Chapter 14 Multirisk Management Contracts: Auto

Defense

Section A of Part A of the liability coverage quoted above indicates that legal defense is not part of the limits of liability. Defense costs often run into the thousands of dollars, making this a significant benefit of liability insurance. If you are found liable, the insurer pays on your behalf to the plaintiff(s), up to the limit(s) of liability under the policy. The insurer’s responsibility to defend ends when that limit is reached (is paid in award or settlement to third-party claimants).

The insurer retains the right to settle claims without the insured’s approval if it finds this expedient. Such action keeps many cases out of court and reduces insurance claims expenses. It can cause dissatisfaction, however, if the insured did not expect to have to settle.

Exclusions

The wording of the insuring agreement of Part A provides for open perils liability coverage. All events resulting in automobile liability, therefore, are covered unless specifically excluded. Some exclusions apply to unprotected persons and others apply to noncovered vehicles. The exclusions, listed in Table 14.6 "Personal Auto Policy, Part A Exclusions (PAP 2003)*", can be discussed in terms of the purposes of exclusions presented in Chapter 9 "Fundamental Doctrines Affecting Insurance Contracts".

As in the homeowner’s policy, intentionally caused (nonfortuitous) harm is always excluded. As before, several exclusions exist to prevent duplicate coverage, which would result in overindemnification. Property damage to owned or used property, for instance, ought to be covered under other property insurance contracts, such as a homeowner’s policy, and is therefore excluded in the PAP. As noted in the homeowners coverage, bodily injury to an employee of the covered person who is eligible for workers’ compensation benefits is excluded. Anyone using a motor vehicle as a taxi, for example, represents greater risk than one who does not. Thus, persons using a vehicle as a public livery or conveyance are excluded from coverage. Because persons employed in the automobile business represent a significant risk while in their employment status, they too are excluded. You can understand that the insurer prefers not to provide coverage to the mechanic while he or she is test-driving your car. The automobile business is expected to have its own automobile policy, with rates that reflect its unique hazards.

Certain other occupations require the use of vehicles that are hazardous regardless of who operates them. Large garbage trucks, for example, are difficult to control. Insurers do not provide liability protection while you operate such a vehicle. Insurers, however, do not exclude all business uses of motor vehicles. Specifically excepted from the exclusion are private passenger autos (e.g., those of traveling salespeople), owned pickups or vans, trailers used with any of these vehicles, and any vehicle used in a farming or ranching business.

Insurers also standardize the risk through exclusion of coverage while “using a vehicle without a reasonable belief that that person is entitled to do so.” The insurance company rates the policy according to the insured’s characteristics, which include who the insured allows to use the covered auto. A thief, or someone without permission to use the covered auto, does not reflect these characteristics. Questions sometimes arise when an insured’s child allows a friend to use the covered car, despite parents’ admonitions to the contrary. Court rulings are mixed on the application of the exclusion in such a situation. Generally, such persons represent greater risks. The use of a motor vehicle with less than four wheels also represents a greater risk than one with at least four wheels. It too is excluded.

To prevent catastrophic exposure, the PAP excludes persons covered under nuclear energy liability policies. This exclusion is a standard provision in all liability policies.

The final two exclusions are confusing. Their purpose is to prevent insureds from obtaining more coverage than was purchased. Thus, no coverage applies for accidents arising out of ownership, maintenance, or use of a motor vehicle you own or have available for regular use if it is not a declared auto in the declarations section of the policy. If such protection were available, you would need to purchase coverage on only one vehicle instead of on all your owned vehicles. The second exclusion is the same, except that it applies to motor vehicles owned by or available for the regular use of family members. This last exclusion does not apply to you. Remember that “you” is the named insured and the named insured’s spouse. Thus, if the named insured uses a noncovered vehicle owned by a family member (perhaps a son or daughter living at home), liability coverage exists. On the other hand, the family member who owns the noncovered vehicle is not protected while driving the undeclared auto.

