Insuring the corporate car

Transcription

1 Insuring the corporate car Insuring the corporate car Resource kit By Dan Corbin, CIC, CPCU, LUTC The executive officer and owner of a corporation is trying to decide how to title and insure his autos. Should he title the autos individually and insure them on a personal auto policy (PAP), or title them individually and insure them on a business auto policy (BAP)? On the other hand, should he title them to the corporation and insure them on a BAP, or title them to the corporation and insure them on a PAP? There are issues of convenience, premium expense, tax deductions, personal liability and insurance gaps to consider when making the decision. Are you prepared to advise this corporate owner if you are approached to make recommendations? While I do not propose that you take on the role of legal or tax advisor (unless, of course, you are qualified to do so), you should be able to offer an explanation of the coverage ramifications inherent with each alternative and show some familiarity with the other issues that will impact the decision. After explaining how coverage will apply, you will direct your client to his or her accountant and/or attorney to weigh other perceived advantages or disadvantages against the insurance benefits or detriments that you have disclosed for each alternative. I realize, of course, in the real world, your client may talk to the accountant first, then come to you to implement the accountant's recommendation. Nevertheless, you still should be prepared to outline the coverage ramifications attendant with the accountant's recommendation. Taxation Titling an executive officer's auto to the corporation makes a lot of sense when looking at the overall tax strategy, particularly if use of the auto is principally for business purposes. Corporate money pays for the auto, or backs the loan, without directly affecting the financial condition of the executive officer. Further, the corporation derives the right to deduct expenses incurred for such items as depreciation, loan interest, oil and gas, insurance, repairs, tires, registration fees, tolls and parking fees. The (normally true) assumption made here is that the corporation is in a higher tax bracket than the executive officer, which amplifies the corporate tax savings over the savings achieved by opting for the executive officer to deduct the expenses. Also, when the executive officer files business auto expenses as miscellaneous itemized deductions, there is a 2 percent threshold to cross before benefits begin to accrue. Not only that, if income exceeds a specified cap, deductions are further limited. Deemed by the IRS to be a capital expense (business asset), only the depreciation, not the purchase price, of an auto is deductible. The corporation can take a multi-year Modified Accelerated Cost Recovery System (MACRS) deduction, but if business use of the auto does not exceed 50 percent, then only a straight-line

2 method of depreciation is permitted. For leased autos, the actual lease costs will be used to determine the deductible expense. Even though the deduction is offset by a credit to income based on IRS tables, leasing usually yields higher net deductions than does ownership. When the executive officer owns the auto and is reimbursed by the corporation, an optional standard mileage rate may be applied to business miles driven in order to compute the deductible expense for depreciation and other expenses associated with the auto's use. An administrative inconvenience that must be tolerated with all methods for deducting business auto expenses, whether on the corporate or personal tax return, is the requirement to keep adequate records showing the division between personal and business use of the auto. Only the business use is deductible. The personal use of a furnished auto must be credited to the executive officer as salary, and the personal use of an auto owned by the executive officer is not deductible. There is, however, a tax loophole that can reduce an employee's tax liability for the personal use of a furnished auto. Congress authorized a safe harbor limit that allows an employee to report the value of using a company auto for commuting to work at $1.50 each way. The employee need only keep records of the trips commuted in order to determine the income that must be reported. Assuming that an employee is required to use the company auto to commute to work, a very significant tax break is realized by the fact that the availability of the auto outside of working hours is excluded as a "working condition fringe benefit." Although the employee has full personal access to the furnished auto, taxes will be paid only on the $3 value of each round trip. Legal liability In most states, merely having ownership of an auto does not make the owner liable for its use. It would require an agency relationship (for example, employer/employee) or some theory of negligence (for example, poor maintenance of the auto) to bring the owner into a suit brought by someone injured due to the auto's use. Some states have adopted the family purpose doctrine, which imposes liability on the head of a household for torts committed by family members while using the family auto. And in a few other states, like New York, legislators have imposed liability by statute upon the owner of an auto. In New York, an illusion persists that there is a legal advantage to titling an auto in the name of the corporation in order to prevent the executive officer from incurring personal vicarious liability for the auto's use. Section 388 of the New York Vehicle & Traffic Law makes a vehicle's owner vicariously liable for unlimited losses resulting from the negligence of any person having permission from the owner to use the vehicle. First of all, this perceived advantage for the executive officer would have very narrow application, because the executive officer, as the customary operator of the auto, yet would be liable for his or her active negligence in causing the damages. And, second, an executive officer whose auto is furnished would be considered an owner according to the statutory definition. Section 128 of the New York Vehicle & Traffic Law defines "owner" to include "a person, other than a lienholder, having the property in or title to a vehicle or vessel" and "any lessee or bailee of a motor vehicle or vessel having the exclusive use thereof, under a lease or otherwise, for a period greater than 30 days." Suppose a corporation leases an auto and furnishes it to an executive officer. The lessor, the lessee corporation and the executive officer are all jointly and severally liable for the auto's use, regardless of their individual negligence. Insurance In most cases, the premium expense under a BAP is going to be higher than under a PAP. This premium differential is important, but should not be given more weight than is prudent, considering the coverage issues that may be involved. There are times when the amount of limits available to protect sizable assets is a

