Chapter 20 Auto Insurance “A careful driver is one who honks his horn when he goes through a red light.” Henry Morgan Lear n in g Ob je c tive s After studying this chapter, you should be able to ■■ Identify the parties that are insured for liability coverage under the Personal Auto Policy (PAP). ■■ Describe the liability coverage in the PAP. ■■ Explain the medical payments coverage in the PAP. ■■ Describe the uninsured motorists coverage in the PAP. ■■ Explain the coverage for damage to your auto in the PAP. ■■ Explain the duties imposed on the insured after an accident or loss. 443 M20_REJD1038_13_GE_C20.indd 443 9/19/16 3:10 PM B eth put her baby, Sophie, in a car seat and then placed the car seat in the back seat of her SUV. She used the seatbelt to secure the car seat. Then Beth set off for the doctor’s office so Sophie could have her 6-month check-up. Because of road construction, Beth took an unfamiliar route to the pediatrician’s office. When they were about halfway there, Sophie started to scream and cry. Beth turned to check on Sophie, and missed a stop sign. She collided with another car. The driver of the other car was injured and his car sustained significant damage. Beth broke her arm and hit her head on the windshield. Sophie was uninjured, and the SUV sustained minor damage. Fortunately, Beth’s auto insurance policy protected her against the financial consequences resulting from the accident. Her insurer covered her legal liability as well as her medical bills and the cost of repairing her car, less a modest deductible. Auto insurance provides similar protection to millions of motorists. It is one of the most important coverages to emphasize in a personal risk management program. Legal liability arising out of an auto accident can reach catastrophic levels; medical bills and physical damage to an expensive car can be substantial; and noneconomic costs may also be incurred, including pain and suffering and the unexpected death of a family member. In this chapter, we discuss the major provisions of the Personal Auto Policy (PAP) drafted by the Insurance Services Office (ISO). The PAP form is widely used throughout the United States. Some insurers, such as State Farm and Allstate, have developed their own forms that differ from the PAP. Overview of Personal Auto Policy In this section, we discuss the major provisions of the 2005 Personal Auto Policy (PAP) drafted by the Insurance Services Office (ISO).1 The 2005 PAP is widely used throughout the United States.2 A copy of this policy is provided in Appendix A at the end of this text. Eligible Vehicles Only certain types of vehicles are eligible for coverage under the PAP. An eligible vehicle is a four-wheeled motor vehicle owned by the insured or leased by the insured for 6 or more continuous months. Thus, a private passenger auto, station wagon, or sport utility vehicle owned by the insured is eligible for coverage. Also, as explained later, a van or pickup can be insured under the PAP if certain requirements are met. Your Covered Auto An extremely important provision is the definition of your covered auto. Four classes of vehicles are considered to be covered autos: Any vehicle shown in the declarations A newly acquired auto ■■ A trailer owned by the named insured ■■ A temporary substitute vehicle ■■ ■■ Any Vehicle Shown in the Declarations Any vehicle shown on the declarations page of your policy is a covered auto. Covered autos include a private passenger auto, station wagon, sport utility vehicle, pickup, or van owned by the named insured. A pickup or van must (1) have a gross vehicle weight rating of 10,000 pounds or less and (2) must not be used to transport business materials unless the materials are incidental to the named insured’s business, and that business is installing, maintaining, or repairing 444 M20_REJD1038_13_GE_C20.indd 444 9/19/16 3:10 PM P a r t A : L ia b ili t y C o v e r a g e vehicle. If the declarations page does not indicate collision coverage for at least one auto, a newly acquired auto is automatically insured for collision coverage for only 4 days. You must notify the insurer within 4 days after you become the owner for collision coverage to continue. If a loss occurs before you notify the insurer, a $500 collision deductible must be met. A similar notification provision applies separately to other-than-collision coverage. furnishings or equipment, or is used in farming or ranching. For example, plumbers and electricians can transport their tools and materials in their vans or pickups and still have coverage under the personal auto policy. A vehicle listed on the declarations page that is leased by the insured for 6 or more continuous months is a covered auto. Newly Acquired Auto A newly acquired private passenger auto, pickup, or van is a covered auto if it is acquired by the named insured during the policy period. With respect to liability coverage, medical payments coverage, and uninsured motorists coverage, coverage begins automatically on the date you become the owner. If the coverages on all listed vehicles are not the same, you receive the broadest coverage provided for any vehicle shown in the declarations. If the vehicle you acquire is an additional vehicle, you are automatically covered for 14 days, but you must notify the insurer within 14 days after you become the owner for coverage to apply. If the vehicle you acquire is a replacement vehicle, you are automatically covered until the policy expires; you are not required to notify the insurer. A replacement vehicle is one that replaces a vehicle shown in the declarations. As a result, liability coverage, medical payments coverage, and uninsured motorists coverage apply automatically to a replacement vehicle without first having to notify the insurer. ■■ With respect to coverage for damage to your auto, however, a different set of rules applies. The PAP contains notification provisions that apply separately to collision coverage and other-than-collision coverage. If the declarations page indicates that collision coverage applies to at least one auto, the newly acquired auto is automatically covered on the date of ownership, but you must notify the insurer within 14 days after you become the owner for collision coverage to continue. The lowest collision deductible on any vehicle shown in the declarations applies to the newly acquired auto. A similar notification provision applies separately to other-than-collision coverage. ■■ The time requirement for notifying the insurer is shorter if there is no collision coverage on any listed ■■ M20_REJD1038_13_GE_C20.indd 445 445 Trailer Owned by the Named Insured A trailer owned by the named insured is also a covered auto. A trailer is a vehicle designed to be pulled by a private passenger auto, pickup, or van and also includes a farm wagon or farm implement while being towed by such vehicles. For example, you may be pulling your boat trailer that overturns and injures another motorist. The liability coverage in the PAP would cover the loss. Temporary Substitute Vehicle A temporary substitute vehicle is also a covered auto. A temporary substitute vehicle is a nonowned auto or trailer that you are temporarily using because of mechanical breakdown, repair, servicing, loss, or destruction of a covered vehicle. For example, if you drive a loaner car furnished by a repair shop or drive a friend’s car while your car is in the garage for repairs, your PAP covers liability arising out of use of the loaner car. Summary of PAP Coverages The PAP consists of a declarations page, a definitions section, and the following six parts: Part A: Part B: ■■ Part C: ■■ Part D: ■■ Part E: ■■ Part F: ■■ ■■ Liability Coverage Medical Payments Coverage Uninsured Motorists Coverage Coverage for Damage to Your Auto Duties after an Accident or Loss General Provisions Part A: Liability Coverage Liability coverage (Part A) is the most important part of the Personal Auto Policy, as legal liability arising from negligent use of an auto can be quite large. Liability coverage protects a covered person against a lawsuit or claim arising out of the ownership or operation of a covered vehicle. 9/19/16 3:10 PM 446 C H A P T E R 2 0 / A u t o I n s u r a n ce Insuring Agreement Insured Persons In the insuring agreement, the insurer agrees to pay any damages for bodily injury or property damage for which any insured is legally responsible because of an auto accident. The PAP is typically written with split limits. Split limits mean that the amounts of insurance for bodily injury liability and property damage liability are stated separately. For example, split limits of $250,000/$500,000/$100,000 mean that you have bodily injury liability coverage of up to $250,000 for each injured person and a maximum of $500,000 of bodily injury coverage for each accident. You also have $100,000 of property damage liability coverage. (Practitioners frequently refer to such limits as 250/500/100.) Liability coverage can also be written with a single limit by adding an appropriate endorsement to the policy. A single limit applies to both bodily injury and property damage liability: the total amount of insurance applies to the entire accident without a separate limit for each injured person. For example, a single limit of $500,000 would apply to both bodily injury and property damage liability in any combination of up to $500,000. The amount paid as damages includes any prejudgment interest awarded against the insured. Many states allow plaintiffs (injured persons) to receive interest on the judgment from the time the lawsuit is entered to the time the judgment is determined. Any pre-judgment interest is part of the damages awarded and is subject to the policy limit of liability. The insurer also agrees to defend you and pay all legal defense costs. The defense costs are paid in addition to the policy limits. However, the insurer’s duty to settle or defend the claim ends when the limit of liability has been exhausted by payment of a judgment or settlement. This provision means that the insurer cannot deposit the policy limits into an escrow account and walk away without first defending the insured. The obligation to defend ends when the policy limits are exhausted by payment of a judgment against the insured or settlement with a claimant. The duty to defend also ends if the claim is settled for less than the policy limits. The insurer has no obligation to defend any claim not covered by the policy. For example, if you intentionally cause bodily injury or property damage while driving the covered auto and you are sued, the insurer has no obligation to defend you because intentional acts are specifically excluded. The following four groups are insured parties under the liability section of the PAP: M20_REJD1038_13_GE_C20.indd 446 The named insured and any resident family member ■■ Any person using the named insured’s covered auto who reasonably believes he or she is entitled to use the auto ■■ Any person or organization legally responsible for any insured’s use of a covered auto on behalf of that person or organization ■■ Any person or organization legally responsible for the named insured’s or family members’ use of any auto or trailer (other than a covered auto or one owned by that person or organization) ■■ First, the named insured and resident family members are insured for liability coverage. Coverage also applies to a spouse if she or he is a resident of the same household. In recognition of widespread divorce and separation found today, the PAP provides coverage for 90 days to a spouse who no longer resides in the named insured’s household and is not listed as a named insured in the policy. If a spouse ceases to be a resident of the same household and is not listed as a named insured, the spouse is covered for 90 days following the change in residency, or until the spouse obtains a separate PAP or the policy period ends, whichever occurs first. If both spouses are named in the declarations as named insureds in the same PAP, the policy covers both spouses even when one spouse no longer resides in the same residence. For example, Melissa and Jeffery are married and live in the same residence. Melissa is the named insured under her PAP policy. Assume that Jeffery is not listed as a