Automobile Insurance

An automobile insurance policy is a type of package policy that may provide:

• Property coverage for damage to the insured’s auto
• Legal liability protection for bodily injury or property damage to others arising out of the operation, maintenance, or use of the insured auto
• Coverage for injury to the insured or members of the insured’s family

Personal Auto Policy

The main policy form used today to cover personal automobile exposures is the Personal Auto Policy (PAP). The definitions section of a PAP explains key terms used throughout the contract. These definitions generally appear on the first page of the PAP and include:

Bodily Injury (BI)

• The definition of “bodily injury” to others includes death.

Family Member

• A person related to the named insured by blood, marriage, or adoption who is a resident of the insured’s household (including a ward or foster child).

Occupying

• In or upon; or getting in, on, out of, or off of the covered auto.

Sidenote

Know this...

Getting out of an auto is also referred to as “alighting” from the auto.

Trailer

• A vehicle designed to be pulled by a private passenger auto. A farm wagon or farm implement, while towed by a private passenger auto, is also considered to be a trailer.

Covered Auto

• The specific vehicle described on the face page of the policy.

Coverage Territory

• The U.S. and its possessions, Puerto Rico, and Canada.

Owned Auto

• The vehicle that appears on the declarations page; the auto that the named insured owns and insures under the Personal Auto Policy.

Four Principal Coverage Parts

A PAP is a package policy that combines property and liability protection. The four principal coverage parts that make up the PAP are: liability coverage; medical payments coverage; uninsured motorist coverage; and coverage for damage to the insured’s auto.

Part A Liability Coverage

Part A states that the insurer will pay damages for bodily injury or property damage to others for which an insured becomes legally responsible. Damages include prejudgment interest awarded against the insured. The insurer will also settle or defend any claim or lawsuit seeking these damages.

In addition to the policy’s limit of liability, the insurer pays the defense costs it incurs.

Split limits

Liability coverage is commonly written on a split-limits basis. The limits are expressed as a series of three numbers, such as 15/30/10. This means the policy will pay:

$15,000 per person for bodily injury to a maximum of $30,000 per accident for bodily injury and $10,000 per accident for property damage.

When liability coverage applies

An auto policy provides liability protection when a named insured or covered family member is legally responsible for bodily injury or property damage to others while operating an owned auto.

The PAP also covers the named insured and/or family members while operating a non-owned auto. For example, if an insured injures someone while driving a non-owned auto and the owner has no liability insurance, the insured may have protection under their own PAP.

Who is an insured

The policy language defines who qualifies as an insured. An insured is:

1. The named insured or any resident family member using, owning, or maintaining the covered auto or trailer
2. Any person using the auto with the permission of the insured
3. Anyone vicariously liable for the acts of (1) or (2)

Supplementary payments

In addition to the policy’s limits of liability for bodily injury or property damage, the insurer will also pay certain additional expenses on behalf of the named insured. The policy lists these supplementary payments:

• Up to $250 for the cost of bail bonds required because of an accident, including related traffic violations;
• Premiums on appeal bonds and bonds to release attachments in any suit the insurer defends
• Interest accruing after a judgment is entered in any legal suit the insurer defends
• Up to $200 a day for loss of earnings, but not other income, because of attendance at trials or hearings at the insurer’s request
• Other usual or likely expenses incurred at the insurer’s request as long as they are reasonable

Endorsements

The following endorsements may be added to the PAP (usually for an additional cost):

Extended non-owned coverage for the named individual

• An insured who has no personal automobile may purchase an endorsement to a personal auto policy, which provides liability protection to the insured while driving any non-owned vehicle

Towing and Labor costs

• This endorsement reimburses the actual costs of towing a disabled covered auto and/or the cost of labor for emergency repairs performed at the site of disablement. Coverage applies only to labor performed at the place where the vehicle became disabled. Labor performed after the vehicle has been towed to a garage or repair shop is not covered under this endorsement.

Part A Exclusions

The insurer will not provide liability protection for any person with regard to any of the exclusions listed in the policy, which commonly include:

• Intentional BI/PD
• Property owned/being transported by insured
• No coverage for bodily injury to any employee of the insured arising out of and in the course of employment by the insured.

Exception: This exclusion does not apply to a domestic employee who is not entitled to (or required to be covered by) workers’ compensation benefits

• Liability from ownership/operation of a vehicle for hire
• Liability from using any vehicle in a business that is not farming or ranching
• Liability coming from the use of a vehicle the insured does not have permission to use (stolen car)
• BI/PD covered by nuclear liability policy
• Motorized vehicles having less than 4 wheels or designated to be used off public roads
• Vehicle furnished for insured’s regular use (company car)
• Competing and/or practicing for an organized racing or speed contest

Part B Medical Payments Coverage

Under Part B, the insurer will pay necessary medical and funeral expenses resulting from bodily injury to an insured or guest occupants of the auto. The insurer will pay only those medical expenses incurred within three years from the date of the accident.

For Part B, an “insured” includes the named insured, family members, and anyone else (guest passengers) while occupying or getting out of the vehicle. A named insured who is hit by a vehicle while a pedestrian is also covered, as long as the vehicle is designed for use on a public road.