3 determining factor in the placement of insurance. Consideration should be given to the accessibility of higher limits under a BAP and a commercial umbrella or excess policy. However, even if primary insurance is provided by a PAP, the corporate BAP could be endorsed to provide excess coverage for the executive officer's use of his auto for corporate business (see the ISO Employees As Insureds CA endorsement). Corporate titled, corporate insured This scenario offers the most favorable tax treatment, as well as a preferred source for funding the purchase or lease of an auto. On the downside, insurance costs under a BAP may be high compared to a PAP. When the executive officer has at least one other auto insured on a PAP, no unusual coverage issues will enter the discussion. But if the executive officer does not have a PAP, there is a nonowned auto exposure to fill which impacts his or her entire family. As long as the executive officer's family drives the furnished corporate autos, they will be insured as permissive operators. It is when the teenage son borrows a friend's uninsured or underinsured auto, or when a car is rented for the family vacation, that problems could arise. Without a PAP, there is no protection for the family when the auto involved has no relationship to the corporate business. Consider the financial hardship that could occur if the executive officer, while riding a bicycle, is severely injured by a hit-and-run driver. One solution would be for the executive officer to purchase a PAP endorsed with the ISO Named Nonowner Coverage (PP 03 22) form. Each member of the family will need to be named in order for coverage to apply to them. While liability, medical payments and uninsured/underinsured motorists coverages are available under this policy, it does not provide physical damage coverage on the nonowned autos. Another solution, probably less costly, is to add the ISO Drive Other Car Coverage Broadened Coverage For Named Individuals (CA 99 10) endorsement to the corporate BAP. Physical damage coverage (if the underwriter permits), as well as liability, medical payments and uninsured/underinsured motorists coverages, are available for personal nonowned autos operated by the executive officer and his family. The executive officer and each family member must be named in the schedule for coverage to apply to them. A resident spouse is automatically covered, but I suggest naming the spouse anyway, in the event of separation. Whether the executive officer chooses a named nonowner policy or a drive-other-car endorsement to cover personal nonowned autos, the ISO Named Individuals Broadened Personal Injury Protection Coverage (CA 22 01) endorsement should be added to the BAP of New York and New Jersey policyholders. By naming the executive officer on the schedule, he and his family will be afforded PIP coverage when injured in a vehicle that does not provide such coverage. An example would be a car rented in Connecticut for vacation purposes. Individually titled, individually insured This scenario offers the lower premium costs of a PAP, eliminates coverage problems for the family's personal use of nonowned autos and simplifies the management of insurance. Unfortunately, the executive officer can expect less favorable tax treatment for the business use of his or her autos due to a lower-than-corporate tax bracket and lower itemized deductions resulting from the 2 percent threshold requirement and upper caps on income. Individually titled, corporate insured In order to insure an individually owned auto on a corporate BAP, it will be necessary to either include the executive officer, along with the corporation, as named insured on the policy or lease the executive officer's auto to the corporation. This scenario is not preferred for tax treatment, nor is it likely to result in the lowest premium costs.