named insured in her policy. He is still considered a named insured because he is Melissa’s husband. If the couple separates and Jeffery moves into another apartment, he is covered for 90 days under Melissa’s policy, or until he purchases his own policy, if earlier. However, if both were named insureds under the same PAP, Jeffery would continue to be covered as a named insured until the policy expires, or until he purchases his own policy, if earlier. A family member is a person related to the named insured by blood, marriage, or adoption who resides in the same household, including a ward of the court or foster child. Thus, the husband, wife, and children are covered while using any auto, owned or 9/19/16 3:10 PM P a r t A : L ia b ili t y C o v e r a g e nonowned. If the children are attending college and are temporarily away from home, they are still covered under their parents’ policy. Second, any other person using the named insured’s covered auto is also insured provided that person can establish a reasonable belief that she or he is entitled to use the covered auto. For example, Claudio may have permitted his girlfriend, Sasha, to drive his car several times over the past 6 months. If Sasha uses Claudio’s car without his express permission, she is covered under his policy as there is a reasonable belief she is entitled to use the car. Third, coverage also applies to any person or organization legally responsible for any insured’s use of a covered auto on behalf of that person or organization. For example, assume that Arthur drives his car on an errand for his employer and negligently injures another motorist. If the injured motorist sues Arthur’s employer, the employer has coverage under Arthur’s PAP. Finally, coverage applies to any person or organization legally responsible for the named insured’s or family members’ use of any auto or trailer (other than a covered auto or one owned by the person or organization). For example, assume that Arthur uses his car to mail a package for his employer. If Arthur negligently injures someone while using that car and the injured person sues Arthur’s employer, the employer has coverage under Arthur’s PAP. However, the PAP does not extend coverage to the employer when the named insured is using an auto owned by the employer. So if Arthur is driving to the post office in a company car, the employer is not insured under Arthur’s Personal Auto Policy. Supplementary Payments In addition to the policy limits and a legal defense, certain supplementary payments can be paid. They include the following: Up to $250 for the cost of a bail bond Premiums on appeal bonds and bonds to release attachments ■■ Interest accruing after a judgment ■■ Up to $200 daily for the loss of earnings ■■ Other reasonable expenses ■■ ■■ Premiums on a bail bond can be paid up to $250 because of an auto accident that results in property damage or bodily injury. For example, Lila is driving negligently and injures another motorist in an auto M20_REJD1038_13_GE_C20.indd 447 4 47 accident. If she is arrested, and bail is set at $2,500, the insurer will pay the bail bond premium up to a maximum of $250. Premiums on an appeal bond and a bond to release an attachment of property in any suit defended by the insurer are also paid as supplementary payments. If interest accrues after a judgment is awarded, the interest is paid as a supplementary payment. Any pre-judgment interest, however, is part of the liability limits. The insurer will also pay up to $200 daily for the loss of earnings (but not other income) due to attendance at a hearing or trial at the insurer’s request. Finally, other reasonable expenses incurred at the insurer’s request are paid. For example, you may be a defendant in a trial and the insurer may request that you testify. If you have meal or transportation expenses, they would be paid as a supplemental payment. Exclusions A lengthy list of exclusions applies to the liability coverage under the PAP. They are summarized as follows: 1. Intentional injury or damage. Intentional bodily injury or property damage is specifically excluded. For example, a driver changes lanes suddenly without signaling and cuts sharply in front of Archie’s car. Archie is enraged and deliberately rams the vehicle. The intentional property damage to the other driver’s car is not covered by Archie’s PAP. Unfortunately, “road rage” is widespread nationally and is responsible for numerous motor vehicle deaths. 2. Property owned or transported. Liability coverage is not provided to any person for damage to property owned or being transported by that person. For example, the suitcase and camera belonging to a friend may be damaged in an auto accident while you and your friend are on vacation together. The damage would not be covered by your PAP. 3. Property rented, used, or in the insured’s care. Damage to property rented to, used by, or in the care of the insured is not covered. For example, if you rent some skis that are damaged in an auto accident, the property damage is not covered. The exclusion, however, does not apply to property 9/19/16 3:10 PM 448 C H A P T E R 2 0 / A u t o I n s u r a n ce damage to a rented residence or private garage. For example, if you rent a house and carelessly back into a partly opened garage door, the property damage to the door would be covered. 4. Bodily injury to an employee. Bodily injury to an employee of the insured who is injured during the course of employment is also excluded. The intent here is to cover the employee’s injury under a workers compensation law. However, a domestic employee injured during the course of employment would be covered if workers compensation benefits are not required or available. 5. Use as a public or livery conveyance. Another exclusion is liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance. The intent here is to exclude coverage if the insured makes the vehicle available for hire to the general public. For example, if you use your car as a public taxi, the exclusion applies. However, the exclusion does not apply to a share-the-expense carpool. With the introduction of car sharing and ride sharing (e.g., Uber, Lyft, Sidecar), this exclusion has come under scrutiny. In response, ISO introduced an exclusionary endorsement for insurers using the PAP. The implications of car sharing and ride sharing for auto insurers are important (see Insight 20.1). I nsi g h t 2 0 .1 What Do Ride Sharing and Car Sharing Mean for Personal Auto Insurance? Personal auto insurers track many industry trends, including mobile app technologies, telematics programs, and automated vehicle advancements. Two new issues — ride sharing and car s­haring — have now crossed insurers’ paths, and they pose some interesting challenges. The idea of sharing a car or a ride seems innocuous; it conjures up images of giving a neighbor a lift to the store or parents taking turns running errands with the family minivan. But despite the friendly-sounding names, the new types of sharing may have implications that insurers and policyholders haven’t anticipated. Employee carpools or college dorm mates sharing a ride home from school are long-standing traditions. But those forms of sharing typically require advance planning and involve people who know each other. Technology has altered the nature of ride sharing. It’s now possible to share cars and rides with little or no advance notice using social networks to draw from large numbers of anonymous individuals. Entrepreneurs are eager to capitalize on the trend. What is car sharing? Simply put, with car sharing, a private individual rents his or her personal vehicle to another driver for a few hours, days, or weeks. Services such as FlightCar, GetAround, and RelayRides act as brokers between people offering their cars for rent and those seeking rentals. Each of those services collects a fee. FlightCar bills its service as “car sharing for travelers.” The company specializes in owners who drive to the airport and park their cars there while traveling. In return for sharing a car that would otherwise sit idle, the car owner gets free airport parking, a ride to the terminal, and a portion of the car’s rental fee. FlightCar even washes and vacuums the car. FlightCar’s rates are typically far below the rates of commercial rental car companies. Their service is currently available at two airports in Boston and San Francisco. GetAround and RelayRides offer “peer-to-peer” car rentals, another version of car sharing. Using a smartphone application, car owners list their cars as available for rent from any location within the geographic area that offers the service. For example, a car owner can drive to work in the morning and park his car, at which time a renter can pick up the car to run a few errands and return it before the end of the workday. The services solicit car owners with pitches such as “The average car sits idle for 22 hours a day” and “Earn up to $1,000 a month by renting your car.”1 Typical rental fees can range from $8 to $10 per hour. GetAround is currently available in San Francisco, Portland, Chicago, Austin, and San Diego. What is ride sharing? Companies like Lyft, Uber, Sidecar, eRideShare, and Ridester act as brokers or ride-sharing exchanges between prospective drivers and passengers. eRideShare and Ridester use web portals to match drivers and passengers. Their services seem geared more toward commuters interested in sharing the expense of carpooling. Lyft, Uber, and Sidecar offer on-demand shared rides. The idea behind ride sharing is to earn money while carrying a passenger in an otherwise empty car. In practice, one might be hard-pressed to distinguish some aspects of on-demand ride sharing from traditional taxi and limousine services, particularly when brokers use pitches for prospective drivers such as “Drivers are making up to $35 an hour and choosing their own hours” and “Just a few hours of driving can help cover costs for parking, insurance, repairs, and gas.”2 For on-demand services, prospective passengers can summon a car using a smartphone app. A recent article in The New York Times describes one example in which a bar patron summoned a car after closing hours using her smartphone and “minutes later, a graduate student moonlighting as a driver pulled up in an SUV.” The same (Continued) M20_REJD1038_13_GE_C20.indd 448 9/19/16 3:10 PM P a r t A : L ia b ili t y C o v e r a g e 449 I nsi g h t 2 0 .1 ( C o n t i n u e d ) passenger was quoted in the article as saying, “This is so much cheaper than a cab, and so much easier.”3 Some traditional taxi companies and related regulators appear vexed by these upstarts. The taxi industry sees a potential loss in revenue as it competes against what it might perceive as lower-cost operators, and regulators often cite potential safety issues in a largely unregulated market.4 But the services appear to be here to stay. One state, California, recently even issued guidelines.5, 6 What does it mean for personal auto insurers? Car- and ride-sharing services target personal automobile owners, so one of the most significant issues for personal auto insurers involves liability. If a car is involved in an accident while used in a car- or ride-sharing arrangement, who pays? Typical language in a personal auto policy, such as that found in ISO’s current Personal Auto Policy, excludes coverage with respect to “liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance.” However, that exclusion “does not apply to a share-the-expense car pool.” From a risk assessment standpoint, car sharing may be the easier of the two services to evaluate. In many cases, car sharing is basically analogous to a public rental. There’s no sharing of expenses and no sharing of a ride between driver and passenger to a common destination. In essence, the car is available to rent for a fee. In line with this, some car-sharing services offer primary coverage in the event of an accident. In many cases, the service offers car owners third-party liability coverage as well as some comprehensive and collision coverage. On-demand ride-share services are more difficult to evaluate. At least one such company states in its terms of service that payments are “donations” and not “fares” and requires passengers and drivers to affirm