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Commercial motor insurance

This article was last updated by the author in October 2016.

A brief introduction to commercial motor insurance.

Contents

Overview

Motor insurance is one of a few classes of insurance which are compulsory in the UK. The most important piece of legislation in this respect is the Road Traffic Act 1988 (as amended and updated by later legislation).

This makes it illegal to use a motor vehicle on a road, or public place, unless insurance is in force covering legal liability for injury to others and damage to their property. From May 2011, it also became illegal to keep a vehicle without appropriate insurance unless the DVLA has been notified that it is 'off road'.

In addition to complying with the requirements of the Road Traffic Act 1988, all motor policies must meet the requirements of a number of EU Motor Insurance Directives.

There are 4 levels of cover available:

  • Road Traffic Act only
  • Third party only
  • Third party, fire and theft
  • Comprehensive

The range of commercial vehicles insured (and the associated risks) vary widely and include:

  • cars used in connection with a business
  • goods-carrying vehicles; the term used to describe all the different types of vehicles that are designed to carry goods. They are classified by insurers for risk assessment purposes either by their carrying capacity or their plated weight. The goods carried are not covered by the motor policy, cover instead being provided under a separate goods in transit policy
  • passenger-carrying vehicles, which include minibuses, coaches and buses. The main exposure for insurers comes from the risk of bodily injury to passengers.
  • hire vehicles. These fall into three categories:
    • private hire; the hiring of a car with driver from the operator's premises
    • public hire; taxis which can be hired on the streets or at recognised taxi stands
    • self-drive hire; the hire of a vehicle, such as a car or van, without a driver
    • agricultural and forestry vehicles, such as tractors, combine harvesters, threshing and baling machines. These vehicles will not usually be used a great deal on the roads and therefore present a lower risk to insurers
    • vehicles of special construction (special types), which include various types of vehicle which are also used as a tool of trade; such as ambulances, mobile shops, cranes and fork-lift trucks. The third party working risk is not covered by the motor policy, cover instead being provided by the insured's public liability or engineering policies.

There are two distinct types of policy that are common in the commercial vehicle insurance market:

  • Fleet. This is where a number of vehicles owned by the same company (usually a minimum of 10) are insured on a single policy. Fleet policies can consist of private cars, goods-carrying vehicles or other types or a mixture of different types. A number of insurers who offer 'mini-fleet policies, which are for a minimum of five vehicles.
  • Non-fleet This is the term used to describe policies which insure individual or fewer than ten vehicles (or five if suitable for a mini-fleet cover).

Insurers also offer specialist motor trade policies. These are designed primarily for garages and similar businesses which sell and/or service and repair vehicles. In addition to cover for their own vehicles, they also have a variety of other needs (such as for damage to customers' vehicles, test drives and breakdown recovery).

 

Typical cover provided

There are 4 levels of cover available. Insurers will modify their 'standard' cover where necessary depending on the vehicle being insured. Some insurers issue specific policy wordings for 'agricultural and forestry' and 'special types' vehicles.

Road Traffic Act (RTA) cover

This is the minimum level of cover which is available and provides the cover needed to meet compulsory insurance requirements. Very few RTA policies are issued, as the difference in cover between RTA and Third Party cover is not great. For all practical purposes, the lowest level of cover offered by insurers is Third Party.

The cover provided under an RTA policy includes:

  • indemnity for bodily injury or death caused to third parties, including passengers, which must be unlimited in amount
  • indemnity for loss of or damage to property belonging to third parties; limited to £1,000,000. This complies with the Motor Vehicles (Compulsory Insurance) Regulations 2007, which were passed in the UK to meet the requirements of the Fifth EU Motor Insurance Directive
  • indemnity for claimants' costs and the expenses of handling the claim
  • charges for any emergency medical treatment and hospital charges arising out of the use of the vehicle
  • the minimum legal cover required when a vehicle is being used in another EU country (or the minimum cover required in the country where the vehicle is kept, whichever is the greater). This meets the requirements of the Third EU Motor Insurance Directive
  • liability to persons in the employment of the insured, when travelling as passengers in the course of their employment (but not the driver). This also meets the requirements of the Third EU Motor Insurance Directive. Any legal liability that the employer has towards the driver would be covered under their employers' liability policy.

There is no cover for damage to the insured's own vehicle.

