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Business vehicle insurance policies for reimbursement programs


The precautions needed to set up a reimbursement program for your drivers may be extensive, but in the end, they’re worth it.


If your employees use their personal vehicles for business purposes, they’re automatically eligible for a reimbursement program – should you choose that route. As their employer, taking advantage of these cost-effective arrangements is crucial. Regardless of the types of vehicles your business may require, a reimbursement program is an alternative to company car programs that must be seriously considered. Rather than managing a car fleet, you can compensate employees with a specific reimbursement rate for operating and maintaining their own vehicles for fees such as gas, insurance, depreciation, and repairs. Depending on the needs of a company – for instance, small businesses may not need as comprehensive coverage for commercial auto insurance – there are a handful of different reimbursement programs, including car allowance, cents-per-mile, or fixed and variable rates (FAVR).

Remember that no plan is equal, and each has unique advantages and disadvantages depending on your driving habits, vehicle type, and tax implications. This article will explain how to set up your business vehicle insurance policy for reimbursement programs and what factors you should consider when choosing a program that suits your needs.

Vehicle reimbursement programs and auto coverage

Liability coverage and auto insurance policies

When employees bring their vehicles to work, they must supply their insurance. In this way, one of the benefits of having a vehicle reimbursement program is the immediate reduction of liability risks for any given company. If your employees use their cars for work-related purposes, the impetus for having adequate insurance coverage is shouldered onto them. This means their insurance company will handle the claims and damages in case of an accident or vandalism, not yours. It’s vital to ensure your employees understand this policy and comply with the minimum insurance requirements for your state. In other words, no matter how clean or spotty their driving record may be, employees are responsible for covering the insurance rate associated with their vehicle. Unlike company car fleets, premiums, deductibles, coverage limits, and everything in-between is no longer the employer’s concern.

Insurance reimbursements

Employees are eligible to be reimbursed for the portion of the insurance cost corresponding to the vehicle’s total business use. If drivers use their car for work 75% of the time, they should receive compensation for 75% of the insurance cost. The remaining 25% related to personal use, i.e. driving off the clock, such as commuting to and fro work, constitutes an exclusion.

Read more: Which insurance coverage designation do I need to drive for work?

Vehicle insurance declaration

A vehicle insurance declaration is a document that proves that a vehicle owner has the minimum required insurance coverage. This document is necessary for FAVR (Fixed and Variable Rate) reimbursement programs, which reimburse employees based on the actual costs of operating their vehicles. Insurance declaration is also commonplace for TFCA (Tax-Free Car Allowance) or CPM (Cents Per Mile) reimbursement programs, which reimburse employees based on a fixed amount or a fixed rate per mile driven.

Declaring insurance: FAVR

Renowned for their cost efficiency, Fixed and Variable Rate (FAVR) programs are a specific reimbursement plan for drivers using their vehicles for business purposes. In this system, employees receive a monthly allowance to cover the fixed costs of owning a car, such as depreciation, insurance, taxes, and registration, and a mileage rate to cover the variable costs of operating a vehicle, such as fuel, maintenance, and oil changes.

FAVR programs are designed to be cost-effective and accurate, as they reflect the local vehicle expenses and the actual business mileage of each employee. To qualify for FAVR reimbursement, you must be insured. Employees must declare their insurance coverage when enrolling in the FAVR program or changing vehicles or insurance providers. If they do not have insurance or have not declared it, you could be taxed on your FAVR reimbursement, as it would not comply with the IRS rules for tax-free payments. Therefore, reporting and updating your insurance coverage is essential to avoid tax consequences.

State minimums

Business owners operating vehicles in the US must know their state’s minimum car insurance requirements; every state has a different law specifying the minimum liability insurance amount to cover the damages and injuries an employee may cause to themselves or others in an auto accident. If someone who works for you is at fault, the penalties could be more severe, depending on their location. Some states also require other types of coverage, such as personal injury protection, uninsured/underinsured motorist, or medical payments.

For example, Alabama requires $25,000 bodily injury liability per person, $50,000 bodily injury liability per accident, and $25,000 property damage liability per accident. Alaska requires $50,000 bodily injury liability per person, $100,000 per accident, and $25,000 property damage liability per accident. Arizona requires $25,000 bodily injury liability per person, $50,000 per accident, and $15,000 property damage liability per accident.