that they’re not using the vehicle for a commercial purpose. Passengers are further required to affirm that they’re not using the service “outside the ride-sharing and carpooling exemptions under applicable law or on behalf of any entity or organization.”7 Another service advertises that it will provide excess liability coverage “ . . . the event that the driver’s personal insurance will cover only a portion of or none of the driver’s liability associated with an incident.” None of the services appears to provide drivers with comprehensive or collision coverage. So, what, if anything, should insurers do? Depending on the specific facts and circumstances, some insurers believe that the “taxi or livery conveyance” exclusion does apply. In response to ride-sharing trends, ISO recently released an exclusion endorsement for 6. Vehicles used in the auto business. If a person is employed or engaged in the auto business, liability arising out of the operation of vehicles in the auto business is excluded. The auto business refers to M20_REJD1038_13_GE_C20.indd 449 vehicle-sharing arrangements as part of its personal auto program. However, a more fundamental challenge for insurers is determining whether a driver was engaged in ride sharing when an accident occurred. And in the typical claims process, when does the question ever arise, “At the time of the accident, were you engaged in ride sharing?” Perhaps surprisingly, the topic did come up in one incident, as recently reported in the San Francisco Bay Guardian.8 According to the article, the insurer discovered that one of its policyholders had an accident while providing ride sharing to passengers and reportedly requested that she stop providing the service in order to continue coverage. There was no mention of how the insurer handled the claim, but the policyholder was reluctant to stop ride sharing because “it’s a big part of my income at this point and I would hate to give it up because I would have to find something else.” Should insurers worry? Recently, one ride-share provider raised more than $60 million in new capital to continue its expansion. The service already provided more than 30,000 rides per week, or 1.5 million rides annually.9 And given the urban locations with the population density to make such services tenable, it’s hard to imagine that all those trips end accident-free. With more ride-share start-ups entering the market, more markets coming online, and the relative ease with which car owners can make money by offering their services, ride sharing appears poised for significant growth. Ride sharing may not be insurers’ number one concern, but it should probably be on their radar. Source: Jim Levendusky, Verisk Analytics, Inc. Reprinted with permission. Notes: 1 https://relayrides.com (https://relayrides.com) 2 www.side.cr/drivers (http://www.side.cr/drivers) 3 www.nytimes.com/2013/07/13/us/in-Los-Angeles-Where-Car-Is-KingSmartphones-May-Cut-Traffic.html (http://www.nytimes.com/2013/07/13/us/ in-Los-Angeles-Where-Car-Is-King-Smartphones-May-Cut-Traffic.html) 4 Ibid. 5 http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M077/ K132/77132276.PDF (http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/ M077/K132/77132276.PDF) 6 http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M077/ K132/77112265.PDF (http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/ M077/K132/77112265.PDF) 7 www.side.cr/terms (http://www.side.cr/terms) 8 www.sfbg.com/2013/08/06/driven-take-risks (http://www.sfbg. com/2013/08/06/driven-take-risks) 9 www.forbes.com/sites/tomiogeron/2013/05/23/lyft-raises-60-million-as-ridesharing-competition-heats-up (http://www.forbes.com/sites/ tomiogeron/2013/05/23/lyft-raises-60-million-as-ride-sharing-competition-heats-up) the selling, repairing, servicing, storing, or parking of vehicles designed for use mainly on public highways. It also includes road testing and delivery. For example, assume you take your car to a garage 9/19/16 3:10 PM 450 7. 8. 9. 10. 11. C H A P T E R 2 0 / A u t o I n s u r a n ce for repairs. If a mechanic has an accident and injures someone while road testing your car, your PAP liability coverage does not protect the mechanic. However, if you are sued because you are the car owner, you are covered. The intent is to exclude loss exposures that should be covered under the auto repair firm’s liability insurance. Note that this particular exclusion does not apply to the operation, ownership, or use of a covered auto by the named insured, by any resident family member, or by any partner, agent, or employee of the named insured or family member. For example, if an auto mechanic has an accident while driving his or her own car to pick up a repair part, the mechanic’s PAP would cover the loss. Other business vehicles. Liability coverage does not apply to any vehicle maintained or used in any other business (other than farming or ranching). This exclusion is similar to the preceding auto business exclusion except it applies to all other business use with certain exceptions. The intent here is to exclude liability coverage for commercial vehicles and trucks that are used in a business. For example, if you drive a city bus or operate a large cement truck, your PAP liability coverage does not apply. This exclusion does not apply to an owned or nonowned private passenger auto, pickup, or van. Thus, you are covered if you drive your car on company business. Using a vehicle without reasonable belief the person is entitled to do so. If a person uses a vehicle without a reasonable belief that he or she is entitled to do so, the liability coverage does not apply. The exclusion does not apply to a family member who is using a covered auto owned by the named insured. Nuclear energy exclusion. Liability of insureds who are covered under special nuclear energy contracts is also excluded. Vehicle with fewer than four wheels. Liability coverage does not apply to any vehicle that has fewer than four wheels or is designed for use mainly off public roads. Thus, motorcycles, mopeds, motor scooters, minibikes, and trail bikes are excluded. However, the exclusion does not apply if the vehicle is being used in a medical emergency or to any nonowned golf cart. For example, if you rent a golf cart and injure another golfer, liability coverage applies. Vehicle furnished or made available for the named insured’s regular use. Liability coverage excludes M20_REJD1038_13_GE_C20.indd 450 a vehicle other than a covered auto that is owned by, furnished to, or made available for the named insured’s regular use. You can occasionally drive another person’s car and still have coverage under your policy. However, if the nonowned auto is driven regularly or is furnished or made available for your regular use, your PAP liability coverage does not apply. For example, if your employer furnishes you with a car, or if a car is available for your regular use in a company carpool, the liability coverage does not apply. The key point is not how frequently you drive someone else’s car, but whether it is furnished or made available for your regular use. For an additional premium, the extended nonowned coverage endorsement can be added to the PAP that covers the insured while operating a nonowned auto on a regular basis. 12. Vehicle owned by, furnished, or made available for the regular use of any family member. This exclusion is similar to the preceding exclusion. However, it does not apply to the named insured and spouse. For example, if Molly borrows a car owned and insured by her son who lives with her, the liability coverage under Molly’s PAP would cover her while driving the son’s car. 13. Racing vehicle. Liability coverage does not apply to any vehicle while it is located inside a racing facility for the purpose of competing in or preparing for a prearranged racing or speed contest. Limit of Liability As noted earlier, the PAP is typically written with split limits. That is, the amounts of insurance for bodily injury liability and property damage liability are stated separately. The maximum amount paid for bodily injury to each person is the amount shown on the declarations page. Subject to that limit for each person, the maximum amount paid for bodily injury to all persons resulting from any one auto accident is the amount shown in the declarations. The maximum amount paid for property damage resulting from any one auto accident is also shown in the declarations. Out-of-State Coverage An important provision applies if an accident occurs in a state other than where the covered auto is principally garaged. If the accident occurs in a state that has a financial responsibility law with higher liability limits 9/19/16 3:10 PM P a r t B : M edical P a y me n t s C o v e r a g e Exhibit 20.1 Primary and Excess Insurance Philip is the named insured and borrows Nicole’s car with her permission. Philip has $50,000 of liability insurance and Nicole has a $100,000 limit. Both policies will cover any loss. Philip negligently injures another motorist and must pay damages of $125,000. The rule is that insurance on the nonowned car is primary, and other insurance is excess. Thus, each company pays as follows: Nicole’s insurer (primary) Philip’s insurer (excess) Total Insured Persons Two groups are insured for medical payments coverage: ■■ $25,000 ■■ than the limits shown in the declarations, the PAP automatically provides the higher specified limits. Likewise, if the state has a compulsory insurance or similar law that requires a nonresident to have insurance whenever he or she uses a vehicle in that state, the PAP provides the required minimum amounts and types of coverage. Other Insurance In some cases, more than one liability policy covers a loss. If other applicable liability insurance applies to an owned vehicle, the insurer pays only its pro rata share of the loss. The insurer’s share is the proportion that its limit of liability bears to the total applicable limits of liability under all policies. However, if the insurance applies to a nonowned vehicle, the insurer’s insurance is excess over any other collectible insurance (see Exhibit 20.1). Part B: Medical Payments Coverage Medical payments coverage is frequently included in the Personal Auto Policy. Medical payments are paid without regard to fault. Insuring Agreement Under this provision, the company will pay all reasonable medical and funeral expenses incurred by an insured for services rendered within 3 years from the date of the accident. Covered expenses include medical, surgical, X-ray, dental, and funeral expenses. The benefit limits typically range from $1,000 to $10,000 per person and apply to each insured individual who is injured in the accident. M20_REJD1038_13_GE_C20.indd 451 Medical payments coverage is not based on fault. Thus, if you are injured in an auto accident and are at fault, medical payments can still be paid to you and to other injured passengers in the car. $100,000 $125,000 4 51 Named insured and family members Other persons while occupying a covered auto The named insured and family members are covered if they are injured while occupying any motor vehicle or are injured as pedestrians when struck by a motor vehicle designed for use mainly on public roads. For example, if the parents and children are injured in an auto accident while on vacation, their medical expenses are covered up to the policy limits. If the named insured or any family member is struck by a motor vehicle or trailer while walking, his or her medical expenses are also paid. However, if you are injured by a farm tractor, snowmobile, or bulldozer, your injuries are not covered because these vehicles are not designed for use mainly on public roads. Other persons are also covered for their medical expenses while occupying your covered auto. For example, if you own your car and are the named insured, all passengers in your car are covered for their medical expenses under your policy. However, if you are operating a vehicle you do not own, other passengers in the car (other than family members) are not covered for their medical expenses under your policy. The intent here is to have other passengers in the nonowned vehicle seek protection under their own insurance or under the medical expense coverage that applies to the nonowned vehicle. Exclusions Medical payments coverage has numerous exclusions. They are summarized as follows: 1. Motorized vehicle with fewer than four wheels. Bodily injury while occupying a motorized vehicle with fewer than four wheels is excluded. Occupying is defined in the policy as “in, upon, or getting in, on, out or off.” 2. Public or livery conveyance. When a covered auto is used as a public or livery conveyance, the medical 9/19/16 3:10 PM 452 3. 