A. Introduction: How PAP Differs from Homeowners

CHAPTER 5 The Personal Auto Policy

A. Introduction: How PAP differs from homeowners. 1. Liability coverage provided first. 2. Consumers are able to pick and choose coverage and deductibles, providing more choice than with the HO contract. 3. Each coverage part stands by itself and definitions can change for each section; an example is the definition of insured. B. Review of Tort Liability System (as it operates in an Auto Insurance—case in text) 1. Rita is injured by Rex’s negligence. 2. Damage to Rita’s car = $25,000; medical expense = $90,000; lost income = $10,000; pain and suffering = $100,000 3. Rex’s auto property damage = $15,000; Rex’s lost income = $15,000 4. Rita sues Rex for her losses. (Rita could collect under her own PAP for her collision damage and medical expenses, but the student has not been informed of this yet.) 5. Rex can defend himself, but if his legal defenses fail, a legal judgment will be awarded to Rita. 6. After the legal judgment is rendered against its insured, Rex’s insurer will pay the award to Rita on Rex’s behalf. C. The Personal Auto Policy Layout 1. Declarations Page 2. Part A—Liability 3. Part B—Medical Payments 4. Part C—Uninsured Motorist Coverage 5. Part D—Physical Damage (Damage to Your Auto) D. Definitions: Designed to minimize ambiguous features of the contract. The student should note that since each section of the PAP stands by itself, definitions may change from section to section, e.g., definition of insured.

E. Part A—Liability 1. Insuring agreement commits insurer to pay for bodily injury (BI) or property damage (PD) on behalf of a COVERED PERSON. 2. Limit of liability a. Either a single or a split limit of liability may be chosen. b. A single limit represents the maximum amount paid for any one accident, regardless of whether one or more people are insured or damage is to property or people. c. Split limits are more traditional. They operate by specifying a limit paid for bodily injury to one individual, to all individuals in the occurrence, and for property damage caused in one occurrence. Thus, 12,500/25,000/5,000 (or 12.5/25/5) implies no one individual can collect more than $12,500 (regardless of the amount of injury sustained) from the contract, no more than $25,000 will be paid for bodily injury (regardless of the number of people injured), and no more than $5,000 will be paid for all property damage legal liability. 3. Insurer agrees to provide legal defense. The cost of the defense does not reduce amount available for claims payment. This is paid in addition to the limits of liability. 4. Insurer has the right to settle any claims without litigation and without the insured’s approval. 5. Persons covered a. Named insured b. Family members who reside with named insured c. Any person using the covered auto. That is, the coverage on the car is “primary” even if the driver has her own insurance. Other insurance, i.e., the driver’s, is excess. d. Other liable organizations because of any of the prior mentioned insured’s acts or omissions. An example is of an organization’s (fraternity’s) liability due to the negligent actions of a member. (This covers vicarious liability.) 6. Main exclusions a. Intentional injury b. Using personal auto as a public conveyance or taxi c. If BI is (should be) covered by workers’ compensation

d. Property being transported (this is to prevent liability coverage [Coverage A] from being substituted for property coverage, which in many cases is provided by the HO) e. Cars used regularly by an insured but for which no premium has been charged f. Driving vehicles with less than four wheels g. Using a car without reasonable belief of permission to do so (does not apply to family members) h. Any property owned, rented used by, transported, or in the custody of the insured i. Vehicles with fewer than four wheels j. Furnished or available for regular use k. Used inside a facility designed for racing F. Part B—Medical Payments 1. Covered persons: named insured and family members when occupying (or being struck by) a covered car 2. Passengers in a covered auto also have coverage. 3. Definition of insured changes. G. Part C—Uninsured Motorists Coverage 1. Uninsured motorists means those without insurance. (It does not apply to inadequate amount of coverage unless coverage is below statutory minimum.) The term does include hit-and-run drivers. 2. The coverage applies to an insured under the PAP who may collect from his own insurer, if his loss was caused by the negligence of an “uninsured motorist.” 3. Financial responsibility laws require motorists to present evidence of financial responsibility (usually insurance) if they are involved in accidents or serious traffic violations. Compulsory Insurance Laws and Unsatisfied Judgment Funds also are designed to deal with problems caused by uninsured motorists. 4. Underinsured Motorist Coverage: If underinsured motorist coverage is purchased, the injured party collects above negligent party’s liability limits if insured’s own liability limits exceed that amount. 5. Note that some states provide property damage for uninsured motorist. This would apply if no physical damage coverage is provided AND the other driver is negligent (or a hit and run).

