When a business chooses self-insurance as a risk management strategy, it doesn’t buy a policy from an insurance company, instead it creates a loss fund to pay for any expenses resulting from an accident including physical damage to the company’s vehicles, property damage, and third-party liability claims. Photo courtesy of designer 491.
Punitive Damages May Not be Covered by Commercial General Liability Insurance
One risk management technique used by some commercial fleets is to self-insure all or some of its exposure by setting aside a pool of money to be used to pay for losses. These companies have decided that self-insurance is more economical than buying commercial auto insurance from a third party.
When a business chooses this risk management strategy, it doesn’t buy a policy from an insurance company, instead it creates a loss fund to pay for any expenses resulting from an accident including physical damage to the company’s vehicles, property damage, and third-party liability claims.
Typically, a self-insured vehicle owner has to demonstrate financial solvency necessary to meet a state’s minimum liability insurance requirements. In some states, certificates of self-insurance are required for eligibility.
Often this is done by purchasing a bond for a certain amount of money to demonstrate the capability of meeting financial obligations in the event of an accident. For instance, if you operate a DOT regulated truck fleet, a company can self-insure by meeting the Federal Motor Carrier Safety Administration’s (FMCSA) financial responsibility requirements by issuing bonds or letters of credit.
Some smaller business owners will have a higher deductible for collision and comprehensive insurance, which amounts to partial self-insurance against loss or damage to a company vehicle. Other self-insured fleets acquire aggregate stop-loss insurance to cap potential losses.
“An aggregate stop-loss policy is designed to limit the exposure a company will experience when self-insuring,” said Tracy Decker, VP, commercial insurance operations for Holman Risk Partners. “This coverage protects the business against claims that are higher than expected by capping a company’s financial loss and protects against a catastrophic incident that potentially could bankrupt a company.”
In essence, an aggregate stop-loss insurance is a policy designed to limit claim coverage (losses) to a specific amount. This coverage ensures that a catastrophic claim (specific stop-loss) or numerous claims (aggregate stop-loss) do not drain the financial reserves of a self-funded insurance plan.
Exposure to Punitive Damage Awards
Although most commercial fleets self-insure or have large deductible programs for their fleet to cover vehicle damage, most carry commercial general liability insurance for bodily injury or property damage caused by their company vehicle or employee.
When property damage and/or bodily injuries are egregious or catastrophic, it may be adjudicated by a jury trial. Sometimes a jury has the right to award punitive damages to “right a wrong” or to punish the offender with the idea of it deterring others who may engage in similar future conduct. Among non-risk management professionals, there is often a mistaken assumption that a commercial liability policy will pay for the punitive damages, which may not always be the case.
Although many states allow liability policies to insure against punitive damages, there are a number of states where this is illegal. The rationale is that insuring punitive damages circumvent the purpose of awarding damages in the first place, which is to right a wrong. In the U.S., each state establishes its own guidelines to insuring against punitive damages and the types of acts that are insurable.
For instance, Florida state law generally prohibits insurance coverage for punitive damages for the direct wrongful conduct of an insured. However, Florida law recognizes an exception to that prohibition when punitive damages are sought for vicarious liability. Each state makes distinctions between “directly” assessed damages — wrongful actions made by the insured — and “vicariously” assessed damages — wrongful actions of others where the insured is legally liable.
In a workplace context, an employer can be vicariously liable for the negligent acts or omissions by its employees, provided it can be shown that they took place under the respondeat superior doctrine, which is a Latin phrase that means “let the master answer.”
This legal doctrine holds an employer legally responsible for the wrongful acts of an employee or agent, if such acts occur within the scope of the employment. When respondeat superior is invoked, a plaintiff will look to hold both the employer and the employee liable.
Changing Fleet Applications
When fleet business applications change, it is important to inform your commercial insurance broker because the existing commercial general liability insurance may not provide coverage to the new operation. When changes are made in business operations, it is necessary to update insurance coverage to accurately reflect current business practices.
For example, let’s say you own a hauling company and decide to expand into the towing business. If you didn’t provide information about the new business application to the insurer, the commercial general liability policy may not provide coverage if one of your tow trucks damages a parked car.
Although insurance responsibilities typically fall outside a fleet manager’s realm of responsibilities, it is important to be aware of the different state laws that affect corporate liability exposure, especially when you are managing a nationally dispersed fleet. In addition, fleet management plays an important role in minimizing loss exposure by enforcing fleet safety policies and implementing fleet safety programs to help deter preventable accidents.
“An award of punitive damages in a single case can destroy an otherwise healthy business,” said Decker. “A good start to minimize the possibility of punitive damages is to establish a strong safety program and enforcing driver policy without exceptions.”
In the final analysis, a fleet manager is a crucial component in corporate risk management by instituting the policies and programs that help to minimize corporate liability exposure.
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