4. 5. 6. 7. 8. C H A P T E R 2 0 / A u t o I n s u r a n ce payments coverage does not apply. The exclusion does not apply to a share-the-expense car pool. Using the vehicle as a residence. Coverage does not apply if the injury occurs while the vehicle is being used as a residence or premises. For example, if you own and occupy a camper trailer as a residence in a campground while on vacation, medical expense coverage does not apply if you burn yourself while cooking on a stove in the trailer. Injury occurring during course of employment. Coverage does not apply if the injury occurs during the course of employment and workers compensation benefits are required or available. Vehicle furnished or made available for the named insured’s regular use. Coverage does not apply to any injury sustained while occupying or when struck by a vehicle (other than a covered auto) that is owned by the named insured or is furnished or made available for the named insured’s regular use. The intent here is to avoid providing “free” medical payments coverage on an owned or regularly used car not described in the policy. Vehicle furnished or made available for the regular use of any family member. A similar exclusion applies to any vehicle (other than a covered auto) that is owned by any family member or is furnished or made available for the regular use of any family member. The exclusion does not apply to the named insured and spouse. For example, if a son living at home owns a car that is not insured for medical payments coverage, and the parents are injured while occupying the son’s car, the parents’ medical expenses would be covered under their policy. Using a vehicle without a reasonable belief the person is entitled to do so. Coverage does not apply if the injury occurs while occupying a vehicle without a reasonable belief of being entitled to do so. The exclusion does not apply to a family member who is using a covered auto owned by the named insured. Vehicle used in the business of an insured. Coverage does not apply to any injury sustained while occupying a vehicle when it is being used in the business of an insured. The intent here is to exclude medical payments coverage for nonowned trucks and commercial vehicles used in the business of an insured person. The exclusion does M20_REJD1038_13_GE_C20.indd 452 not apply to a private passenger auto, to a pickup or van, or to a trailer used with any of the preceding vehicles. 9. Nuclear weapon, radiation, or war. Bodily injury from a nuclear weapon, nuclear radiation, or war is not covered. 10. Racing vehicle. Coverage does not apply to a bodily injury sustained while occupying a vehicle located inside a racing facility for the purpose of competing in or preparing for a prearranged racing or speed contest. Other Insurance If other auto medical payments insurance applies to an owned vehicle, the insurer pays its pro rata share of the loss based on the proportion that its limits bear to the total applicable limits. However, medical payments coverage is excess with respect to a nonowned vehicle. For example, assume that Kim is driving her car and picks up Patti for lunch. Kim loses control of the car and hits a tree, and Patti is injured. Patti’s medical bills are $6,000. Kim has $5,000 of medical expenses coverage and Patti has $10,000. Under the medical payments coverage, Kim’s insurer pays the first $5,000 as primary insurer, and Patti’s insurer pays the remaining $1,000 as excess insurance. Part C: Uninsured Motorists Coverage Some motorists are irresponsible and drive without liability insurance. Across the United States, if someone is injured in an auto accident, the chances are about one in seven that the at-fault driver is uninsured. According to the Insurance Research Council (IRC), the estimated number of uninsured motorists in the United States peaked at 29.9 million in 2009, reflecting the recession. The percentage of insured drivers trended down in 2010, 2011, and 2012 (see Insight 20.2). There is wide variation in the percentage of uninsured drivers among the states. The IRC study showed that the estimated percentage of uninsured drivers ranged from a high of 25.9 percent in Oklahoma to a low of 3.9 percent in Massachusetts (see Exhibit 20.2). 9/19/16 3:10 PM P a r t C : U n i n s u r ed M o t o r i s t s C o v e r a g e 453 I nsi g h t 2 0 . 2 New Study Reveals a Declining Trend in the Percentage of Uninsured Motorists Approximately one in eight drivers across the United States may be driving uninsured, according to a recent study by the Insurance Research Council (IRC). The estimated percentage of uninsured drivers in 2012 was 12.6 percent. The number of uninsured peaked in 2009 at 29.9 million. The number uninsured in 2012 was estimated to be 29.7 million, according to the IRC. The study, Uninsured Motorists, 2014 Edition, estimates the percentage of uninsured drivers countrywide and by state for 2008 and 2009. The IRC estimates the uninsured driver population by using a ratio of insurance claims made by individuals who were injured by uninsured drivers to claims made by individuals who were injured by insured drivers. The study contains recent statistics by state on uninsured motorists claim frequency, bodily injury liability claim frequency, and the ratio of uninsured motorists to bodily injury claim frequencies. The magnitude of the uninsured motorists problem varies widely from state to state. In 2012, the five states with the highest uninsured driver estimates were Oklahoma (25.9 percent), Florida (23.8 percent), Mississippi (22.9 percent), New Mexico (21.6 percent), and Michigan (21.0 percent). The five states with the lowest Uninsured motorists coverage pays for bodily injury (and property damage in some states) caused by an uninsured motorist, by a hit-and-run driver, or by a negligent driver whose insurance company is insolvent. Insuring Agreement The insurer agrees to pay compensatory damages that an insured is legally entitled to receive from the owner or operator of an uninsured motor vehicle because of bodily injury caused by an accident. Damages include medical bills, lost wages, and compensation for a permanent disfigurement resulting from the accident. Several important points must be emphasized with respect to this coverage. 1. The coverage applies only if the uninsured motorist is legally liable. If the uninsured motorist is not liable, the insurer will not pay for the bodily injury. 2. The insurer’s maximum limit of liability for any single accident is the amount shown in the declarations. You cannot receive duplicate payments for the same elements of loss under the uninsured motorists coverage and Part A (liability coverage) M20_REJD1038_13_GE_C20.indd 453 uninsured driver estimates were Massachusetts (3.9 percent), Maine (4.7 percent), New York (5.3 percent), Utah (5.8 percent), and North Dakota (5.9 percent). Discounting fatalities and total permanent disability claims, the IRC estimates that $2.6 billion was paid in the United States on 2012 uninsured motorists claims. Despite the declining trend in uninsured rates over the last decade, the aforementioned total claim payment amount is up 75 percent over the last 10 years. “Responsible drivers who pay for insurance end up also paying for injuries caused by uninsured drivers,” said Elizabeth Sprinkel, CPCU, senior vice president of the IRC. She adds, “The declining trend in the percentage of uninsured motorists is a positive development for consumers; however the heightened levels of uninsured motorists and the rising claims payments involved still remain a concern for insured drivers, insurers and policymakers.” Source: Insurance Research Council, New Study Reveals a Declining Trend in the Percentage of Uninsured Motorists, News Release, August 5, 2014. Reprinted with permission. or Part B (medical payments coverage) of the policy, or any underinsured motorists coverage provided by the policy. Also, you cannot receive a duplicate payment for any element of loss for which payment has been made by or on behalf of persons or organizations legally responsible for the accident. Finally, the insurer will not pay you for any part of a loss if you are entitled to be paid for that part of the loss under a workers compensation or disability benefits law. 3. The claim is subject to arbitration if the insured and insurer disagree over the amount of damages or whether the insured is entitled to receive any damages. However, both the insured and insurer must agree to arbitration. Under this provision, each party selects an arbitrator. The two arbitrators select a third arbitrator. A decision by two of the three arbitrators is binding on all parties. However, the decision is binding only if the damages awarded do not exceed the state’s minimum financial responsibility law limits. 4. Some states also include coverage for property damage from an uninsured motorist in their uninsured motorists law. In these states, if an uninsured driver runs a red light and smashes into 9/19/16 3:10 PM 454 C H A P T E R 2 0 / A u t o I n s u r a n ce Exhibit 20.2 Estimated Percentage of Uninsured Motorists in the United States in 2012 State Uninsured State Uninsured State Uninsured Oklahoma 25.9% Missouri 13.5% North Carolina 9.1% Florida 23.8% Illinois 13.3% Oregon 9.0% Mississippi 22.9% Alaska 13.2% Hawaii 8.9% New Mexico 21.6% Texas 13.3% Wyoming 8.7% Michigan 21.0% Maryland 12.2% Vermont 8.5% Tennessee 20.1% Nevada 12.2% West Virginia 8.4% Alabama 19.6% D.C 11.9% Connecticut 8.0% Rhode Island 17.0% Wisconsin 11.7% South Dakota 7.8% Colorado 16.2% Georgia 11.7% South Carolina 7.7% Washington 16.1% Delaware 11.5% Nebraska 6.7% Arkansas 15.9% Minnesota 10.8% Idaho 6.7% Kentucky 15.8% Arizona 10.6% Pennsylvania 6.5% California 14.7% New Jersey 10.3% North Dakota 5.9% Indiana 14.2% Virginia 10.1% Utah 5.8% Montana 14.1% Iowa 9.7% New York 5.3% Louisiana 13.9% Kansas 9.4% Maine 4.7% Ohio 13.5% New Hampshire 9.3% Massachusetts 3.9% Source: Insurance Research Council, 2015 Insurance Fact Book. Reprinted with permission. your car, the property damage to the car would be covered under your uninsured motorists coverage, subject to any applicable deductible. There is considerable variation among the states that include property damage coverage in their uninsured motorists laws. In some states, property damage coverage is an optional coverage that is purchased separately from the regular uninsured motorists coverage. In other states, both bodily injury and property damage coverages are included together in the uninsured motorists coverage; however, the insured may have the option of waiving the coverage if it is not desired. Finally, the property damage is subject to a deductible. Insured Persons Three groups are covered under the uninsured motorists coverage: ■■ ■■ The named insured and his or her family members Any other person while occupying a covered auto M20_REJD1038_13_GE_C20.indd 454 ■■ Any person legally entitled to recover damages because of bodily injury to a person described previously First, the named insured and his or her family members are covered if they are injured by an uninsured motorist. Second, any other person who is injured while occupying a covered auto is also an insured; the coverage applies only if the individual is occupying a covered auto. Finally, any person legally entitled to recover damages because of bodily injury or death to a previously described person is also insured. An individual may not be physically involved in the accident but may be entitled to recover damages from the person or organization legally responsible for the bodily injury of the insured person. For example, if the named insured is killed by an uninsured motorist, the surviving spouse could collect damages under the uninsured motorists coverage. 