Supplementary Payments

In addition to the limit for liability, the insurer will pay up to $250 for the cost of bail bonds required because of an accident if the accident results in bodily injury or property damage covered by the policy. Note that this would not cover the cost of a bond for a traffic ticket you receive when there is no accident. Premiums on appeal bonds and bonds to release attachments are paid in any suit the insurer defends. Interest accruing after a judgment is entered, and reasonable expenses incurred at the insurer’s request are paid. Up to $200 a day for loss of earnings because of attendance at hearings or trials is also available.

Single or Split Limits

Although liability coverage under the PAP usually is subject to a single, aggregate limit (called a combined single limit [CSL]), it can be divided by use of an endorsement into two major subparts: bodily injury liability and property damage liability. Bodily injury liability applies when the use of your car results in the injury or death of pedestrians, passengers of other vehicles, or passengers of your automobile. Property damage liability coverage applies when your car damages property belonging to others. Although the first thing you probably think about under this coverage is the other person’s car (and you are right), this coverage could also cover street signs, fences, bicycles, telephone poles, houses, and other types of property. Remember, however, that it does not apply to your house or to other property you own because you cannot be legally liable to yourself.

If you choose a single limitCoverage under which the insurer will pay on your behalf for all losses up to a specified limit for any single accident, whether the losses are property-related or bodily injury-related. of liability to cover all liability, including both property damage and bodily injury, then the insurer will pay on your behalf for all losses up to this limit for any single accident, whether they are property-related or bodily injury-related. The only limit you are concerned with in this case is the single, or aggregate, limit. Once all losses equal this limit, you will have to bear the burden of any further liability.

If you choose a split limitCoverage under which the insurer applies a set of two limits to bodily injury, and an single, aggregate to property damage. of liability, a set of two limits will be specifically applied to bodily injury, and a single, aggregate limit will be applied to property damage. For the bodily injury limits, one limit applies per person, per accident, and a second limit is the total the insurer will pay for your liability to all persons injured in an accident. The limit for property damage is shown separately. For example, your limits are shown as follows:

In insurance jargon, these limits would be described as 150/300/50. An example will help illustrate how the split limits work. If you caused an accident in which only one person was injured, the coverage is limited to $150,000 for that person. If the accident involved six people, each person is covered up to $150,000, but the total for all six injured people combined cannot exceed $300,000. So if all are badly injured, the limit for the accident may not be sufficient. In this case (and as discussed in Chapter 13 "Multirisk Management Contracts: Homeowners"), an umbrella policy with high limits—such as $1 million—may be very valuable.

Alternatively, a single limit, say, $300,000, can be purchased to cover all liabilities from any one accident. Whether you have single or split limits, the need for adequate limits is imperative, as noted above. Also note the clarifying language in “limit of liability,” which states that the amount shown is the maximum payable, regardless of the number of covered persons, claims made, vehicles or premiums shown in the declarations, or vehicles involved in the auto accident. If two vehicles shown in the declarations are involved in the same accident, twice the limit of liability will not be available. At least, this is the intent of the insurer. Various state courts have interpreted the policy differently, permitting what is called stacking. StackingSituation that arises when a single auto policy covers two vehicles, and the court interprets this situation to yield a limit of liability equal to double the amount shown in the policy declarations. may occur when a single auto policy covers two vehicles, and the court interprets this situation to yield a limit of liability equal to double the amount shown in the policy declarations.

Out-of-State Coverage

Part A also has provisions for out-of-state coverage and other insurance. The out-of-state provision takes care of a situation in which your liability limits comply with the financial responsibility or compulsory insurance law in your state but are inadequate in another state. It provides that, under such circumstances, your policy will provide at least the minimum amounts and types of coverage required by the state in which you are driving. Suppose you have limits of 15/25/15 ($15,000/$25,000/$15,000), the minimum required in the state where your car is garaged. If you are driving in a state that requires 25/50/20 ($25,000/$50,000/$20,000) and are involved in an accident, your insurer will interpret your policy as if it had the higher limits. Thus, even though you have to meet only the requirements where you live, your policy will provide the limits you need in any state or province in which you may be driving.

