Small Business Brief

Auto Dealership

What Does Car Insurers Say About Personal Use of a Company Vehicle

Did you know that 60% of accidents in company vehicles happen on the employee’s personal time? Because of this, you may want to limit the personal use of a company vehicle. 

Insurance companies want you to know that you are probably more liable than you realize. So keep reading to find out the reality of putting your entire business at risk by offering company cars. 

We will also offer some alternatives if you decide the risk is too great for you to continue offering this perk. 

Your Premiums Are Expensive 

If you allow employees to use their vehicles 24/7 then your insurance company is going to expect you to pay. Auto insurance is notoriously the least profitable type of insurance. 

Because of this, insurance companies don’t want the increased liability of your employees driving your vehicles all of the time. Think about it this way; there is a certain level of liability when your vehicles get used Monday through Friday during business hours. 

When your employees have access to the vehicle all of the time, the risk goes up. Employees will use the vehicle to go out on the weekend or run to the store in a storm. 

What Vehicles Will They Cover?

You have three options when it comes to deciding how much car insurance coverage you want for your company vehicles. 

The most restrictive type of coverage will only apply to specifically described vehicles. Think of this as functioning like your personal auto policy. You will specifically identify the vehicles you want to be covered. 

The second option is a bit broader in that your policy covers all vehicles that the business owns, hires, and leases. This makes managing your policy a bit easier as you can automatic coverage of the vehicles you use without having to worry about updating your policy. If you decide leasing your fleet is right for your business, you will want this type of coverage. 

The third option is the broadest and the one that most businesses should strive to have. This coverage is for all vehicles that a business may use. This way your business will have coverage over everything the business owns, but also those vehicles that the business uses but may not own or lease. 

Employee Personal Insurance Will Not Cover 

Most personal auto insurance policies have a clause that excludes other available vehicles from the policy. Because of this, a company car is not covered. 

The only way the employee’s personal car insurance would cover the company car is if the company car was borrowed by the employee as a temporary replacement for the employee’s own unavailable car. 

Add Supplemental Coverage 

That same sort of exclusionary clause that we talked with personal insurance policies also happens with the company auto policy. When the employee uses the company car for personal use and does not have another car, there is a gap in the insurance coverage. 

You need to add supplemental coverage in the form of Drive Other Car Coverage Endorsement. This will cover your employee and their family while driving the car for personal use. 

What If There Is an Accident? 

Thanks to the legal doctrine of respondeat superior the company is liable for the actions of their employees while the employee is performing work duties. So if an accident happens while the employee is driving for work-related activities, the company’s insurance is going to step in. 

But what about if the accident happens while the employee is driving for personal reasons? No company wants to be liable for what their employees do on the weekend. 

Employees need to pay attention to the vehicle agreement they sign with their employer. It most likely will say that the company will not indemnify its employees for accidents that happen during non-work related use. An insurance company will stand behind the business and deny coverage. 

If employees get into an accident in a company car during personal use, they need to find a lawyer. They will need a legal expert to help them walk through the financial and legal implications of the event. 

Insurance Companies Recommend Alternatives 

You can reduce risk and costs by opting to do a different type of program. Instead of giving employees cars, offer then an allowance or reimbursement. 

Car Allowance 

There are two types of car allowances, non-accountable and accountable. If you go with the non-accountable plan, you don’t need to separate your employee’s business and nonbusiness use.

Whatever you pay will be supplemental income. Your employees will need to report this and pay income tax. 

If you decide to use an accountable system, then you will give your employees a pre-decided on stipend amount. Then your employee will need to keep a log book of their business use. 

The advantage of this type of plan is that the allowance used for business use is not considered wages. So your employees won’t have to pay income tax on their stipend. 

Mileage Reimbursement 

If you want to keep it simple, just pay your employees a reimbursement. Decide how many cents per mile you are willing to pay. This money is not considered taxable income for your employees.  

Will You Allow Personal Use of a Company Vehicle

When it comes to personal use of a company vehicle, the waters are murky. This is probably why many companies have moved away from this perk for their employees. 

Insurance companies will only cover specific acts as authorized by the company. So both companies and employees need to carefully review all paperwork so that they know what their liabilities are. 

If you have any questions, the smartest thing you can do is consult an attorney. They will be able to help you understand the technical language often associated with these types of contracts. 

Now that you understand the insurance aspect, be sure to read our post about how to pick the right vehicles for your company.