9/19/16 3:10 PM P a r t C : U n i n s u r ed M o t o r i s t s C o v e r a g e Uninsured Vehicles An extremely important provision defines an uninsured motor vehicle. Four groups of vehicles are considered to be uninsured vehicles: 1. An uninsured vehicle is a motor vehicle or trailer for which no bodily injury liability insurance policy applies at the time of the accident. 2. A bodily injury liability policy may be in force on a vehicle. However, the amount of insurance on that vehicle may be less than the amount required by the state’s financial responsibility law in the state where the named insured’s covered auto is principally garaged. This vehicle is also considered to be an uninsured motor vehicle. 3. A hit-and-run vehicle is also considered to be an uninsured vehicle. Thus, if the named insured or any family member is struck by a hit-and-run driver while occupying a covered auto or a nonowned auto, or while walking, the uninsured motorists coverage will pay for the injury. 4. Another uninsured vehicle is one to which a bodily injury liability policy applies at the time of the accident, but the insurer denies coverage or becomes insolvent. For example, assume that you are involved in an auto accident, and the other driver is at fault. If the negligent driver’s insurer denies coverage, you can file a claim under the uninsured motorist coverage in your own policy. Likewise, if you have a valid claim against a negligent driver, but her or his insurer becomes insolvent before the claim is paid, your uninsured motorists coverage would pay the claim. Exclusions 3. 4. 5. 6. 7. Uninsured motorists coverage has several general exclusions, summarized as follows: 1. No uninsured motorists coverage on vehicle. Coverage does not apply to an insured while occupying or when struck by a motor vehicle owned by that insured, which is not insured for this coverage under the policy. 2. Primary coverage under another policy. Family members are not covered while they are occupying a vehicle owned by the named insured, which is insured for uninsured motorists’ coverage on a primary basis under another policy. The intent M20_REJD1038_13_GE_C20.indd 455 455 here is to have such family members seek protection under the policy insuring the vehicle that they are occupying. Settling a claim without the insurer’s consent. If an insured or legal representative settles a bodily injury claim without the insurer’s consent, and the settlement jeopardizes the insurer’s right to recover a loss payment, the uninsured motorists coverage does not apply. The purpose of this exclusion is to protect the insurer’s subrogation rights. Using the vehicle as a public or livery conveyance. If an insured occupies a covered auto when it is being used as a public or livery conveyance, coverage does not apply. The exclusion does not apply to a share-the-expense car pool. No reasonable belief the person is entitled to use the vehicle. Coverage does not apply to any person who is using a vehicle without a reasonable belief that he or she is entitled to do so. This exclusion does not apply to a family member who is using a covered auto owned by the named insured. No benefit to workers compensation insurer. The uninsured motorists coverage cannot directly or indirectly benefit a workers compensation insurer or self-insurer. A workers compensation insurer may have a legal right of action against a third party who has injured an employee. If an uninsured driver injures an employee who receives workers compensation benefits, the workers compensation insurer could sue the uninsured driver or attempt to make a claim under the injured employee’s uninsured motorists coverage. This exclusion prevents the uninsured motorists coverage from providing benefits to the workers compensation insurer. No punitive damages. The PAP excludes payment for punitive or exemplary damages under the uninsured motorists coverage. Other Insurance The PAP contains a number of complex provisions that apply when more than one uninsured motorist coverage applies to the loss. These provisions are summarized as follows: ■■ The maximum amount paid is limited to the highest limit of any of the policies that provide uninsured motorists coverage. 9/19/16 3:10 PM 456 C H A P T E R 2 0 / A u t o I n s u r a n ce If an insurer provides uninsured motorists coverage on a vehicle not owned by the named insured, the insurance provided is excess over any collectible insurance providing insurance on a primary basis. For example, Tomás has an uninsured motorists coverage limit of $25,000, and Ashley has an uninsured motorists coverage limit of $50,000. If Tomás is injured by an uninsured driver while occupying Ashley’s car and has bodily injuries of $60,000, Ashley’s policy is primary and pays $50,000. Tomás’s insurer pays the remaining $10,000 as excess insurance. ■■ When the named insured’s policy and the other policy provide uninsured motorists coverage on a primary basis, each policy pays its pro rata share of the loss. Each insurer’s share is the proportion that its limit of liability bears to the total of all applicable limits of liability for coverage provided on a primary basis. ■■ When the named insured’s policy and the other policy provide uninsured motorists coverage on an excess basis, each policy also pays its pro rata share of the loss. Each insurer’s share is the proportion that its limit of liability bears to the total of all applicable limits of liability for coverage provided on an excess basis. ■■ bodily injury damages are $100,000, she would receive only $25,000 from the negligent driver’s insurer, because that amount is the driver’s applicable limit of liability. However, she would receive another $75,000 from her insurer under her underinsured motorists coverage. However, assume that Kristen’s bodily injury damages are $125,000. The maximum amount she would collect under the underinsured motorists coverage is still only $75,000, which is the difference between the $100,000 limit under her underinsured motorists coverage and the $25,000 collected from the negligent driver’s insurer (see preceding rule). To collect the full amount of her injury, Kristen should have carried limits of at least $125,000. Underinsured motorists coverage endorsements are not uniform among the states. In some states, underinsured motorists coverage can be added as an endorsement to the PAP to complement the coverage provided by the uninsured motorists coverage. In other states, a single endorsement provides both uninsured and underinsured coverage and replaces uninsured motorists coverage that is part of the standard PAP. In addition, some states make the underinsured motorists coverage mandatory, whereas other states make it optional. Finally, the available or required limits for underinsured motorists coverage also vary by state. Underinsured Motorists Coverage Underinsured motorists coverage can be added to the Personal Auto Policy to provide more complete protection. Underinsured motorists coverage applies when a negligent third-party driver carries liability insurance, but the limits carried are less than the insured’s actual damages for bodily injury. An underinsured vehicle is defined as a vehicle to which a liability policy applies at the time of the accident, but the liability limits carried are less than the limits provided by the insured’s underinsured motorists coverage. The maximum amount paid for bodily injury under the coverage varies among the states. In general, the maximum amount paid is the underinsured motorists coverage limit stated in the policy less the amount paid by the negligent driver’s insurer. For example, assume that Kristen adds underinsured motorists coverage to her policy in the amount of $100,000. She is injured by a negligent driver who has liability limits of $25,000/$50,000, which satisfy the state’s minimum required bodily injury limits. If her M20_REJD1038_13_GE_C20.indd 456 Part D: Coverage for Damage to Your Auto Part D (coverage for damage to your auto) provides coverage for damage or theft of an auto. Insuring Agreement The insurer agrees to pay for any direct and accidental loss to a covered auto or any nonowned auto as defined in the insuring agreement, including their equipment, less any deductible. If two autos insured under the same policy are damaged in the same accident, only one deductible must be met. If the deductible amounts are different, the higher deductible will apply. Two optional coverages are available: (1) collision coverage and (2) other-than-collision coverage (also called comprehensive). A collision loss is covered only if the declarations page indicates that collision coverage is provided for that auto. Likewise, coverage 9/19/16 3:10 PM P a r t D : C o v e r a g e f o r D ama g e t o Y o u r A u t o for an other-than-collision loss is in force only if the declarations page indicates that other-than-collision coverage is provided for that auto. Collision Loss Collision is defined as the upset of your covered auto or nonowned auto or its impact with another vehicle or object. The following are examples of a collision loss: You lose control of your car on an icy road, and it overturns. ■■ Your car hits another car, a telephone pole, a tree, or a building. ■■ Your car is parked, and you find the rear fender dented when you return. ■■ You open your car door in a parking lot, and the door is damaged when it hits the vehicle parked next to you. ■■ Collision losses are paid regardless of fault. If you cause the accident, your insurer will pay for the damage to your car, less any deductible. If the other driver damages your car, you can either collect from the negligent driver (or from his or her insurer), or look to your insurer to pay the claim. If you collect from your own insurer, you must give up subrogation rights to your insurer, who will then attempt to collect from the negligent party who caused the accident. If the entire amount of the loss is recovered, your insurer will refund the deductible. Other-Than-Collision Loss The PAP can be written to cover an other-than-collision loss. The PAP distinguishes between a collision and an other-than-collision loss. This distinction is important because some car owners do not wish to pay for collision coverage on their cars. Also, the deductibles under the two coverages may be different. Other-than-collision coverage is frequently written with a lower deductible. Other-than-collision loss coverage applies to losses to the covered auto not caused by a collision or in cases in which an exclusion applies. Some examples of losses covered by other-than-collision coverage are losses caused by: Missiles or falling objects Fire ■■ Theft or larceny ■■ Explosion or earthquake ■■ Windstorm ■■ Hail, water, or flood ■■ ■■ M20_REJD1038_13_GE_C20.indd 457 457 Malicious mischief or vandalism Riot or civil commotion ■■ Contact with a bird or animal ■■ Glass breakage ■■ ■■ These perils are self-explanatory, but a few comments are in order. Theft of the vehicle is covered, including the theft of equipment, such as wheel covers, tires, or a stereo. Theft of an air bag from a covered vehicle parked on the street is also covered. Colliding with a bird or animal is not a collision loss. Thus, if you hit a bird or deer with your car, the physical damage to the car is considered to be an other-than-collision loss. Finally, if glass breakage is caused by a collision, you can elect to have it covered as a collision loss. This distinction is important because both coverages (collision loss and other-than-collision loss) are written with deductibles. Without this qualification, you would have to pay two deductibles if the car has both body damage and glass breakage in the same accident. By treating glass breakage as part of the collision loss, only the collision deductible must be satisfied. Nonowned Auto The Part D coverages also apply to a nonowned auto. As defined in Part D, a nonowned auto is a private passenger auto, pickup, van, or trailer not owned by or furnished or made available for the regular use of the named insured or family member, while it is in the custody of or is being operated by the named insured or family member. For example, if Ellen borrows Mike’s car, Ellen’s collision coverage and other-than-collision coverage on her car apply to the borrowed car. However, Ellen’s