4 If the decision is to add the executive officer as a named insured (assuming the underwriter will do it), then the ISO Individual Named Insured (CA 99 17) endorsement should be added to the policy in order to provide the executive officer and her family with protection for the personal use of nonowned autos, including physical damage coverage. There is no additional premium charged for this endorsement. Nevertheless, it is redundant to add the endorsement if the executive officer has a PAP insuring other autos. In fact, it would complicate the settlement of claims that are insured by both policies. If the decision is for the executive officer to lease the auto to the corporation, then the ISO Employee As Lessor (CA 99 47) endorsement should be added to the BAP. The endorsement will insure the auto as though it were owned by the corporation and include the executive officer as an insured, in order to overcome ISO BAP exclusion b.(2) of Who Is An Insured under Section II Liability Coverage. Despite adding this endorsement, the executive officer and his or her family's personal use of nonowned autos yet must be taken care of by one of the methods previously discussed. Corporate titled, individually insured In order to insure a corporate-owned auto on a PAP, it will be necessary for the corporation to lease the auto to the executive officer. The PAP will be endorsed with the ISO Additional Insured Lessor (PP 03 19) and Loss Payable Clause (PP 03 05) forms in order to protect the corporation's interest in the auto. This scenario offers the lower premium costs of a PAP, eliminates coverage problems for the family's personal use of nonowned autos and permits corporate funding of the auto. On the other hand, complexity is injected into tax planning without any real gain in deductions for the corporation, shifting the tax burden to the executive officer. There also is some expense in drawing up the lease. An interesting variation on this scenario occurs in New York because the registrant of a motor vehicle can be someone different from the title holder. It is very common in New York to insure a corporate-owned auto on a PAP without the formality of a lease. This presents some coverage issues that need to be understood. You may recall that the ISO PAP insures for liability any person or organization that is legally responsible for an otherwise insured operator of the auto (Insuring Agreement B.3. of Part A Liability Coverage). Since by statute and under the right circumstances, by respondeat superior the corporation is liable for the use of the auto, it follows that the corporation is an insured under the PAP. It is not necessary to name the corporation as an additional insured, the corporation is insured by policy definition. The real problem with insuring a corporate-owned auto on a PAP emerges when the executive officer seeks recovery for physical damage to the auto. Many insurers will try to deny a claim based upon the executive officer's lack of an insurable interest, since he is not the owner or lessee. Technically, even adding the corporation as a loss payee on an ISO Loss Payable Clause (PP 03 05) endorsement, does not permit payment to the corporation if the executive officer has no insurable interest. This is because the PP form does not give the loss payee an independent right to make a claim, but only piggybacks its interest on the right of the named insured to receive payment for a covered claim. Nevertheless, I think insurers are wrong to deny an executive officer's claim based upon a lack of insurable interest. The New York statute (Section 3401 of the Insurance Law) defining insurable interest is quite broad. It has been liberally interpreted by the courts to encompass a pecuniary benefit or advantage that may be derived from the property's preservation, causing the insured to suffer pecuniary loss from its destruction. A good attorney could force the insurer to pay the claim, but therein lies the problem. Do you want your client to have this kind of difficulty with the insurance you sold her?

5 It's always a good idea to consider these matters in advance. Your clients need your input in deciding how to insure the corporate car. Give it to them straight, and don't be intimidated by their accountant or attorney. Once you give your best advice, though, the client is responsible for the decision. PIA thanks Mary Ann Racicot, CPA, of the Charles L. Marvin & Co., PC, accounting firm in Schenectady, N.Y., for her contribution to this article. Includes copyrighted material of Insurance Services Office Inc., with its permission. Copyrighted, Insurance Service Office, 1986, 1987, 1994, /02 PIA your best source of information With respect to all information found in this communication, PIA of Florida and its directors, officers, members, or employees make no warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, or usefulness of any information contained therein. PIA of Florida does not warrant that the information or services will meet any specific requirements; nor will it be error-free or uninterrupted; nor shall PIA of Florida be liable for any indirect, incidental, or consequential damages sustained or incurred in connection with the use of information in this communication. Under no circumstances will PIA of Florida be liable for any loss or damage caused by anyone's reliance on information contained in this communication. 1-05