ISO BUSINESS AUTO COVERAGE FORM UNDERWRITING CONSIDERATIONS

(October 2019)

INTRODUCTION

Underwriting the Insurance Services Office (ISO) Business Auto Coverage Form involves examining several different areas. Some of the more important ones are the named insured, operations, management, vehicle information, driver information, loss history, tailoring coverage, and deductibles.

THE NAMED INSURED

Insurance policies are designed to protect the named insured's assets. This means that in order to underwrite the exposure there must be an understanding of who is being protected. There can be multiple named insureds. Each named insured must be individually underwritten and there must be an explanation as to how each of the named insureds is related to the others. The first named insured has certain rights and responsibilities related to premium and notices but being named first does not grant any differences in coverage.

If the named insured is an individual, CA 99 17–Individual Named Insured must be attached. Because this results in expanding coverage to include family members, the personal auto exposures must be underwritten as well as the commercial ones.

Related Article: CA 99 17–Individual Named Insured

OPERATIONS

The named insured’s operations determine the type of automobile exposures to be expected. The types of covered autos involved should match the operations. Questions should arise when the operations and the vehicles are not compatible.

Example: John, a new underwriter for Leaping Ltd. Insurance Company, receives a Business Auto Application from Citytown Bank. He calls the agent who submitted the application when he sees three large trucks included in the vehicle schedule. He wants to know what other operations the bank may be running.

MANAGEMENT

Management establishes the safety standards. Automobile loss ratios deteriorate if management does not proactively address maintenance issues and driver responsibilities. Drug testing programs generate positive results only when written procedures, standards, and post-testing actions are in place. They are ineffective if management fails to follow through in a consistent manner. Periodic ordering and review of Motor Vehicle Reports (MVRs) on all regular drivers is equally important. Procedures that explain the consequences and actions of new infractions that appear on them should be in place and must be followed consistently. All vehicles should receive regularly scheduled preventive maintenance that is documented with copies kept in a central location.

Management should have guidelines on the personal use of company vehicles. When family members are permitted to use them, motor vehicle records on each potential driver must also be obtained and examined. In addition, other information, such as each driver's level of training, may be needed, depending on the frequency, type, and radius of operations. Any driver training that the named insured offers should also be evaluated.

Formal safety programs should be evaluated to determine if they are comprehensive and properly address the operation involved. Positive incentives should be offered to encourage safe driving, such as bonuses for good driving and for loss-free or accident-free drivers. Mandatory training programs should be established and administered to drivers holding certain types of licenses or handling dangerous cargo. A tracking system should be in place to check and verify that all mandatory licenses are current.

VEHICLE INFORMATION

Properly underwriting business auto coverage requires careful consideration of these factors:

The nature of the insured’s operation(s)
The make, model and serial number of each vehicle
The retail, service or commercial use of each vehicle
Each vehicle's gross vehicle weight (GVW)
The operating radius of each vehicle
The age of each vehicle
The vehicle's cost new or stated value

There should be regular and scheduled preventive maintenance for all vehicles that is documented and kept in a centralized location. Information regarding when vehicles are replaced can also be important for certain fleets.

DRIVER INFORMATION

The driver is the critical factor in auto underwriting. His or her ability to handle any covered vehicle determines the likelihood of an accident, regardless of the vehicle's equipment or maintenance. The business should have a current drivers list that is updated on a continuous basis. It should include the name, date of birth, driver's license number, vehicles driven, and frequency of operation. The list should be used to order periodic motor vehicle records for each driver. Potential new hires who will be driving company owned vehicles should be required to meet established minimum standards of acceptability prior to hire.

Drivers should hold an appropriate driver license and have an acceptable MVR. When trucks carry hazardous waste, drivers should also be trained in spill containment and hold a Hazardous Material Endorsement.

LOSS HISTORY

Loss history is critically important. It should include the date, time of day, driver, the vehicle involved and type or description of each accident or loss. In addition, loss history should include the amount of loss, whether it is open, closed, reserved, or in suit. Loss frequency predicts the possibility of a severe loss occurring in the future. The named insured should use controls to minimize frequency and discipline drivers involved in minor at-fault accidents. Any large losses should be singled-out, identified, explained and any remedial actions taken as a result should be fully described.

RESTRICTING, BROADENING, CLARIFYING OR TAILORING COVERAGE

Because of the broad nature of the current version of the ISO Business Auto Coverage Form, underwriting considerations must include determining if a specific insured needs every coverage available or provided. If not, some can be deleted by endorsement for a premium credit. Some insurance companies require other exclusions to meet their underwriting requirements. In some cases, the basic coverages provided may not be broad enough and endorsements are needed to broaden coverage or delete exclusions. These may or may not be subject to additional or return premiums at the insurance company's discretion. Another category of available endorsements clarifies and restates a coverage form condition or provision that may apply to a given insured.

DEDUCTIBLES

Deductibles are another important underwriting consideration and are available for liability coverage, physical damage coverage or both. Different physical damage deductibles are available by coverage or by vehicle.

Deductibles may be used to reduce premium costs. Credits are given based on the size and type of deductible. The insured must evaluate whether such premium reductions make sense relative to the larger portion of losses it retains. In some cases, the insured does not have a choice if the insurance company insists on higher deductibles as a means to avoid or reduce the effects of loss frequency.

COVERED AUTOS LIABILITY LIMIT OF INSURANCE

The most the insurance company pays for the total of all damages is the limit of insurance on the declarations, including any covered pollution cost or expense that results from any one covered accident. This limit applies is regardless of the number of insureds, autos covered, autos involved in an accident, the premium paid or the number of claims made.

The limit should be sufficiently high to protect the named insured’s assets, but the limit is not always only the named insured's choice. In some cases, governmental regulatory bodies establish minimum acceptable limits. In others, a client may be business' customer may require certain minimum limits as a precondition of the insured driving onto its premises.

Many larger fleets must purchase umbrella coverage in order to meet their total limits demands.