H. Part D—Damage to Your Auto 1. Collision means contact between a covered auto and another object it upsets. However, several types of “collisions” are not considered collisions (see list in text under other than collision). These are considered “other than collision.” The advantage would occur if there were a difference in deductible between collision and other than collision coverage or if a person had other than collision but not collision coverage. 2. Other than collision coverage, traditionally called “comprehensive,” covers all losses except collision and a few others specifically excluded, e.g., radioactive contamination, prohibited uses of the vehicle. I. Loss Settlement 1. Coverage D is settled on an ACV basis. 2. When cost of repair generally exceeds the market value of the auto before the loss, the vehicle is “totaled” and the insurer pays the ACV of the loss. 3. The limit of the amount payable is the amount not to exceed what it would cost to repair or replace with “like kind and quality,” allowing the repair facility to use after-market parts that meet or exceed OEM standards. J. Part E—Duties after an Accident or Loss 1. Prompt notification 2. Cooperation during the investigation 3. Uninsured motorist coverage—notify police of hit-and-run 4. Damage to your auto—take steps to protect property, report thefts to police, allow inspection and appraisal of the vehicle.

K. Part F—General Provisions 1. Bankruptcy—does not relieve insurer of obligation 2. Fraud—voids policy 3. Suit of company—no suit allowed against insurer until all conditions complied with 4. Subrogation—insurer’s right to subrogation affirmed 5. Territory covered—territorial restrictions apply 6. Assignment—cannot unless the insurer agrees to it

IV. ANSWERS TO REVIEW QUESTIONS

1. Briefly, how does the tort liability system apply to automobile accidents? The basic premise for the tort liability system is that individuals should be responsible for the damage that they cause others. When a person fails to use reasonable care while using an automobile and causes damage, tort liability applies, and they can be judged to be legally liable. When held legally liable, the automobile contract responds if coverage exists and the event causing the damage is not excluded in some way.

2. Explain the difference between primary and excess coverage in automobile insurance. Primary coverage refers to the insurance policy that pays first before other coverage pays. Excess coverage pays after the primary coverage has exhausted its limits. With respect to automobile coverage, the general rule is that the coverage on the car involved in the accident is primary and other coverage is considered excess. For example, if John borrows Fred’s car, Fred’s coverage pays first, and John’s coverage is identified as excess, even though John is driving the car.

3. Several distinct categories of drivers are insured under the terms of the PAP. Identify three categories of drivers covered by the PAP and give examples of each category. Category 1 covers the named insured and resident family members who are covered for the ownership, maintenance, or use of any auto, whether it is owned or borrowed, unless an exclusion applies. Category 2 covers any person using the named insured’s covered auto (believes he/she has permission to use the car). Categories 3 and 4 cover people or organizations other than a driver who are sued due to a driver’s negligence. In some of these instances, the PAP will cover the liability of these people. The difference between Categories 3 and 4 is between the insured driving an owned versus a nonowned vehicle.

4. Explain whether each of the people described in the following scenario has coverage under Part A of the PAP and say why or why not:

Bob, the named insured, is an auto mechanic. Bob and his wife, Belle, own and drive a Ford. They have two children, Ben and Bill. Ben, age 26, is in the U.S. Army and comes home to visit about twice a year. Bill is 16, lives at home, and has a learner’s permit but no permanent driver’s license. Ben often rents cars on weekends and drives battle tanks as his Army assignment. Bob drives the church van to pick up nondriving members each Sunday. He also test drives vehicles after he has repaired them at his place of

employment, Barney’s Garage. Bill has been known to lend the family car to his teenage pal, Bubba. Once, Bubba actually lent the auto to his girlfriend, Brenda.

Bob and his wife Belle are both insured under the PAP. Ben is insured because he is using the car with the belief that he has permission. Bill is an insured because he is a resident relative of the insured. Bubba is insured because he has reasonable belief that he is able to use the car; this also applies to Brenda. Even though they are all insureds, they are not all covered all the time. Ben does not have coverage driving his own car or any tank. Bob does not have coverage while driving a public or livery conveyance, as well as when he test drives cars that he repairs.

5. Does the PAP provide coverage if a named insured drives a nonowned auto? What is the definition of a nonowned auto? The PAP provides coverage for the named insured while driving a nonowned auto. “Nonowned auto” means 1. any private auto, pickup, van or “trailer” not owned by or furnished or available for the regular use of you or any “family member” while in the custody of or being operated by you or any “family member;” or 2. Any auto or “trailer” you do not own while used as a temporary substitute for “your covered auto” which is out of normal use because of its a. breakdown; b. repair; c. servicing; d. loss; or e. destruction.

6. What are the four general areas of protection provided by Coverages A through D of the PAP? A. Liability coverage in the event of property damage or bodily injury caused by an insured; B. limited medical expense coverage for insureds, family members, and passengers; C. uninsured motorists protection in case the insured is hit by a negligent driver who has no auto liability insurance; and D. physical damage protection in the event the insured’s car is damaged.

7. Assume that an insured causes an automobile accident that injures five people and damages one auto. Assume that each of the injured parties successfully sues for $20,000. The damaged auto was worth $10,000. How much would the insurer pay if:

a) the insured carried 10/20/5 limits?

b) the insured carried 50/100/5 limits?

c) the insured carried 100/300/50 limits?

a) A total of $25,000 would be paid: $20,000 for the five injured people, and $5,000 for the damaged car (claims paid is order of suits filed subject to $10,000 limit, and exhaustion of $20,000 limit).

b) A total of $105,000 would be paid: $100,000 (5 × $20,000) for bodily injury liability and $5,000 for the property damage.

c) The total claim would be paid: $100,000 for the bodily and $10,000 for the property damage.

