Personal Auto vs. Commercial Auto

Auto insurance is auto insurance right? I mean, what’s the big deal if my vehicle is used for work and my home life? Unfortunately, personal auto insurance and commercial auto insurance are not the same. In fact, it can seem like people speaking 2 different languages when you are new to it. Let’s do a brief overview of each and then we’ll note the similarities and differences.

Personal Auto Insurance is designed for individuals and their family members primarily residing in the same household. Even this first sentence can be tricky when it comes to certain life situations that can impact anyone like divorce, having a roommate, shared custody, children away at college, caring for a parent or grandparent in the home. Since the language used in the personal auto policy is very specific about who is and isn’t covered depending on the situation, it’s best if you review your particular situation with a licensed agent. Moving on from the hot potato of who is covered by the policy we get to what is covered. Personal Auto policies are for insuring private-passenger-type autos owned by individuals. The policy may be structured to provide a combination of liability, personal injury protection, medical payments, uninsured and underinsured motorists, and physical damage coverages. In laymen’s terms, a personal auto policy is designed to provide coverage for the vehicle owner and its operators in the event of injury or damage caused to another person or another’s property as well as damage to the vehicle itself.

Commercial Auto Insurance is designed to meet the various auto insurance needs of any type of commercial entity. This includes coverage for repair shops, car dealers and truckers as well as any business that owns and uses vehicles in running its operations. Some of the coverages are very similar: liability, uninsured/underinsured motorists, medical payments and physical damage. However, a business can have more exposure due to its daily operations which requires more specific or extensive coverage.

So what do these 2 very different types of coverage have in common?

1.       Liability coverage is required by law in most states so you will see it on both commercial and personal auto policies.

2.       All drivers and household members with access to vehicles are considered when determining premium for an auto policy.

3.       No matter if your policy is personal or commercial it is important to let your agent know WHO OWNS THE VEHICLE (what name is listed on the title). If the vehicle is titled to you personally, it should be on a personal auto policy unless it is used solely for business. If it’s titled in the name of a commercial entity, it should be on a commercial policy. Some companies will allow vehicles titled in the name of the owner of the company to be on the commercial policy as well.

4.       Both policies give you the opportunity to purchase uninsured/underinsured motorist coverage and physical damage coverage. Uninsured/underinsured motorist coverage provides additional funds if you are involved in an auto accident caused by another who doesn’t have enough insurance to pay for the damages / injuries. Physical damage coverage allows you to purchase coverage that will repair damage to the auto covered under your auto policy.

5.       The way a vehicle is used can impact your premium with both types of policies. Do you use your personal vehicle for business (sales calls)? Does your business do a lot of deliveries? How far away from your location do your vehicles travel on a regular basis? Do you drive to work or do you use the vehicle only rarely?

There are other things personal and auto insurance policies have in common but now let’s move on to some major differences.

1.       With a personal insurance policy, liability coverage follows the vehicle. For example, if you own a trailer or camper that is insured on a personal policy, more than likely the only coverage you have for it is physical damage coverage. When the trailer or camper is being pulled by a vehicle covered under yours or anyone else’s personal insurance policy, liability extends to the trailer or camper from the vehicle. If Bob borrows Joe’s trailer and there is an auto accident in which the trailer causes damage to a 3^rd party, Bob’s liability coverage that he has on the vehicle that pulls the trailer will pay the claim. This is completely opposite on a commercial insurance policy. Each trailer must have liability coverage for itself. If Business A loans a trailer to Business B and Business B has an auto accident in which that trailer causes damage to a 3^rd party, Business A’s insurance will pay the claim because the liability coverage comes from the policy of the owner of the trailer.

2.       Drivers with permits or under the age of 18 are expected on personal auto policies. Personal auto policies also have discounts available to help decrease the higher premium that can be generated by a youthful driver. Not the case for commercial insurance.  Most insurance companies will not allow drivers under a certain age to be insured on a business’ policy. Furthermore, if the company can be persuaded to allow a youthful driver it can be under specific restrictions and cost.

3.       The definition of a vehicle insured on a personal auto policy is a private-passenger type vehicle as noted above. However, the definition of a vehicle insured on a commercial auto policy can be extremely broad. The coverage can be determined by ownership, usage and type of business. A commercial auto policy has a specific section that outlines what types of vehicles are covered and for what coverage. It will also contain a listing of vehicles like a personal auto policy; however the commercial policy listing can include items like mobile equipment and non-owned autos.