Financial Responsibility

This one sentence states, “When this policy is certified as future proof of financial responsibility, this policy shall comply with the law to the extent required.” The requirements in each state are shown in Table 14.4 "Automobile Financial Responsibility/Compulsory Limits by State, 2009".

Other Insurance

The liability coverage of the PAP is excess with regard to a nonowned vehicle. In the event of a loss while you are driving a friend’s car, your insurer will pay only the amount by which a claim (or judgment) exceeds the limits of your friend’s auto insurance. In such a situation, your friend’s insurance is primary coverageCoverage for the first payee in a situation where two or more coverages apply., or the first payee in a situation where two or more coverages apply, and your insurance is excess coverage. This means that coverage on the vehicle is always primary. If two excess policies apply, then the “other insurance” provision calls for a pro rata distribution of liability. For example, if you were driving a friend’s car whose insurance had expired and you were an insured under two policies (as, perhaps, a resident relative of two insureds who bought separate policies on their vehicles), these two policies would share in any liability attributable to you on a pro rata basis. This example, however, is quite unusual.

Insuring Agreement

Under Part B, the insurer agrees to pay reasonable expenses incurred within three years from the date of an accident for necessary medical and funeral services because of bodily injury caused by an accident and sustained by a covered person. A covered person means you or any family member, while occupying, or as a pedestrian when struck by, a motor vehicle designed for use mainly on public roads or a trailer of any type. It also includes any other person occupying your covered auto.

Note that you or a family member would be covered by your PAP medical payments protection while occupying a nonowned car, but other passengers in the vehicle are not. No benefits are paid if you are struck by a machine not designed for use on the highway, such as a farm tractor.

Exclusions

Medical payments coverage is similar to liability coverage because it is provided on an open perils basis within the category of automobile use. Seven of the exclusions to Part A (liability) are nearly identical to exclusions found in Part B (medical payments). These exclusions are as follows:

• While occupying a motor vehicle with less than four wheels
• While occupying your covered auto when it is being used as a public livery or conveyance
• While occupying any vehicle located for use as a residence or premises
• During the course of employment if workers’ compensation is available
• While occupying or when struck by any vehicle (other than your covered auto) that is (a) owned by you or (b) furnished or available for your regular use
• While occupying or when struck by any vehicle (other than your covered auto) that is (a) owned by any family member or (b) furnished or available for the regular use of any family member
• While occupying a vehicle without a reasonable belief that the insured is entitled to do so
• While occupying a vehicle when it is being used in the business or occupation of a covered person, unless the vehicle is a private passenger auto, pickup, or van owned by the insured or trailer used with one of these means of transportation
• Caused by the consequence of nuclear weapons, war, civil war, insurrection, or rebellion or revolution
• Consequence of nuclear reaction to radiation or radioactive contamination
• While occupying any vehicle located inside a facility designed for racing, for the purpose of (a) competing in or (b) practicing or preparing for any prearranged or organized racing or speed contest

Limit of Liability

The limit of liability for medical payments is on a per person basis, such as $5,000 per person. This is the maximum limit of liability for each person injured in any one accident. If you have two autos insured, with a medical payments limit for each shown on the declarations page, you cannot add all (stack) the limits together. It may appear that you have $10,000 in medical payments coverage because you have $5,000 on each vehicle, but such is not intended by the insurer.

When there is other applicable auto medical payments insurance, your policy will pay on a pro rata basis. With respect to nonowned automobiles, however, the PAP is excess; that is, it pays only after the limits of all other applicable insurance have been exhausted.

Other Insurance

Any amounts payable by this coverage are reduced by any amounts payable for the same expenses under Part A (liability) or Part C (uninsured motorists). Thus, a passenger in your car who is injured cannot recover under both liability and medical payments coverages for the same losses. Nor can you recover expenses under both medical payments and the uninsured motorists coverages. Injured parties are entitled to indemnity but not double payment.

