Company-owned fleets of executive cars have long been a symbol of prestige and convenience for employees. However, alongside the benefits, there are inherent risks associated with these fleets, particularly when company vehicles are used for personal purposes. Accidents that occur during non-business use of these cars can lead to significant insurance problems for the company and can cause the company to suffer from deep pocket jurisprudence. To mitigate these risks, a viable solution lies in implementing vehicle reimbursement programs, such as Cents per Mile, FAVR (Fixed and Variable Rate), or Accountable Allowances. In this blog post, we will delve into the challenges posed by company-owned fleets and explore the advantages of adopting vehicle reimbursement programs.
The Risks of Company-Owned Fleets
When employees take their company cars home or allow family members to drive them, accidents that occur during personal use can pose substantial challenges for the company. Some of the key risks associated with company-owned fleets are:
- The company is sometimes held responsible for accidents that occur outside of work when employees are driving the company car for personal reasons.
- Loss of Control: Once a company vehicle leaves the premises, it becomes challenging for the organization to monitor and enforce safe driving practices. This lack of control increases the likelihood of accidents and creates potential liabilities.
- Insurance Complications: Business insurance coverage could potentially exclude accidents that occur during personal use of company vehicles. This could leave the company exposed to substantial liability and financial losses, as traditional insurance policies may not adequately protect against such incidents.
- Maintenance and Administrative Burdens: Maintaining and managing a large fleet of company-owned vehicles can be a time-consuming and costly process. Ensuring regular maintenance, repairs, and addressing administrative tasks like licensing and registration can drain resources and distract from core business activities.
Deep Pocket Jurisprudence
Accidents that are the result of a company car being used out of working hours, even if the accident is caused by the employee, are often the target of deep pocket jurisprudence. This concept, described in 2014 by an Iowa Supreme Court Judge, occurs when a company is the target of a tort law case, because it is believed that the company has the “deep pocket” funds to cover the liability.
According to the Washington Legal Foundation, an example of this practice in when automobile manufacturing companies are sued by drunk driver plaintiffs who have in turn been sued by someone who incurred damage or injury by the drunk driver on the basis that the vehicle was unreasonably dangerous. A similar incidence of deep pocket bias could occur if a plaintiff from a case pertaining to an accident caused by an employee driving a company car were to sue the company rather than the employee for causing harm.
Deep pocket jurisprudence was described in 2014 by the Iowa Supreme Court as “law without principle”. Regardless of this diagnosis, deep pocket jurisprudence continues to happen and is one of the reasons why risk can be better managed with VRPs rather than company fleets.
Commercial Car Insurance Costs and Risks
In addition to legal risks associated with company fleets, companies with fleets also must pay for insurance on their vehicles. Their premiums are also at risk of increasing if there was an accident. This can add cost even without the risk of legal complications.
When a company uses a company fleet, it is solely responsible for paying for the company car insurance policy. However, when a company has their employees drive their personal cars, then the insurance is partially covered under the employee’s personal policy, and partially covered by the company, yielding reduced costs. According to Investopedia, commercial car insurance costs a company an average of 1762$ annually per car owned. This rate per car also increases when a company has more cars.
When there is an accident, and the driver is deemed at-fault, insurance premiums can increase by 15-30%. This can create significant cost, particularly if your company owns or leases multiple vehicles.
Read more: What Does Commercial Fleet Insurance Cost?
Maintenance and Administration
Apart from legal and insurance risks, maintaining and administering company fleets can have unforeseen costs that can impact your company and distract from core company activities. AAA estimates that the average car that meets the 14,000 miles annually mark can expect to pay approximately 1,186$ annually in maintenance fees. This cost can increase as the car ages, creating more financial burden on your company.
Alongside maintenance costs, company fleets can also require administrative energy that could divert from your company’s main activities and goals. Car licensing and registration takes significant time and focus, and this can create additional administrative burden. Generally then, in addition to upfront costs associated with company fleets, legal risks, insurance costs and risks, and maintenance and administrative needs can all create risk for your company, and potentially create deterrence from company success.
Introducing Vehicle Reimbursement Programs
To address the risks associated with company-owned fleets, many organizations are adopting vehicle reimbursement programs. These programs shift the responsibility of using a vehicle for business purposes to the employees’ personal cars. Let’s explore three popular reimbursement models:
- Cents per Mile (CPM): Under the CPM reimbursement model, employees track their business mileage and are reimbursed based on a predetermined rate per mile driven. This rate typically includes fuel, depreciation, insurance, and other associated costs. CPM provides a simple and transparent way to reimburse employees for their business-related driving.
- FAVR (Fixed and Variable Rate): FAVR is a more comprehensive reimbursement program that takes into account both fixed and variable costs associated with owning and operating a personal vehicle. Fixed costs include insurance, registration, and depreciation, while variable costs encompass fuel, maintenance, and repairs. FAVR ensures employees are fairly compensated based on their specific vehicle expenses.
- Accountable Allowance (463/TFCA): An accountable allowance is a predetermined fixed amount that the company provides to employees to cover their business-related driving expenses. To qualify for tax benefits, employees are required to report their actual expenses and return any unused portion of the allowance. This model offers flexibility while ensuring accountability.
Benefits of Vehicle Reimbursement Programs
Implementing a vehicle reimbursement program can offer numerous advantages for both the company and its employees:
- Reduced Liability: By shifting the responsibility of business travel to personal vehicles, the company mitigates the risk of accidents occurring during personal use. Insurance complications are minimized since employees are covered under their personal auto policies. Risks of deep pocket practices are also reduced because the employee is not driving a company car, and so is not affiliated with the employees’ actions after work hours.
- Cost Control: Vehicle reimbursement programs allow companies to streamline expenses and avoid the high costs associated with maintaining and managing a fleet of company-owned vehicles. Reimbursement amounts can be tailored to reflect actual usage, resulting in potential cost savings.
- Increased Flexibility: Employees can use their preferred personal vehicles, which often leads to higher job satisfaction and productivity. Employees feel empowered by having control over their vehicle choice and usage.
- Simplified Administration: Implementing a vehicle reimbursement program eliminates the need for complex fleet management. Administrative tasks like maintenance scheduling, repairs, and documentation are transferred to individual employees, freeing up valuable resources.
While company-owned fleets of executive cars offer convenience, they also present inherent risks when accidents occur during personal use. Adopting vehicle reimbursement programs, such as Cents per Mile, FAVR, or accountable allowances, provides a practical solution to mitigate these risks. By shifting the responsibility of business travel to employees’ personal vehicles, companies can reduce liability, control costs, increase flexibility, and simplify administrative burdens. As organizations seek to strike a balance between employee satisfaction and risk management, vehicle reimbursement programs prove to be a valuable alternative to company-owned fleets.
Disclaimer: 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: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.