The exclusions applying to Part B are similar to those appearing in Part A, but also include injuries sustained while using a vehicle as a residence.

Part C Uninsured Motorist Coverage

Part C pays compensatory damages that an insured is legally entitled to collect for bodily injury caused by an uninsured driver. The coverage limits are written on a per person/per accident basis. The limit of liability shown in the declarations is the maximum amount the insurer will pay for damages resulting from any one accident.

An uninsured motor vehicle is a vehicle that is:

• Uninsured (someone who simply doesn’t have insurance);
• A hit-and-run vehicle is considered an uninsured motor vehicle if it causes bodily injury to an insured.

Under the standard ISO Personal Auto Policy, physical contact with the hit-and-run vehicle is required for the loss to qualify for Uninsured Motorist (UM) coverage.

However, some states do not require physical contact. These states have “phantom vehicle” or “miss-and-run” rules that allow UM coverage when the vehicle leaves the scene without contact, as long as there is independent evidence of the event. These states include:

{` - *Kansas, New Mexico, New Jersey, Oregon, Washington, and Wisconsin*
`}

In most other states, the insured must show actual physical contact - either direct impact or indirect contact (such as debris from a vehicle) - for the incident to be treated as a hit-and-run under UM coverage.

• Insuring company denies coverage or becomes insolvent.
• Vehicles not considered to uninsured include:
• Vehicle owned by the government
• Vehicle owned by self-insurer approved by licensing authority
• Vehicle operated on rails or a vehicle located for use as a residence

Underinsured Motorist Coverage is also available to anyone who purchases uninsured motorist coverage. It covers BI sustained by an insured when the negligent operator has insurance, but the limits of liability are not sufficient to cover the damages.

Often, an applicant for a PAP asks for “state minimum” or “the cheapest available policy” and later discovers the financial impact of being hit by an uninsured motorist. To document the applicant’s choice, the insurer may require the applicant to “opt out” in writing if they do not want to purchase uninsured motorist coverage.

Part D Coverage for Damage to the Insured Auto

Part D provides property insurance protection for the covered auto. There are two primary forms of coverage under Part D: collision coverage and other than collision coverage (comprehensive). Both are subject to a deductible before the policy pays, up to its limit of liability.

Collision

Collision is defined as “the upset of the covered vehicle or damage resulting from impact with another auto or object.” Collision losses are paid regardless of fault.

• If an insured can’t collect from an at-fault third party, the insured’s policy pays for the loss, less any deductible.
• The insurer may then subrogate against the at-fault party to recover what it paid.
• If the insured is responsible for the collision damage, the policy still pays up to its limit, less any deductible.

Collision coverage also applies to damage to a non-owned auto being operated by the named insured. This coverage is excess over other coverage applicable to the non-owned auto.

Sidenote

Know this...

Part D will pay only$500 for damage to a non-owned trailer.

Other than collision (comprehensive)

Other than Collision (comprehensive) coverage covers direct and accidental damage to the covered auto from causes “other than collision,” such as:

• Falling objects
• Fire
• Explosion
• Earthquake
• Windstorm, hail, water, flood
• Theft or larceny
• Malicious mischief or vandalism
• Riot or civil commotion
• Breakage of glass
• Contact with a bird or animal

Transportation expenses

Part D will pay, in addition to its limits and without applying a deductible, up to $20 per day (maximum of $600) for transportation expenses if the vehicle is damaged by a collision or other than collision loss, provided the insured carries these coverages.

Sidenote

Know this...

If the covered auto is stolen, the insurer will pay only expenses incurred during the period beginning 48 hours after the theft and ending when the covered auto is returned to use, or the insurer pays for its loss (maximum of 30 days).

Part D Exclusions

• Losses to covered auto being used as passenger carrier for hire
• Damage due to wear and tear, mechanical, electrical breakdown, road damage to tires
• War/nuclear perils
• Sound reproduction equipment, except when permanently installed.
• TVs, antennas, awnings, cabanas
• CB radio, scanner, telephones, except when permanently installed
• Custom furnishing
• Radar detection equipment
• No benefit to bailee

Two Additional Policy Parts

Part E

Part E describes the insured’s duties after a loss. These duties include:

• Notify the insurer as soon as reasonably possible after a loss occurs
• Cooperate with the insurer in the investigation of a claim
• File police report if required
• Submit to physical exams if requested
• Authorize the insurer to obtain medical reports or other pertinent records
• Submit a written proof of loss when requested.

Sidenote

Know this...

Written proof of loss must be sent to the insurer before any claim payment will be made. A notice of loss to an insurer does not constitute proof of loss.

Part F

Part F includes other general provisions such as:

Bankruptcy of insured

• The company is obligated even if it is bankrupt

Policy changes

• It must be in the form of a written endorsement

Fraud

• There is no coverage in the case of fraud on the insured’s part

Legal action

• Only after the insured has fulfilled his/her contractual obligations can the insured take action against the insurer

Termination

• The insured may give written notice of intent to cancel at any time; the insurer must provide at least 10 days’ notice if the reason is for nonpayment of premium and at least 30 days’ notice in all other cases.