Third party only

The cover provided by a third party only policy includes all the cover under an RTA policy, plus the following:

  • cover is extended to apply whilst the insured vehicle is being driven on private land, as well as on a road or public place. Territorial limits apply, which are usually anywhere in the United Kingdom, the Isle of Man or the Channel Islands. Some insurers extend cover to apply to the whole of the EU for a limited time in any one period of insurance
  • cover for accidents occurring whilst loading or unloading the vehicle;
  • an increased limit for third party property damage, typically £5 million
  • indemnity to anyone who is driving or using the vehicle on the insured's order or permission, including for social, domestic and pleasure purposes
  • indemnity to passengers should they be held responsible for an accident
  • legal costs incurred in the defence of a claim
  • limited cover for legal representation costs following a prosecution for a motoring offence which may give rise to a claim.

There are specific exclusions that relate to a third party only policy:

  • damage to property owned, held in trust by or in the custody or control of any person claiming indemnity under the policy
  • liability covered by any other insurance policy

Third party, fire and theft

This is the first level which includes some cover for the insured's own vehicle.

The cover provided by a third party, fire and theft policy includes all the cover under a third party policy, plus the following:

  • damage to the insured vehicle by fire, lightning or explosion
  • damage to the insured vehicle during attempted theft or whilst it is stolen. Some insurers include the taking of the vehicle without consent
  • loss of the insured vehicle due to it being stolen and not recovered.

In addition to the two third party policy exclusions identified earlier, a third party fire and theft policy also excludes 'loss of use'; i.e. any financial losses incurred by the insured whilst their own vehicle is off the road.

Cover for spare parts and accessories may only apply while they are attached to the vehicle.

Comprehensive

This level of motor insurance cover offers the widest possible protection.

The cover provided by a comprehensive policy includes all the cover under a third party fire and theft policy, plus other accidental or malicious damage to the insured's car. The cover provided is on an 'all risks' basis, which means that all loss or damage is covered unless specifically excluded;

A number of specific exclusions apply to comprehensive cover, including:

  • loss or damage to accessories and spare parts, unless on the insured's vehicle
  • wear and tear and depreciation
  • loss of use
  • mechanical and electrical failure or breakdown. It is only the part that fails which is excluded; any resulting damage to the vehicle is covered
  • damage to tyres caused by road punctures or bursts

Optional extensions

There are a number of optional extensions to a commercial vehicle policy which are available:

  • an increased limit for third party property damage
  • breakage of glass can be added to a non-comprehensive policy
  • cover for personal belongings and clothing, medical expenses and personal accident benefits
  • loss of use covering up to 80% of leasing or hire charges
  • full foreign use cover, giving the same cover whilst driving abroad as whilst driving in the UK
  • cover whilst motor vehicles are used in connection with carnivals
  • comprehensive cover for trailers. Third party cover is automatically included by many insurers for trailers while they are attached to the insured vehicle
  • indemnity to hirers
  • indemnity to principal
  • legal expenses
  • breakdown cover

Insurers will charge an additional premium for a number of these extensions.

Key exclusions

In addition to the exclusions which apply to the specific sections of cover, there are a number of general and market exclusions applicable to all sections of the policy, including:

  • driving by unlicensed drivers
  • use of the insured vehicle outside the uses that the policy permits
  • contractual liability
  • war risks
  • radioactive contamination and explosive nuclear assembly
  • riot and civil commotion in Northern Ireland, for own damage cover
  • sonic bangs
  • pollution and contamination unless arising from a single identifiable event
  • using a vehicle in an unroadworthy condition. However, this is one of a number of circumstances, listed in the Road Traffic Act, where the insurer must pay an RTA claim and then seek to recover its outlay from the insured.

In addition any driver insured by the policy must hold, or have held, a licence to drive the vehicle and not be disqualified from holding or obtaining such a licence. The insured will not be indemnified if they know that the person driving the vehicle at the time does not hold a licence. However, the insurer will be obliged to pay any RTA claim and then seek recovery from the insured. 

Rating factors

There is greater individual underwriting of commercial motor risks compared to private motor, because of the huge variety of different categories of vehicles and their uses, together with the need to consider the individual claims experience for each risk. However, smaller commercial risks, insuring individual or small numbers of vehicles, lend themselves to process-driven type operations which require less of the traditional underwriting skills.

Fleet risks are predominantly rated on the historical claims experience of the fleet, adjusted to take allow for inflation, administration expenses and profit.

Non-fleet risks are rated on a combination of factors, including the type of vehicle; details of the proposer and drivers (including the business description and the drivers' age, driving and claims record); the geographical area of use; the use to which the vehicle is put; and the level of cover required.

Product providers

The vast majority of risks are still placed through intermediaries, often alongside the company's other general insurances. The business is placed either with traditional insurers or Lloyd's syndicates.

These channels are also used for smaller commercial risks. However, increasingly these are placed direct, including over the internet, rather than through the traditional intermediary route. 

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