8. Why is damage to an insured’s own property excluded under Part A? Coverage A provides liability insurance. Liability insurance is designed to protect an insured against the successful lawsuits of others. Since one cannot be liable to oneself, this coverage cannot provide protection for the loss of one’s own property. In addition, since the property is in the person’s care, custody, or control, there is ample opportunity to insure the property that is known to exist. For this property, property insurance protection is provided by coverage D (damage to your auto). Other personal property should be covered on a first party basis in a property contract, such as in the HO-2 (Coverage C), or the property should be covered under a personal property floater. Liability coverage pays for property damage to property that you do NOT have in your care, custody, or control and do NOT have an opportunity to insure directly.

9. Identify other major categories of exclusions under Part A.

1) “Intentionally causing bodily injury or property damage.” Since intentional injuries are not accidental losses, they are not insurable.

2) There is no liability coverage for property owned, transported by, rented to, used by, or in the care of a covered person.

3) There is generally no coverage if the injury is sustained by an employee of the insured because it is expected that workers’ compensation insurance will cover this event.

4) There is no coverage if the auto can be hired by the public to carry persons or property for a fee, but car pooling is permissible.

5) Excludes coverage for some circumstances involving the automobile and other nonfarming businesses.

6) There is no coverage when a person uses an auto without a reasonable belief that he or she is entitled to do so.

10. What situations are covered by the medical expense protection part of the PAP? If an insured were struck by an auto while walking, would there be coverage under this provision? The medical expense coverage of the PAP provides compensation to the insured

and each injured resident relative and to passengers of cars (owned or nonowned) being driven by the insured. Coverage is provided for all reasonable medical, dental, ambulance, and funeral expenses. Coverage is available to the insured and any resident relatives if they are struck by an automobile while walking (as a pedestrian). The key definition in the above sentence is automobile. There is no coverage for one hit by a vehicle other than an automobile.

11. Why do drivers need uninsured motorists insurance if they have purchased liability and property damage insurance? Liability coverage protects an insured if she/he damages or injures another person or his property. Physical (property) damage coverage protects an insured for losses to his own property. If, however, an insured is injured by one who has no insurance, his liability coverage will not help. Property damage insurance will pay if one’s property is damaged by an uninsured motorist, less any applicable deductible. Medical expenses will also be covered. However, lost wages, compensation for pain and suffering and the like, for which there would be compensation if an insured motorist caused the injury, will go unmet if the one who caused the accident had no liability insurance and no other assets to satisfy a legal judgment.

12. Explain the difference between an uninsured and an underinsured motorist. Uninsured motorist coverage generally provides an insured compensation when she has the legal right to collect from a negligent party and the negligent party meets the definition of an “uninsured motorist.” Generally this is when the negligent driver fails to maintain the minimum liability coverage required by the state. Underinsured motorist coverage compensates the injured insured when the negligent party has less coverage than the insured has purchased. In this case, the difference is available to the injured party.

13. What are the insured’s major duties after a loss? Depending on the type of coverage, duties vary. To quote from the PAP “A. We must be notified promptly of how, when and where the accident or loss happened. Notice should also include the names and addresses of any injured persons and of any witnesses. B. A person seeking any coverage must: 1. Cooperate with us in the investigation settlement or defense of any claim or suit. 2. Promptly send us copies of any notices or legal papers received in connection with the accident or loss. 3. Submit, as often as we reasonably require: a. To physical exams by physicians we select. We will pay for these exams. b. To examination under oath and subscribe the same. 4. Authorize us to obtain: a. Medical reports; and b. Other pertinent records. 5. Submit a proof of loss when required by us. C. A person seeking Uninsured Motorists Coverage must also: 1. Promptly notify the police if a

hit-and-run driver is involved. 2. Promptly send us copies of the legal papers if a suit is brought. D. A person seeking Coverage for Damage to Your Auto must also: 1. Take reasonable steps after loss to protect “your covered auto” or any “nonowned auto” and their equipment from further loss. We will pay reasonable expenses incurred to do this. 2. Promptly notify the police if “your covered auto” or any “nonowned auto” is stolen. 3. Permit us to inspect and appraise the damaged property before its repair or disposal.”

14. Do insureds have a right to demand replacement of parts damaged in a collision with parts from the original equipment manufacturer? The PAP limits the insured’s recovery to “The amount necessary to repair or replace the property with other property of like kind and quality.” This wording allows insurers to use “after market” repair parts, instead of repair parts made by the car’s manufacturer.

15. How does the legal doctrine of subrogation apply under the PAP? Subrogation means the insurer receives the insured’s right (a substitution of rights) to sue a negligent party once the insurer has paid for a loss. If the insured does something after a loss (such as signing a waiver releasing a negligent party for his actions) that impairs the insurer’s ability to subrogate. The insured has breached the contract, and thus the insurer may decide not to pay for the loss.