Non renewal

• The insurer has the right not to renew a policy for any reason

Automatic termination

• At the end of the policy period, the insurer does not send a premium request

Policy period and territory

• The US, its possessions and territories, Puerto Rico, and Canada. Cover only accidents occurring during the policy period and within the territory

Other state coverage

• When the insured is in another state besides the state of residency, the insurance minimum limits become those of the state traveling through

Insurer’s right to recover

• The company has subrogation rights

Transfer of interest

• Insured cannot give rights to another person without the insurer’s written consent

Lesson Summary

An automobile insurance policy provides property coverage, legal liability protection, and personal injury coverage for the insured and their family. The main policy form used is the Personal Auto Policy (PAP), with key definitions including bodily injury, family member, occupying, trailer, covered auto, coverage territory, and owned auto.

The Personal Auto Policy includes four main coverage parts: liability coverage, medical payments coverage, uninsured motorist coverage, and coverage for damage to the insured’s auto.

• Part A: Liability Coverage - Pays for bodily injury or property damage to others due to the insured’s auto on a split limits basis. Additional expenses for defense are also covered.
• Part B: Medical Payments Coverage - Covers medical and funeral expenses resulting from bodily injury in the insured’s auto.
• Part C: Uninsured Motorist Coverage - Pays compensatory damages for bodily injury caused by an uninsured driver.
• Part D: Coverage for Damage to the Insured Auto - Provides collision and other-than-collision coverage, subject to a deductible.

Endorsements that can be added to the PAP include extended non-owned coverage and towing and labor costs. Exclusions in Parts A and B include intentional injury or property damage, liability from vehicle use for hire, and other specific scenarios.

Requirements under Part E include notifying the insurer of a loss, cooperating in investigations, and submitting proof of loss. Part F outlines general provisions such as policy changes, fraud, legal actions, and termination conditions.

Chapter Vocabulary

Definitions

Auto Liability

Coverage that protects against financial loss because of legal liability for motor vehicle-related injuries (bodily injury and medical payments) or damage to the property of others caused by accidents arising out of ownership, maintenance, or use of a motor vehicle (including recreational vehicles such as motor homes). Commercial is defined as all motor vehicle policies that include vehicles that are used primarily in connection with business, commercial establishments, activity, employment, or activities carried on for gain or profit. No Fault is defined by the state concerned.

Auto Physical Damage

Motor vehicle insurance coverage (including collision, vandalism, fire, and theft) that insures against material damage to the insured’s vehicle. Commercial is defined as all motor vehicle policies that include vehicles that are used in connection with business, commercial establishments, activity, employment, or activities carried on for gain or profit.

Automobile Liability Insurance

Coverage for bodily injury and property damage incurred through ownership or operation of a vehicle.

Bailee - A person who received temporary custody of goods or property belonging to others.

Collision Coverage

A type of auto insurance that covers physical damage occurring when the insured auto strikes another auto or stationary object. It may also include upset or overturn of the insured auto.

Common Carrier

A company or concern engaged in the transportation of goods or persons for a fee.

Creditor-Placed Auto

Single interest or dual interest credit insurance that is purchased unilaterally by the creditor, who is the named insured, subsequent to the date of the credit transaction, providing coverage against loss to property that would either impair a creditor’s interest or adversely affect the value of collateral on automobiles, boats, or other vehicles.

Dual Limits

Separate limits are provided for various perils, which are several forms of liability insurance.

Gap Insurance

An automobile insurance option, available in some states, that covers the difference between a car’s actual cash value when it is stolen or wrecked and the amount the insured owes the finance company. Typically used for leased cars.

Other States Coverage

With auto insurance, when an insured is in another state besides the state of residency, the insurance coverage becomes at least equal to the state minimum limits of the state traveling through.

Other than Collision Coverage

See Comprehensive Coverage

Personal Auto Policy

Coverage designed to insure private passenger automobiles and certain types of trucks owned by an individual or husband and wife.

Personal GAP Insurance

Credit insurance that insures the excess of the outstanding indebtedness over the primary property insurance benefits in the event of a total loss to a collateral asset.

Private Passenger Auto (PPA)

Filings that include singularly or in any combination coverage such as the following: Auto Liability, Personal Injury Protection (PIP), Medical Payments (MP), Uninsured/Underinsured (UM/UIM); Specified Causes of Loss, Comprehensive, and Collision.

Supplementary Payments

Provides coverage for the cost of bail bonds up to $250, premiums to appeal and release of attachment bonds, interest on judgments, loss of earnings, and other reasonable claim settlement expenses that occurred at the insurance company’s request.

Total Loss

The condition of an automobile or other property when damage is so extensive that repair costs would exceed the value of the vehicle or property.

Transit

Transporting from one location to another. Transportation policies are also referred to as transit insurance.

Underinsured Motorist Coverage

Policy option for bodily injury or property losses caused by a motorist with coverage insufficient to cover the total dollar amount of losses. Compensation for the injured party is equal to the difference between the losses incurred and the liability covered by the motorist at fault.