insurance is excess over any physical damage insurance on the borrowed car. Part D coverages apply only if the nonowned auto is not furnished or made available for the regular use of the named insured or family members. The courts generally have ruled that a vehicle is not furnished or made available for your regular use if you must ask permission every time you use the vehicle. Thus, you can occasionally drive a nonowned vehicle with permission, and your Part D coverages will apply to the borrowed vehicle. However, if the vehicle is driven on a regular basis or is furnished or made available for your regular use, the Part D coverages do not apply. The key point here is not how frequently you drive a nonowned auto, but whether the vehicle is furnished or made available for your regular use. 9/19/16 3:10 PM 458 C H A P T E R 2 0 / A u t o I n s u r a n ce The Part D coverages also apply to a temporary substitute vehicle, which is also considered in Part D to be a nonowned auto. A temporary substitute vehicle is a nonowned auto or trailer that is used as a temporary replacement for a covered auto that is out of normal use because of its breakdown, repair, servicing, loss, or destruction. Thus, the Part D coverages that apply to a covered auto also apply to a temporary substitute vehicle. For example, if your car is in the shop for repairs, and you are furnished a loaner car, your physical damage insurance also applies to the loaner car. If you have an accident while operating a nonowned auto, the PAP provides the broadest physical damage coverage applicable to any covered auto shown in the declarations. For example, assume that you own two cars. One vehicle is insured for both collision and other-than-collision, and the other is insured only for other-than-collision. If you drive a nonowned auto, the borrowed vehicle is covered for both collision and other-than-collision losses. Collision Damage Waiver on Rental Cars Our discussion of collision insurance on nonowned cars would not be complete without a brief discussion of the collision damage waiver (CDW) on rental cars. This coverage is sometimes called a loss damage waiver (LDW). When you rent a car and check the CDW box, you are relieved of financial responsibility if the rental car is damaged or stolen. However, the rental agreement contains numerous restrictions. The CDW may be void even when checked if you cause an accident by speeding, driving while intoxicated, or driving on unpaved roads. The CDW is expensive and can easily increase the daily rental cost by $15, $20, or some higher amount. Should you purchase the CDW if you rent a car? Many consumer experts say the CDW is not needed if (1) you carry collision and comprehensive insurance on your own car because the coverages also apply to the rental car and (2) certain credit cards cover the physical damage or theft of a rental car on an excess basis if the card is used to rent the car. The preceding view that the CDW may be unnecessary is not uniform among all insurance advisors. In particular, the Independent Insurance Agents & Brokers of America, an association of independent ­property/casualty insurance agents and brokers, says consumers in general should purchase the CDW, at M20_REJD1038_13_GE_C20.indd 458 least for short-term rentals. Because of numerous restrictive provisions in the rental agreement, incomplete protection under the PAP, and credit card limitations, the organization believes consumers generally should buy the CDW even if it is costly.3 Deductible The collision coverage is typically written with a straight deductible of $250, $500, or some higher amount. Coverage for other-than-collision losses is also normally written with a deductible. Deductibles are designed to prevent small claims, hold down premiums, and encourage the insured to be careful in protecting the car from damage or theft. Transportation Expenses Part D also pays for temporary transportation expenses. The insurer will pay, without application of a deductible, up to $20 daily to a maximum of $600 for temporary transportation expenses incurred by the insured because of loss to a covered auto. Payments can be made for a train, bus, taxi, rental car, or other transportation expense. Transportation expenses resulting from a collision loss are paid if the auto is covered by collision coverage. Likewise, transportation expenses resulting from an other-than-collision loss are paid if the auto is covered by other-than-­collision loss coverage. The coverage also includes payment of any expenses for which the insured is legally responsible because of loss to a nonowned auto, such as the loss of daily rent on a rental car. Finally, if the loss is caused by the theft of a covered auto or nonowned auto, expenses incurred during the first 48 hours after the theft occurred are not covered. If the loss is caused by a peril other than theft, expenses incurred during the first 24 hours after the auto has been withdrawn from use are not covered. Coverage for towing and labor costs can be added by an endorsement. This coverage pays for towing and labor costs if a covered auto or nonowned auto breaks down, provided the labor is performed at the place of breakdown. The breakdown can be for any reason, and the amount paid is the amount shown in the endorsement. For example, if you call a repair truck because your car fails to start, the labor costs and any towing costs will be paid up to the policy limits. Labor costs, however, are covered only for work done at the place of the breakdown. Charges for 9/19/16 3:10 PM P a r t D : C o v e r a g e f o r D ama g e t o Y o u r A u t o gasoline or a battery provided at the breakdown site are not covered. Also, the cost of repairs at a service station or garage is not covered. Exclusions Numerous exclusions apply to the Part D coverages, summarized as follows: 1. Use as a public or livery conveyance. Loss to a covered auto or any nonowned auto is excluded while the vehicle is being used as a public or livery conveyance. For example, if you use your car as a public taxi, the exclusion applies. Again, the exclusion does not apply to a share-the-expense carpool. 2. Damage from wear and tear, freezing, and mechanical or electrical breakdown. There is no coverage for any damage due to wear and tear, freezing, mechanical or electrical breakdown, or road damage to tires. The intent here is to exclude the normal maintenance cost of operating an auto. However, the exclusion does not apply to the theft of a covered auto or any nonowned auto. For example, if a stolen car is recovered but the electrical system is damaged by a thief who hot-wired the car, the loss is covered. 3. Radioactive contamination or war. Damage from radioactive contamination or war is excluded. 4. Electronic equipment. The PAP expands coverage of certain types of electronic equipment. New cars often include electronic equipment such as navigational systems, video entertainment systems, and Internet access systems. Because the electronic equipment is permanently attached to the vehicle, insureds expect that the PAP will cover such equipment. Coverage of electronic equipment is somewhat complicated. The PAP first excludes loss to electronic equipment that reproduces, receives, or transmits audio, visual, or data signals. The policy provides examples of excluded equipment, including but not limited, to the following: Radios and stereos Tape decks ■■ Compact disc systems ■■ Navigation systems ■■ Internet access systems ■■ Personal computer ■■ ■■ M20_REJD1038_13_GE_C20.indd 459 459 Video entertainment systems Telephones ■■ Televisions ■■ Two-way mobile radios ■■ Scanners ■■ Citizens band radios ■■ ■■ However, the preceding exclusion does not apply to electronic equipment that is permanently installed in a covered auto or nonowned auto. Thus, there is coverage of such equipment if the equipment is permanently installed in the vehicle. Note that a car telephone must be permanently installed for coverage to apply. Thus, a portable cell phone would not be covered. Mounting evidence indicates that using a cell phone, texting, and other “distracted driving” practices can be extremely dangerous.4 According to the National Highway Traffic Safety Administration (NHTSA), more than 3,300 people died in 2012 because of distracted driving.5 According to NHTSA, drivers in their 20s made up 27 percent of the distracted drivers in fatal crashes.6 Survey results released by the Centers for Disease Control and Prevention in 2014 found that 41.4 percent of high school respondents said they had sent a text or e-mail message from behind the wheel in the previous 30 days.7 The perils of using electronic devices, some statistics on electronic device usage, and measures that can be followed to reduce the use of electronic devices while driving are provided in Insight 20.3. 5. Tapes, records, and discs. Loss to stereo tapes, records, discs, or other media designed for use with the electronic equipment described previously is also excluded. An endorsement can be added to the PAP to cover excluded tapes, records, and discs. 6. Government destruction or confiscation. The PAP excludes total loss to a covered auto or nonowned auto due to destruction or confiscation by a governmental or civil authority. For example, if a federal drug agency confiscates a drug dealer’s car, the loss would not be covered. 7. Trailer, camper body, or motor home. The PAP excludes loss to a trailer, camper body, or motor home not shown in the declarations. This exclusion also applies to facilities and equipment, such as cooking, dining, plumbing or refrigeration 9/19/16 3:10 PM 460 C H A P T E R 2 0 / A u t o I n s u r a n ce I nsi g h t 2 0 . 3 Using Electronic Devices while Driving is a Serious Safety Problem Most drivers know that texting while driving is a dangerous behavior, but many still use their cell phones and other mobile devices when they are behind the wheel, putting themselves and others at risk. Many drivers see distracted driving* as risky when other drivers do it, but do not recognize how their own driving deteriorates. Almost half (48.6%) of drivers say they answer incoming phone calls, and 1 of 4 drivers (23.9%) are willing to place calls on all, most, or some trips. About half (48.5%) said they never place calls while driving. Considering there are more than 210 million licensed drivers in America,1 slightly more than 102 million drivers were answering calls and 50 million drivers were placing calls while driving in 2012. At any given daylight moment across America, there are about 660,000 drivers using cell phones or manipulating electronic devices while driving.2 What Data Tells Us • At this very moment, there are some 660,000 drivers talking on handheld cell phones—5 percent of all American drivers at any given typical daylight moment. www-nrd. nhtsa.dot.gov/Pubs/811719.pdf • Almost double that number—1.18 million drivers (9%)—were using some type of mobile device (either handheld or handsfree) at a typical daylight moment. • Use of an electronic device while driving can distract drivers from appropriately thinking about the driving task, watching the road and surrounding environment, and keeping their hands on the steering wheel. Texting while driving, a common activity in today’s world, involves all three types of distraction — visual, manual, and cognitive. (www.Distraction.gov) • Accurate reporting of distracted driving in fatal crashes poses a challenge for police officers who prepare crash reports after the incident. The highway safety community is working to create uniform reporting guidelines for distracted driving and to train officers to use them. In 2011, 7 percent of the drivers in fatal crashes were reported as distracted at the time of the crashes, and of these, 12% were using cell phones. More than half the drivers in fatal crashes using cell phones were 15 to 29 years old. Almost one in six (17%) injury crashes involved distraction, resulting in 387,000 injured people in 2011. Cell phone use was reported in an estimated 21,000 distraction-affected crashes (www.Distraction.gov). What People Tell Us • According to NHTSA’s 2012 National Distracted Driving Telephone sur vey (www.nhtsa.gov/staticfiles/nti/ pdf/811730.pdf), almost half (48%) of drivers say they