Automobile Exposures - What You Have to Lose!

By Melanie Herman, Executive Director of the Nonprofit Risk Management Center

Many agencies believe that since they do not own any automobiles they do not have an exposure to loss from an automobile accident. When a legal aid society or public defender office does not own any vehicles nor provide transportation for its clients, how can it have an auto exposure? Before declaring the agency free from an auto exposure, you need to ask if any employees or volunteers ever drive for agency business. Do attorneys drive their own vehicles to court, to meetings with a client or witnesses, or to teach or attend a legal clinic? Would an employee or volunteer ever drive his or her car or borrow a co-worker s vehicle to drive to the bank, post office or other business errand? Has an employee or board member ever rented a car while on agency business such as attending an out-of-state conference, continuing education session, or board or committee meeting? Quite simply, whenever an employee or volunteer drives his or her own car for the business of the agency, the organization has an exposure to loss. The agency s exposures arise from the operation and use of hired and nonowned autos that place the drivers, vehicle owners, and organization at risk.

A legal services provider's responsibility for the actions of its agents arises from a central principle of agency law, the doctrine of respondeat superior. The principle states that A master is subject to liability for the torts of his servants committed while acting in the scope of their employment. (Restatement [Second] of Agency [1957]). Therefore, the agent s liability is imputed to the organization when it has the right to control its agents (employees and volunteers) activities and the person is acting within the scope of his or her responsibilities for the agency. Therefore, an auto accident caused by an organization s employee or volunteer while driving on agency business creates a substantial exposure for the organization. An auto accident can be a single vehicle incident with minimal damage or a catastrophic loss involving numerous victims and vehicles. The financial repercussions from an auto loss can be devastating to a small or sizeable organization.

The greatest exposure to a legal services provider is from the use of hired and nonowned autos. The business auto policy defines a hired auto as any auto that the named insured leases, hires, rent or borrows except any auto that the insured leases, hires, rents, or borrows from any employees, volunteers, or members of their households. Cars rented by the named insured (the organization) are the most common form of hired autos. In contrast, a car rented by an employee or volunteer individually is a nonowned auto. The policy defines a nonowned auto as any auto the named insured does not own, lease, hire, rent or borrow that is used in connection with its business. Autos owned by the named insured s employees, volunteers and members of their households while used in the named insured s business or personal affairs are also nonowned vehicles.

Risk Management Techniques

Now that you have acknowledged your automobile exposures, the next step is to select the best techniques for managing these risks. Every agency has four possible techniques to use in managing its risks avoid, modify, retain, and transfer. The first option is to avoid the risk, which is not feasible with the auto exposure. Although an agency can adopt a no driving rule it is impractical to enforce. It is inevitable that every organization will at some time have an agent driving on its behalf. Therefore, you cannot avoid the automobile exposure.

Another alternative is to modify the risks so that the risk is acceptable to the organization. An agency can establish various driving policies and programs to minimize its chances for an auto loss. One of the first steps is to identify those positions that involve driving and assess the extent of the driving exposure (an occasional or frequent driver). Based upon the extent of the driving exposure, the agency can either require copies of the drivers motor vehicle records from the state Department of Motor Vehicles or insist that drivers declare their driving history. The agency should prohibit any unacceptable drivers from driving on its behalf after carefully defining what constitutes an unacceptable record.

An organization can also require all driving employees or volunteers to have personal auto insurance with limits at least equal to the state s financial responsibility law. In the event of an accident, the initial financial responsibility belongs to the owner of the vehicle. Any insurance purchased by the agency provides excess protection for the agency, not necessarily the car s owner or driver.

Another method for managing the auto exposure is to adopt a driving policy for the organization. An effective policy defines who can drive on behalf of the agency, what constitutes authorized travel, and the agency s position on transporting clients and others. The driving policy should also include general safety guidelines such as the requirement that drivers obey all driving laws, always use seatbelts, don t drive when tired or with impaired abilities, and keep doors locked. Last, the organization should offer guidance to employees and volunteers who drive on how to respond in the event of an auto accident. Every potential driver should know how and to whom to report any accident that occurs while driving for the agency.

An organization may elect to retain risk by deciding to pay for any auto losses from its own funds. Unfortunately, many agencies retain the risk inadvertently by not acknowledging the potential for loss and purchasing the necessary insurance. Due to the potential financial consequences of an auto loss, retention is only a viable option for very large organizations.

The last risk management technique is transfer. The agency can transfer the financial aspects of an auto loss through insurance by paying an annual premium. Any agency that owns a vehicle should purchase a business auto policy that provides liability and physical damage coverage. The auto policy should include coverage for any owned (including long-term leased) vehicles and hired and nonowned autos. If the agency does not own any autos, it just needs the hired and nonowned auto coverages. Additionally, ask the insurance company to attach an endorsement entitled, Employees as Insureds (CA 99 33) to the business auto policy. As discussed above, employees are not an insured as respects hired and nonowned auto, therefore the policy only protects the agency and the individual employee. This endorsement adds employees as an insured under the hired and nonowned auto coverage. You can also ask the insurance company to extend the insured status for volunteers driving on your behalf.

The loss potential from an automobile accident can be devastating to an organization. Unfortunately, it is a risk many agencies do not recognize and manage properly. A few simple steps will protect your agency and others from possible harm. Take the time now to create your automobile risk management policy and ensure that you have the proper insurance protection.

Melanie Herman is the Executive Director of the Nonprofit Risk Management Center, a resource center serving nonprofits throughout the U.S. For more information on the Center, visit www.nonprofitrisk.org or call (202) 785-3891.