Uninsured Motor Vehicle

Because you can recover expenses under Part C of the PAP only if you are involved in an accident with a negligent driver of an uninsured motor vehicle, the definition of such a vehicle is crucial. The policy defines it as a land motor vehicle or trailer of any type, with the following specifications:

• One to which no bodily injury liability bond or policy applies at the time of the accident
• One to which there is a bodily injury liability bond or policy in force, but the limit of liability is less than that specified by the financial responsibility law in the state where your covered auto is garaged
• A hit-and-run vehicle whose operator/owner cannot be identified and that hits you or any family member, a vehicle you or any family member are occupying, or your covered auto
• One to which a bodily injury liability bond or policy applies at the time of the accident, but the company denies coverage or is insolvent

However, an uninsured motor vehicle does not include any of the following vehicles or types of equipment:

• Owned by, furnished, or available for the regular use of you or any family member
• Owned or operated by a self-insurer under any applicable motor vehicle law, except a self-insurer who is or becomes insolvent
• Owned by any governmental unit or agency
• Operated on rails or crawler treads
• Designed mainly for use off public roads and used while not on public roads
• While located for use as a residence or premises

Exclusions

Perhaps because the definition of an uninsured motor vehicle is so limited, only four exclusions apply to Part C. Like the prior two parts, uninsured motorists coverage excludes losses:

1. Involving an undeclared motor vehicle owned by you or any family member
2. While using a vehicle without reasonable belief of permission
3. When there is other coverage, such as workers’ compensation or disability benefits
4. Not applicable to punitive damages

In addition, exclusion B1 denies payment to a covered person “if that person or the legal representative settles the bodily injury claim without our consent.” Just because a negligent driver is an uninsured motorist, he or she is not free from liability. The insurer, therefore, does not want its subrogation rights to be adversely affected by agreements between the insured and negligent driver, which could include collusive and fraudulent situations.

On the other hand, the auto insurer does not want to make uninsured motorists payments available through subrogation to a workers’ compensation or disability benefits insurer. If the accident occurred during the course of employment and resulted in workers’ compensation benefits, the compensation insurer might seek such subrogation. Exclusion C prevents this type of activity.

Last, the coverage is not intended to pay for punitive damages, which are excluded. Additionally, the insuring agreement is specific in promising to pay compensatory damages only. Punitive damages are not compensatory.

Other Provisions

The limit of liability provision for uninsured motorists coverage is nearly the same as for medical payments (although the actual limit is usually quite different). The other insurance provision is the same as that for parts A and B, namely, pro rata for your covered auto and excess for a nonowned auto. In the event of a dispute concerning the right to recover damages or their amount, either party—you or the insurer—can demand binding arbitration. Local rules about procedure and evidence apply.

There are provisions for other insurance and for arbitration. The arbitration section specifies that if the insured and the insurer do not agree about the amounts of entitled recovery of damages, both parties can arbitrate. But both must agree to arbitration and may not be forced to arbitrate.

Underinsured motorists coverageInsurance that fills in the coverage gap that arises when the negligent party meets the financial responsibility law of the state, but the auto accident victim has losses in excess of the negligent driver’s liability limit. fills in the coverage gap that arises when the negligent party meets the financial responsibility law of the state, but the auto accident victim has losses in excess of the negligent driver’s liability limit. In such circumstances, when the negligent driver meets the legal insurance requirements but is legally responsible for additional amounts, the driver is not an uninsured motorist. The negligent driver may not have available other noninsurance resources to pay for the loss, leaving the injured party to bear the financial strain. Underinsured motorists coverage permits the insured to purchase coverage for this situation.