These are just some examples of the minimum car insurance requirements by state. However, remember that these are only the minimum requirements, and you may need more to protect yourself and your business from financial losses in case of a severe accident. Consider getting higher limits or additional coverage options to suit your needs and budget.

One option for you to put on the policy is your state’s minimum for your driving policy. This means you will only have the minimum amount of coverage required by law in your state. This option may be cheaper than getting more coverage, but it comes with more risks. You must pay the difference out of your pocket if you cause an accident exceeding your policy limits. You may also face legal consequences if the other party sues you. Additionally, if you drive in another state with higher minimum requirements than yours, you may need more coverage to meet their standards.


One of the common types of auto insurance that businesses often opt for is 100/300/100 coverage. This means that the policy covers up to $100,000 per person and $300,000 per accident for bodily injury liability and up to $100,000 per accident for property damage liability. Bodily injury liability covers the other party’s medical expenses if you cause an accident. In contrast, property damage liability covers the repair costs of the other party’s vehicle or property1. This type of coverage provides more protection than the minimum required by most states. However, it also costs more than lower coverage levels, so consider your budget and risk factors when choosing an option.

1  Insurance Mistakes to Avoid

Consulting your internal risk department

Having a good idea of the ins and outs of potential risks is always necessary during the decision-making process – especially when it comes to which insurance policy or outsourced vehicle reimbursement provider an employer will take on. An internal risk department can help you analyze different options’ potential risks and benefits and ensure compliance with relevant regulations and standards.2 Risk management should be embedded within the organization’s culture so everyone is focused on managing and optimizing risk. If you already have a specific insurance policy in place other than 100/300/100, ask your outsourced vehicle reimbursement provider whether you can use your existing policy or if you need to change it. Your internal risk department can help you evaluate the impact of this decision on your financial and operational performance, as well as your reputation and stakeholder trust. Consulting your internal risk department is a good practice and a strategic advantage that can help you create value and achieve your business objectives.

2 How Companies Can Reduce Internal and External Business Risk 

Withholding reimbursements when you’re out of compliance 

One of the ways to ensure compliance with your reimbursement policy is to withhold reimbursements when employees fail to meet the requirements. Since on FAVR programs it is an IRS compliance measure that all employees must have insurance, your employees are not eligible to receive their reimbursement tax-free when they have not declared their insurance. 

Other ways to reimburse drivers that don’t require verification

There are different ways to return drivers that don’t require proof. Namely, TFCA and CPM. You are allowed not to verify insurance on these programs. However, your drivers still probably need insurance to drive at least a state minimum in their territories.

  • Tax-Free Car Allowance (TFCA): A program that pays drivers a fixed monthly amount based on their driving profile and location. It is tax-free for the employer and the employee as long as the allowance does not exceed the IRS standard mileage rate.
  • Cents per Mile (CPM): A program that pays drivers a variable amount per mile driven based on the IRS standard mileage rate. It is also tax-free for both parties, as long as the drivers meet the criteria for the CPM program, such as driving at least 50% of their work time.

TFCA and CPM do not require insurance verification, as they are based on IRS guidelines and not on driving expenses. However, drivers still need insurance and must comply with the state laws and regulations regarding minimum insurance coverage in their territories. Please do so to avoid exposing them and their employers to legal risks and liabilities in case of accidents or damages.

Educating drivers about their insurance responsibilities and options is essential when choosing TFCA or CPM programs. They should also be aware of the benefits and drawbacks of each program, such as flexibility, accuracy, fairness, and simplicity. They may find one program more suitable depending on their driving patterns and preferences.


Reimbursement programs are a great way to pay employees for using their vehicles for business purposes; not only do they save a great deal of money when contrasted with the costs of managing a fleet of company vehicles, but they also help guarantee a business has adequate collision coverage. Nevertheless, not all programs are the same, and it’s essential to ensure that each business vehicle insurance policy is compatible with a given program. It’s also necessary to weigh the pros and cons of each kind of reimbursement system, be it standard car allowance, cents-per-mile, or fixed and variable rate (FAVR), based on your employees’ driving habits, vehicle type, and potential tax implications. 


Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: For Cardata’s terms of service, go here:

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