answer their cell phones while driving at least some of the time, and more than half of those (58%) continue to drive after answering the call. This has not changed in the past 2 years. (www. nhtsa.gov/staticfiles/traffic_tech/tt407.pdf) • Fewer drivers (14%) say they send text messages or e-mails, but about one-third of those (35%) continue to drive when sending text messages. • Drivers of all ages use their phones while they are driving at least sometimes. More drivers recognize the risk and say they do not make or place calls or messages while driving than in 2010. • Most drivers support bans on handheld cell phone use (74%) and texting while driving (94%), and they approve fines of $200 or higher for talking on cell phones or texting while driving. Crashes • Some 6 percent of drivers say they were involved in a crash and 7 percent were in a near-crash situation in the past year. Of those, 2 percent say they were using cell phones at the time, and 3 percent were sending or reading text messages. These percentages remain unchanged from 2010 to 2012. It’s the other driver’s fault • As passengers, almost all motorists considered a driver who was sending or reading a text message while driving as very unsafe. Two of five passengers (40%) said they would be likely to say something if their driver was talking on a handheld cell phone, and three-quarters (76%) would say something if their driver was texting. Young drivers are less likely to speak up. States and communities can • Enforce strong laws banning texting and handheld cell phone use to let drivers know distracted driving is a serious safety matter. • Conduct high-visibility enforcement campaigns of existing texting and cell phone laws using NHTSA’s Phone in One Hand, Ticket in the Other model. www.distraction.gov/download/ research-pdf/508-research-note-dot-hs-811-845.pdf • Publicize the results of enforcement campaigns. • Work with partners such as advocacy groups, youth groups, schools, traffic safety agencies, law enforcement agencies, and public health agencies to continue the discussion on the dangers of distracted driving. • Visit www.TrafficSafetyMarketing.gov for media material you can download. • Go to www.distraction.gov for comprehensive information about distracted driving and see Blueprint to end distracted driving. (Continued) M20_REJD1038_13_GE_C20.indd 460 9/19/16 3:10 PM P a r t D : C o v e r a g e f o r D ama g e t o Y o u r A u t o 4 61 I nsi g h t 2 0 . 3 ( C o n t i n u e d ) Employers can • Adopt, publicize, and enforce company policies that prohibit employees from texting or talking on handheld cell phones while in a company vehicle, or in a personal vehicle while using a company-issued cell phone. You can • Turn off electronic devices and put them out of reach before starting to drive. • Speak up when you are a passenger and your driver uses an electronic device while driving. Offer to make the call for the driver, so his or her full attention stays on the driving task. • Always wear your seat belt. Seat belts are the best defense against other unsafe drivers. Parents can • Be good role models for young drivers and set a good example. Talk with your teens about responsible driving. equipment, and awnings or cabanas. For example, damage to a stove or refrigerator is not covered. The exclusion does not apply to a nonowned trailer. Likewise, it does not apply to a trailer or camper body acquired during the policy period provided that you notify the insurer within 14 days after you become the owner. 8. Loss to a nonowned auto used without reasonable belief of being entitled to use it. Loss to a nonowned auto is not covered when it is used by the named insured or his or her family member without a reasonable belief of being entitled to do so. 9. Radar detection equipment. Equipment for the detection or location of radar or laser is excluded. This exclusion is rationalized on the basis that radar detection equipment circumvents state and local speed laws. 10. Custom furnishings or equipment. Loss to customized furnishings or equipment in or upon a pickup or van is not covered. Such furnishings or equipment include special carpeting, furniture or bars, height-extending roofs, and custom murals or paintings. In 2009, ISO introduced an optional endorsement that insurers can use that replaces M20_REJD1038_13_GE_C20.indd 461 • Make sure your community and State laws include electronic device bans in graduated driver licensing laws for young novice drivers, and make them part of your teen’s driving responsibilities. References 1. FHWA. (2011, December). Highway Statistics 2010. Table DL-1C Washington, DC: Federal Highway ­Administration. Available at www.fhwa.dot.gov/policyinformation/­ statistics/2010/dllc.cfm 2. Pickrell, T. M., & Ye, T. J. (2011, December). Driver Electronic Device Use in 2010. (Traffic Safety Facts Research Note. Report No. DOT HS 811 517). Washington, DC: National Highway Traffic Safety Administration. Available at www-nrd.nhtsa.dot.gov/Pubs/811517.pdf * Distracted Driving is any activity that could divert a person’s attention away from the primary task of driving. All distractions endanger driver, passenger, and bystander safety. Source: NHTSA’s “Safety in Numbers,” April 2013. U.S. Department of Transportation. this exclusion. The present exclusion of custom furnishings or equipment applies only to pickups and vans. The new endorsement redefines custom equipment and now applies to all vehicles. However, the endorsement provides $1,500 of coverage for items that qualify as custom equipment.8 11. Nonowned auto used in the auto business. Loss to a nonowned auto maintained or used by someone engaged in the business of selling, repairing, servicing, storing, or parking vehicles designed for use on public highways is specifically excluded. For example, if the insured is a mechanic who damages a customer’s car while road testing it, the loss is not covered under the mechanic’s PAP. Instead, this business loss exposure should be covered under a commercial garage policy. 12. Racing vehicle. Loss to a covered auto or nonowned auto is not covered while it is located inside a racing facility for the purpose of competing in or preparing for a prearranged racing or speed contest. 13. Rental car. Loss to or loss of use of a vehicle rented by the named insured or family member is not covered if a state law or rental agreement precludes the car rental agency from recovering from the named insured or family member. 9/19/16 3:10 PM 462 C H A P T E R 2 0 / A u t o I n s u r a n ce Limit of Liability The amount paid for a physical damage loss to a covered vehicle is the lower of (1) actual cash value of the damaged or stolen property or (2) amount necessary to replace the property with other property of like kind and quality. If the cost of repairs exceeds the vehicle’s actual cash value, the vehicle may be declared a constructive total loss, and the amount paid is the actual cash value less the deductible. In practice, insurers declare a vehicle to be a total loss if the estimated cost of repairs plus the salvage value exceeds the actual cash value of the car. For a partial loss, such as a smashed fender, only the amount necessary to repair or replace the damaged property with property of like kind and quality will be paid. A car can be repaired with parts manufactured by the original equipment manufacturer (OEM) or with generic auto parts (also called after market parts). Some policyholders believe that generic auto parts are of lower quality than OEM parts, which has resulted in a number of lawsuits against auto insurers. However, in 2005, the Illinois Supreme Court ruled that insurers in that state are free to use less-expensive generic auto parts to repair damaged cars and trucks. Most states now require insurers to notify policyholders when generic auto parts are used to repair the vehicle. Insurance company practices differ in this regard, however. In some cases, policyholders can pay the difference between OEM parts and generic parts and have the vehicle repaired with OEM parts. Some auto insurers offer policyholders a choice between OEM parts and generic parts by an endorsement to the policy. Some insurers always use OEM parts, whereas others use OEM parts for repairing new or late model cars. You should contact your agent and inquire about the claim settlement practices of your company so you know what to expect if your car is damaged. The PAP also has limits on the amount paid for certain losses. Loss to a nonowned trailer is limited to $1,500. Loss to equipment designed for the reproduction of sound, which is installed in locations not used by the auto manufacturer for such equipment, is limited to $1,000. Betterment If the value of the vehicle is increased after repairs are completed (such as repainting the M20_REJD1038_13_GE_C20.indd 462 entire car when only one fender and door are damaged), the insurer will not pay for the betterment or increase in value. Diminution in Value A car damaged in an auto accident may have a reduced market or resale value. In recent years, many insureds have requested payment for the loss in market value. The Insurance Services Office has prepared a clarifying endorsement that insurers can add to the policy. The endorsement states that any loss in market or resale value (also called diminution in value) from a direct and accidental physical damage loss to a covered auto is not covered. Finally, many consumers finance the purchase of a new car by a bank loan or lease the car for a specified period. The value of a new car declines substantially during the first year because of depreciation. Also, the collision deductible on a leased car may be $500 or higher. If a new car is totaled in an accident shortly after purchase, the amount paid by the insurer may be substantially less than the payoff amount of the loan or lease. As a result, you could owe a bank or other financial institution hundreds or thousands of dollars. This risk can be handled by gap insurance, which pays the difference between the amount your insurer pays for a totaled car and the amount owed on the loan or lease. You normally do not buy a gap policy when you lease a car. The dealer typically buys a master policy from an insurer and includes the cost in the monthly lease payment. You should check with the car dealer before you buy or lease a car. The Insurance Services Office also has an endorsement that can be added to the PAP that bridges the gap between the amount paid by Part D and the amount owed to the lessor or lender. Payment of Loss The insurer has the option of paying for a physical damage loss in money (including any sales tax) or repairing or replacing the damaged or stolen property. If the car or its equipment is stolen and recovered later, the insurer will pay the expense of returning the stolen car to the named insured and will also pay for any damage resulting from the theft. The insurer also has the right to keep all or part of the recovered stolen property at an agreed or appraised value. In addition, insurers can recover part of their loss payments by salvage. When a vehicle is considered a 9/19/16 3:10 PM P a r t E : D u t ie s A f t e r a n A ccide n t o r L o s s constructive total loss, it can be repaired, but it is not cost-effective to do so. In such cases, the insurer takes the car and sells it to a salvage dealer, which allows the insurer to recover part of the loss payment. Other Sources of Recovery If other insurance covers a physical damage loss, the insurer pays only its pro rata share. The insurer’s share is the proportion that its limit of liability bears to the total of all applicable limits. With respect to a nonowned auto (including a temporary substitute), the Part D coverages are excess over any other collectible source of recovery. Thus, any physical damage insurance on the borrowed car is primary, and your physical damage insurance is excess. If you borrow a car and damage it, the owner’s physical damage insurance (if any) applies first, and your collision insurance is excess, subject to any deductible. For example, assume that you borrow a friend’s car and damage it in an accident. The owner’s collision deductible is $500, and your collision deductible is $250. If repairs to the borrowed car are $2,000, the