section of a general liability policy.