You may purchase underinsured motorists coverage in amounts up to the amount of liability (Part A) protection you purchased. The same amount of uninsured motorists coverage must also be purchased. The underinsured motorists coverage will pay the difference between the at-fault driver’s liability and the at-fault driver’s limit of liability insurance, up to the amount of underinsured motorists coverage purchased. For example, assume that you were hit by another motorist and that you incurred damages of $60,000. Further assume that the other driver is found liable for the full amount of your loss, but that driver carries insurance of only $30,000, which meets the financial responsibility law requirement. An underinsured motorists coverage equal to your limit of liability coverage, say, $100,000, would cover the remaining $30,000 of loss above the at-fault driver’s insurance. Your total payment, however, could not exceed the underinsured motorists coverage limit of liability. If your loss were $115,000; therefore, you would receive $30,000 from the at-fault driver’s insurer and $70,000 from your own insurer. The remaining $15,000 loss is still the responsibility of the at-fault driver, but you may have difficulty collecting it.

Exclusions

Two of the exclusions found in Part D (the first and third) have already been discussed. The remaining exclusions are dominated by limitations on the coverage for automobile equipment. Part D exclusions are listed in Table 14.8 "Personal Auto Policy, Part D Exclusions—ISO PAP 2003". One important exclusion reflects the high frequency of theft losses to certain equipment. Exclusion 4 omits coverage for electronic equipment, including radios and stereos, tape decks, compact disk systems, navigation systems, Internet access systems, personal computers, video entertainment systems, telephones, televisions, and more. These exclusions do not apply to electronic equipment that is permanently installed in the car.

Overall, custom furnishings in pickups and vans and loss to awnings or cabanas and equipment designed to create additional living facilities are excluded. Such equipment represents nonstandard exposures for which insurance can be bought through endorsement.

Recall that trailers you own, whether declared or not, are defined as covered autos. To obtain property insurance on those trailers, they must be declared (permitting the insurer to charge a premium). Nonfortuitous losses are also excluded. Certain losses are expected or preventable, such as damage due to wear and tear, freezing, mechanical or electrical breakdown, and road damage to tires. Exclusion 7 denies coverage for loss or destruction because the government seized the vehicle. This exclusion follows the development of new laws associated with illegal drug trafficking and the handling of hazardous waste.

Prior to revisions in 1986, the PAP covered damage to nonowned autos (including temporary substitutes) for liability only. If you were driving a friend’s car or a rental vehicle, the old policy would cover damage to that vehicle only if you were legally liable. The 1986 form provided property damage coverage for nonowned autos in Part D, negating the requirement that you be liable. The 1989 form went one step further by including temporary substitutes (cars used because the declared vehicle is out of commission) in Part D rather than Part A.

The amount of coverage available for nonowned autos, however, is limited to the maximum available (actual cash value) on any declared auto. In addition, a deductible likely applies, and three exclusions relevant to nonowned autos have been added. First, a nonowned auto used without reasonable belief or permission to do so is not covered. Second, a nonowned vehicle damaged while being driven by someone performing operations associated with the automobile business (servicing, repairing, etc.) is not covered. Last, if the nonowned auto is driven by anyone in any business operation (other than a private passenger auto or trailer driven by you or any family member), the auto is not covered.

Other Provisions

The limit of liability is the lesser of the actual cash value of the stolen or damaged property or the amount necessary to repair or replace it. The insurer reserves the right to pay for the loss in money or repair or replace the damaged property. There are limits, however, as described in the policy: $500 for a nonowned auto and $1,000 for equipment designed solely for the reproduction of sounds. For payment of loss, the insurer will repair or replace the damaged property. If the stolen property is returned damaged, the insurer will repair it.

The no benefit to bailee provision says, “This insurance shall not directly or indirectly benefit any carrier or other bailee for hire.” If your car is damaged or stolen while in the custody of a parking lot or transportation company, your insurer will pay you and then have the right of subrogation against a negligent bailee. If other insurance covers a loss, your insurer will pay its share on a pro rata basis. If there is a dispute concerning the amount of loss, either you or the insurer may demand an appraisal, which is binding on both parties. As a practical matter, appraisal is seldom used by an insured because the cost is shared with the insurer.

The other insurance provision is pro rata except for nonowned autos, which is excess. In prior coverages, nonowned autos were included in the liability part, not Part D. As in other parts of the policy, there is an appraisal section for evaluating the value of the loss.