owner’s PAP pays $1,500 ($2,000–$500), and your PAP pays $250 ($500–$250). The remaining $250 of loss would have to be paid either by the owner or by you. In short, if the owner’s collision deductible is larger than your deductible, your insurer pays the difference between the two deductibles. Appraisal Provision The PAP contains an appraisal provision for handling disputes over the amount of a physical damage loss. This provision is particularly important in the case of damage to a low-mileage car or to a car in above-average condition. The insured may claim that the car is worth more than the amounts stated in various sources listing auto values.9 To resolve the dispute, either party can demand an appraisal of the loss. Each party selects a competent and impartial appraiser. The two appraisers then select an umpire. Each appraiser states separately the actual cash value of the car and the amount of the loss. If the appraisers fail to agree, they submit their differences to the umpire. A decision by any two parties is binding on all. Each party pays his or her appraiser, and the umpire’s expenses are shared equally. Finally, by agreeing to an appraisal, the insurer does not waive any rights under the policy. M20_REJD1038_13_GE_C20.indd 463 463 Part E: Duties After an Accident or Loss You should know what to do if you have an accident or loss. Some obligations are based on common sense and others are required by law and by the provisions of the Personal Auto Policy. You should first determine if anyone is hurt. If someone is injured, an ambulance should be called immediately. If there are bodily injuries, or the property damage exceeds a certain amount (such as $200), you must notify the police in most jurisdictions. You should give the other driver your name, address, and the name of your agent and insurer and request the same information from him or her. You should also get the name and address of any witnesses. Do not admit fault. The question of who caused the accident will be determined by the insurers involved or by a court of law. After the accident occurs, the PAP requires you to perform certain duties. The policy states specifically that the insurer has no duty to provide coverage if you fail to comply with certain listed duties. However, the insurer can deny coverage only if failure to comply is prejudicial (harmful) to the insurer. Many courts have held that the insured’s failure to comply with every duty may not harm the insurer’s position or interest. The PAP recognizes this principle and states that the insurer is relieved of its obligation to provide coverage only if failure to comply with the listed duties is prejudicial to the insurer. You are required to notify your insurance company or agent promptly of the accident. Failure to report the accident promptly to your insurer could jeopardize your coverage if you are later sued by the other driver. In addition, you must cooperate with the insurer in the investigation and settlement of a claim. You must send to the insurer copies of any legal papers or notices received in connection with the accident. If you are claiming benefits under the uninsured motorists, underinsured motorists, or medical payments coverages, you may be required to take a physical examination at the insurer’s expense. You must also authorize your insurer to obtain medical reports and other pertinent records. Finally, you must submit a proof of loss at the insurer’s request. Some additional duties are imposed on you if you are seeking benefits under the uninsured motorists coverage. The police must be notified if a hit-and-run 9/19/16 3:10 PM 464 C H A P T E R 2 0 / A u t o I n s u r a n ce driver is involved. Also, if you bring a lawsuit against the uninsured driver, you must send copies of the legal papers to your insurer. If your car is damaged, and you are seeking indemnification under Coverage D, other duties are imposed on you. You must take reasonable steps to protect the vehicle from further damage; your insurer will pay for any expense involved. You must also permit the insurer to inspect and appraise the car before it is repaired. Part F: General Provisions This section contains a number of general provisions. Only two of them are discussed here. Policy Period and Territory The PAP provides coverage only in the United States, its territories or possessions, Puerto Rico, and ­Canada. The policy also provides coverage while a covered auto is being transported between the ports of the United States, Puerto Rico, or Canada. For example, if you rent a car while vacationing in England, ­Germany, or Mexico, you are not covered. Additional auto insurance must be purchased to be covered while driving in foreign countries. If you intend to drive in Mexico, you should first obtain liability insurance from a Mexican insurer. A motorist from the United States who has not purchased insurance from a ­Mexican insurer could be detained in jail after an ­accident, have his or her automobile impounded, and be subject to other penalties as well. Termination An important provision applies to termination of the insurance by either the insured or insurer. There are four parts to this provision: Cancellation Nonrenewal ■■ Automatic termination ■■ Other termination provisions ■■ ■■ All states place restrictions on the insurer’s right to cancel or nonrenew an auto insurance policy. Many states, however, have laws that differ from the termination provisions contained in the PAP. In such cases, M20_REJD1038_13_GE_C20.indd 464 an endorsement is added to the PAP to make the auto policy conform to state law. Cancellation The named insured can cancel at any time by returning the policy to the insurer or by giving advance written notice of the effective date of cancellation. The insurer also has the right of cancellation. If the policy has been in force for fewer than 60 days, the insurer can cancel by sending a cancellation notice to the named insured. At least 10 days’ notice must be given if the cancellation is for nonpayment of premiums and at least 20 days’ notice is required in all other cases. Thus, the insurer has 60 days to investigate a new insured to determine whether he or she is acceptable. After the policy has been in force for 60 days, or it is a renewal or continuation policy, the insurer can cancel for only three reasons: (1) the premium has not been paid, (2) the driver’s license of any insured has been suspended or revoked during the policy period, or (3) the policy was obtained through material misrepresentation. Nonrenewal The insurer may also discontinue coverage through nonrenewal of the policy at the end of the coverage period. If the insurer decides not to renew the policy, the named insured must be given at least 20 days’ notice before the end of the policy period. Automatic Termination If the insurer decides to renew the policy, an automatic termination provision becomes effective. This means that if the named insured does not accept the insurer’s offer to renew, the policy automatically terminates at the end of the current policy period. Thus, once the insurer bills the named insured for another period, the insured must pay the premium, or the policy automatically terminates on its expiration date. However, some insurers may provide a short grace period to pay an overdue renewal premium. Finally, if other insurance is obtained on a covered auto, the PAP insurance on that auto automatically terminates on the day the other insurance becomes effective. Other Termination Provisions Many states place additional restrictions on the insurer’s right to cancel 9/19/16 3:10 PM I n s u r i n g M o t o r c y cle s a n d O t he r Vehicle s or not renew an auto insurance policy. If state law requires a longer period of advance notice to the named insured or modifies any termination provision, the PAP is modified to comply with those requirements. Also, if the policy is canceled, the named insured is entitled to any premium refund; however, making or offering to make a premium refund is not a condition for cancellation. Finally, the effective date of cancellation stated in the cancellation notice is the end of the policy period. Insuring Motorcycles and Other Vehicles The PAP excludes coverage for motorcycles, mopeds, and similar vehicles. However, a miscellaneous-type vehicle endorsement can be added to the PAP to insure motorcycles, mopeds, motor scooters, golf carts, motor homes, dune buggies, and similar vehicles. One exception is a snowmobile, which requires a separate endorsement to the PAP. The miscellaneous-type 465 vehicle endorsement can be used to provide the same coverages found in the PAP. You should be aware of several points if the miscellaneous-type vehicle endorsement is added to the PAP. First, the liability coverage does not apply to a nonowned vehicle. Although other persons are covered while operating your motorcycle with your permission, the liability coverage does not apply if you operate a nonowned motorcycle (other than as a temporary substitute vehicle). Second, a passenger hazard exclusion can be elected, which excludes liability for bodily injury to any passenger on the motorcycle. When the exclusion is used, the insured pays a lower premium; however, if a passenger on your motorcycle is thrown off and is injured, the liability coverage on the motorcycle does not apply. Finally, the amount paid for any physical damage losses to the motorcycle is limited to the lowest of (1) the stated amount shown in the endorsement, (2) the actual cash value, or (3) the amount necessary to repair or replace the property (less any deductible). C ase A pplication Tanya, age 20, is a college student who recently purchased her first car from a friend who had financial problems. The vehicle is a high-mileage, 2004 Toyota Corolla with a current market value of $2,000. Assume you are a financial planner and Tanya asks your advice concerning the various coverages in the PAP. a. Briefly describe the major coverages that are available in the PAP. b. Which of the available coverages in (a) should Tanya purchase? Justify your answer. c. Which of the available coverages in (a) should Tanya not purchase? Justify your answer. d. Assume that Tanya purchases the PAP coverages that you have recommended. To what extent, if any, would her insurance cover the following situations? 1. Dani, Tanya’s roommate, borrows Tanya’s car with her permission and injures another motorist. Dani is at fault. M20_REJD1038_13_GE_C20.indd 465 2. Tanya is driving under the influence of alcohol and is involved in an accident where another motorist is seriously injured. 3. During the football season, Tanya charges a fee to transport fans from a local bar to the football stadium. Several passengers are injured when Tanya suddenly changes lanes without signaling and hits another car. 4. Tanya drives her boyfriend’s car on a regular basis. While driving the boyfriend’s car, she is involved in an accident in which another motorist is injured. Tanya is at fault. 5. Tanya rents a car in England where she is participating in a summer study abroad program. The car is stolen from a dormitory parking lot. e. Tanya also owns a motorcycle. To what extent, if any, does Tanya’s PAP cover the motorcycle? 9/19/16 3:10 PM 466 C H A P T E R 2 0 / A u t o I n s u r a n ce Summary ■■ ■■ The Personal Auto Policy (PAP) consists of a declarations page, a definitions section, and six major parts: Part A: Liability Coverage Part B: Medical Payments Coverage Part C: Uninsured Motorists Coverage Part D: Coverage for Damage to Your Auto Part E: Duties After an Accident or Loss Part F: General Provisions ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ Liability coverage protects the insured from bodily injury and property damage liability arising out of the negligent operation of an auto or trailer. The insurer also pays legal defense costs. A covered auto includes any vehicle shown in the declarations; newly acquired vehicles; a trailer owned by the insured; and a temporary substitute auto. Insured persons include the named insured and spouse, resident family members, other persons using a covered auto if a reasonable belief that permission to use the vehicle exists, and any person or o...
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