4.       A personal auto policy gives all the drivers listed on the policy coverage no matter what vehicle they are driving – even if it is one they borrow one from someone else. A commercial auto policy provides coverage for the drivers listed on the policy only when they are driving vehicles that the policy designates as covered. Doing so protects the business from any fallout caused by an employee’s driving on his/her personal time. However, the owner of the business and his/her family may need to add more coverage to their business policy if they don’t have a personal auto policy to provide them with coverage as drivers in any situation.

5.       Commercial auto policies can be designed to provide coverage for test driving vehicles, transporting cargo from Iowa to Washington or pizza delivery in the employee’s own car. In this way it is a far more flexible policy than a personal auto policy. 

No matter what kind of policy you think you need, discuss with a licensed agent.  They are your best guide to what will protect you the most.

Rating Factors

Just like anything else, the more advanced technology gets, the more complex rating insurance has become with personal insurance rating (home, auto, motorcycle, umbrella, rentals, etc.). We can no longer collect three or four factors and tell you a rate, instead we must plug in several characteristics into the computer and get a rate. Those that have 10+ years experience in the Insurance Industry quite frequently tell me… “back in the day it was much easier, we could just pull out a manual, plug in a few  factors and get an accurate quote.” Those days are long gone. Now-a-days, it’s much more complex. Not only does it take more time, but it’s also hard to foresee future renewal pricing, or what reporting a claim will do to rates.

Actuaries are the folks that work for insurance companies and they analyze data on risk, and determine the key factors that would predict future losses and profitability of an account. Based on their findings they make recommendations to the insurance company advising how they should rate their policies.  As a consumer, we should be aware of the factors that drive our insurance rates upward or down.

Like mentioned above, there are many, potentially hundreds of factors playing into the creation of a rate. Below are, in my opinion, the most important factors that play a part in the rating and underwriting of your insurance policies.

Ø   “Insurance Score” :  From what I’ve been told this is likely the most important indicator of future claims, therefore is heavily considered to influence rates. This is derived primarily from information reported on your personal credit history. It is not a true credit score, but it is heavily based on the characteristics that make up your credit score. The better your insurance score the more preferred pricing you will receive.  As an agency we cannot view your credit history or information. However, there is a website which will allow you to order your annual credit report from each of the 3 major credit reporting agencies (TransUnion, Experian, and Equifax), one time per year for free. If you find errors on your report, it’s important to get these corrected.

o   The website is: www. AnnualCreditReport.com

Ø  Claim History: Each time you report a claim, regardless of whether there was a payout, mandatorily the insurance company must report this claim. It will be recorded on your claim history (similar to how a driving violation shows up on your Motor Vehicle Report).  Zero dollar payouts are not going to affect you as much as a claim with a payout, but note that zero payout claims are still recorded.

Insurance companies will look heavily at the frequency and/or severity of claims when underwriting a homeowners or auto policy. The truth is, insurance policies are really meant for the catastrophic claims, and should be used in this manner. Turning in every small claim will likely raise your rates for future renewals or alert an underwriter to review the account and determine if they want to continue offering coverage in the future.

Ø  Continuous Coverage without a Lapse: Similar to Claims history and motor vehicle reports, when you take out an insurance policy, continuity of coverage with an insurance company is recorded and is accessible to other insurance companies should you shop for insurance in the future. Actuaries have determined that continuous coverage without a lapse means a better risk; therefore better rates are afforded for these clients.  Even better yet is continuous coverage with a single carrier for a number of years without a lapse. As an independent agency we have other markets, and you may find a better rate with another company.  However tenure advantages with your current company should be weighed when contemplating changing insurance companies.

Ø  Prompt Payment of Insurance Premiums: Making sure that you get your insurance premiums paid on time is very closely monitored. Underwriting has told us this is one of the largest indicators of whether an account will be profitable long-term. If you are on time making your payments the majority of the time, you will get preferred pricing and favorable underwriting consideration. If you ever think you cannot make a scheduled payment on time, please call the agency in advance and we’ll do our best to help you. Contact us in prior the due date, and we will work with the company to come up with a plan so that it’s not viewed as late.

We know that sometimes the above factors may be skewed against you, and that’s why we’re here… to help you however we can.