How an Employee's Car Insurance Coverage Can Hurt Your Business

Written by mBurse Team Member Sep 23, 2019 9:05:00 AM

If your company has employees who drive as part of their job, your company faces immense risk. According to OSHA, a motor vehicle crash occurs every 5 seconds, a crash-related injury occurs every 10 seconds, and a motor vehicle fatality occurs every 12 minutes. Many of these accidents occur during work-related activities.

Employee auto insurance for business vs. personal use

With more and more Americans driving personal vehicles for work purposes, it is vital that employers set clear parameters for employees’ auto insurance. Many organizations only require employees to carry the minimum personal insurance coverage mandated by their state. Others set no requirements for employees that drive personal vehicles for business. In both cases, failure to establish clear guidelines leaves both employer and employee exposed to financial risk.

In general, a personal auto insurance policy will cover some business use. However, if a personal vehicle is used primarily for business purposes, an insurer might refuse to cover an employee-involved accident. If you have drivers who cover large territories, they could easily put more business mileage than personal mileage on their cars and therefore fall into this category. 

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So who pays if an employee causes an accident on the job, and their coverage is insufficient or the insurer refuses to pay? There's a high likelihood that the employer will face liability in this case, due to the legal doctrine of respondeat superior. (For more on respondeat superior, check out our guide to respondeat superior.)

Because of the financial risk to your company, it's very important that you educate yourself about employee car insurance. This is even more crucial if you own a small business that has little margin for auto insurance liability claims.

Your business and state minimums for auto insurance coverage

State minimums for auto insurance typically fall short of what is realistic for modern day accident costs. If a driver causes an accident while on the job, and the expense exceeds the driver’s insurance coverage, the company employing the driver will be responsible for the difference in costs. An organization that thinks, “If it’s good enough for the state, it’s good enough for us,” will experience a rude awakening in the event of an accident.

Auto insurance coverage is typically summarized in terms of three specific limits to the amount the insurance company will pay in the event of an accident: 1. bodily injury for one person involved in the accident, 2. bodily injury for all persons per accident, and 3. property damage.

For example, the state of Ohio requires that a driver’s insurance pay up to $12,500 for medical costs for each individual injured, or up to $25,000 per accident, and up to $7,500 for property damage. This requirement would be expressed as 12.5/25/7.5. The Insurance Information Institute, however, reports that in 2015 the average individual claim for bodily injury was $17,024. And that's just average. Injury claims of $50,000 or more are not uncommon at all.

Because not all accidents involve bodily injuries the property damage portion of car insurance should not be neglected. Low impact accidents have the potential to cause substantial property damage exceeding a states property damage easily. Take the state of California, it only requires that a driver's insurance pays up to $5,000 for property damage. With the high costs of replacing and repairing property the minimum can be met very quickly and potentially involve your organization.

Business car insurance coverage vs. state minimums for employees

To keep your company free from having to pay the difference between an underinsured employee's coverage and the actual cost of an accident, at a minimum you should require employees to carry business car insurance for their personal vehicle, which sets coverage at 100/300/50. Best practice, however, is to require employees to carry business auto insurance coverage at 250/500/100. It's only minimally more expensive per month and well worth the peace of mind.

The reality is, no state minimum for auto insurance coverage is sufficient.

Look at the list below and consider the risk of allowing employees to stick with the state minimum:

10/20/10: FL, LA, OK
12.5/25/7.5: OH
15/30/5: CA, DE, NJ, PA
15/30/10: AZ, GA, NV
20/40/5: MA
20/40/15: IL, IA, MD, TX
20/50/ 10: ID
25/50/15: AR, CO
25/50/20: VA, WY
25/65/15: UT
30/60/10: MN
30/60/25: NC
50/100/25: AK, ME

Don't get caught with state minimum auto insurance – it is bad for business. Even if your organization is protected by a policy that requires business insurance for a personal vehicle, you could still be at risk. The importance of annual Motor Vehicle Reports (MVR) cannot be neglected. 

Verifying minimum business coverage for employees' auto insurance

Once you have established an appropriate amount of insurance coverage for employees, it's important to enforce the policy. First of all, give employees every incentive to comply. That will probably involve a modest increase in each employee's car allowance or vehicle reimbursement to make up for their increase in auto insurance premium.

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But second, establish a procedure for verifying that each employee stays compliant with the business auto insurance requirements. It is perfectly reasonable to check and not an invasion of privacy. For more information on how to properly conduct employee car insurance verification, read our post.

The fact is, a policy is no good if it's not enforced. It might feel uncomfortable to require employees to purchase business auto insurance coverage and then check behind them for compliance. But a small business could face bankruptcy in the event of a costly employee car accident. And a larger company with more drivers on the road faces significant financial risk multiplied by the number of drivers.

Take the company risk quiz below to see how exposed your organization is to a potential employee car accident.

Your companies risk is based on your employees that drive.

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