Discuss the differences between uninsured and underinsured motorist coverage, and the importance of each. What is the consequence of not meeting the coinsurance requireme

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PERSONAL AUTOMOBILE AND RECREATIONAL VEHICLE INSURANCE

CHAPTER 11

INTRODUCTION

Many clients can elect to self-insure a variety of items. For example, a client can choose not to insure a diamond ring because the ring is always kept in a safe deposit box. Automobile insurance—liability, in particular—is not one of those things. This chapter discusses the coverages in the standard personal auto policy and the importance of them to your clients. (Business auto coverage is addressed in .)Chapter 24

Personal auto insurance is written on a specified auto basis (that is, each vehicle is described by make, model, and serial number) for qualifying vehicles owned by an individual or by husband and wife. Autos owned by individuals, other than husband and wife, residing together, may be insured by use of the joint ownership endorsement. The auto must be jointly owned by both parties. The joint ownership endorsement can be used for nonresident relatives, or individuals who are not related and are living together. For example: Calvin and George are brothers, each with his own apartment, and together they bought a fancy sports car. This endorsement can be used to provide them coverage for the auto. Likewise, Lisa and Larry live together and buy a vehicle together, but they are not married. They can also be insured using this endorsement.

Autos leased under a long-term arrangement (usually a continuous period of at least six months) are considered owned and are eligible for coverage under the personal auto policy.

A personal auto policy may even be written for someone who owns no autos, called a named nonowner policy. The named nonowner policy provides liability and medical payments coverage for an individual who does not own her own vehicle but may drive vehicles owned by others: the company she works for, or friends, neighbors, relatives. In the event of an accident, the insured is provided with liability and medical payments coverage.

Qualifying vehicles are those having no fewer than four wheels of the private passenger type. As mentioned previously, vehicles are identified by make, model, and serial number. This is so the vehicle can be identified in case of theft and so the proper premium for the vehicle can be determined. A brand new Lexus will cost more to repair than an older Chevy, and a Hummer can cause more damage or injuries to others than a VW Beetle. Pickups and vans also qualify, but they must have a gross vehicle weight rating of 10,000

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pounds or less and cannot be used for delivery or transportation of goods and materials. Vehicles over 10,000 pounds are not truly designed for personal use and in most cases should be insured under a commercial policy. Pickups or vans used for farming or ranching may be insured, though, as may vehicles such as a plumber’s van used to transport his or her equipment.

Persons insured on the auto policy are: the person shown in the declarations—this person is referred to as the named insured—his or her spouse if a resident of the same household, and family members of either, who reside in the same household as the named insured. Family members are those related by marriage, blood, or adoption. Wards or foster children are included.

Auto policies typically cover an insured’s liability for bodily injury or property damage, medical payments coverage, uninsured and underinsured motorist coverage, and physical damages.

Insurance for recreational vehicles is structured much the same way as an auto policy. Many times, however, coverage for these vehicles may be endorsed onto an auto or homeowners policy. Watercraft are frequently written on an individual policy, although some coverage is available on a standard homeowners policy, depending upon the model, size and speed of the watercraft.

THE AUTO POLICY

A standard auto policy typically contains the following coverage parts: liability, medical payments coverage, uninsured and underinsured motorist coverage, and physical damage coverage. If these parts were to be ranked in order of their importance, it would likely be liability, uninsured and underinsured motorist, medical payments, and physical damage coverage. The reason for ranking the coverages in this order has to do with the ability to assume liability. Many people, although they might not like the possibility, could walk away from a total loss to a vehicle without insurance compensation. Few, however, could walk away from a million-dollar suit claiming bodily injury. Often people will complain about a $250 deductible for comprehensive coverage, but not stop to think of the risk they run by carrying minimal liability limits.

Liability

Although it is not the purpose of this text to recommend limits of insurance, an adequate limit of liability is the first line of defense in protecting a client’s assets.

The liability section of an auto policy states that the insurer will pay damages (that is, money) for bodily injury or property damage for which any insured becomes legally responsible because of an auto accident. The insurer will also settle or defend any claim or suit asking for these damages. The insurer pays defense costs in addition to the limit of liability. So, for example, an insured may carry bodily injury liability limits of $100,000 per person, $300,000 per accident, and a property damage liability limit of $100,000. This means that the most that will be paid in the event of an accident for which the insured is legally responsible is $100,000 per person, but not more than $300,000 for all bodily injury claims arising out of that accident, even if five persons are injured and each sues for $100,000. No matter how many vehicles are damaged in the accident (a Hummer and a

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Lincoln Navigator), the most available for property damage claims is $100,000. Defense costs are in addition to the total amount of the limits—in this scenario, $400,000.

Besides settling or defending any claims or suits, the company agrees to pay certain supplementary payments on behalf of an insured. These payments are in addition to the limit of liability and do not reduce that limit as they are paid out by the company. These are currently: up to $250 for the cost of bail bonds required because of an accident, premiums on appeal bonds and bonds to release attachments, interest accruing after a judgment is entered, up to $200 per day for the insured’s loss of earnings because of attendance at a trial or hearing, and other reasonable expenses incurred by the insured at the insurer’s request.

As is common in all policies of insurance, there are exclusions applying to the liability coverage. Intentionally-caused bodily injury or property damage and liability coverage for the ownership, maintenance, or use of a vehicle regularly furnished to the named insured other than an insured auto are but two of them. When a vehicle is regularly furnished to a named insured, it should be covered under an insurance policy. If it is not listed on the insured’s policy then no premiums are collected and the risk is unknown to the company.

Uninsured and Underinsured Motorist Coverage

The insurer promises to pay compensatory damages that an insured is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by an insured and caused by an auto accident. The owner’s or operator’s liability for these damages must arise out of the ownership, maintenance, or use of the uninsured motor vehicle. An example of this coverage is: if Tom is injured by a negligent driver, Matthew—who has no insurance on his auto—Tom’s uninsured motorists coverage will pay the damages to Tom that he, by rights, should have recovered from Matthew.

A key element of the uninsured motorists coverage insuring agreement is that the operator or owner of the uninsured motor vehicle must be legally responsible to pay for the insured’s damages. The insurance company has no obligation to pay for an insured’s injuries unless the elements of legal liability are present and fall to another party. That is one of the reasons uninsured motorists coverage has been described as reverse liability insurance. Think of uninsured motorists insurance in this way: the insurance company becomes, in a sense, the liability insurer of any uninsured motorist that injures its insured. The insurance company is providing the coverage that the uninsured person should have had in order to pay for the insured’s injuries.

The named insured—“you” as stated in the policy—or any family member is an insured. Remember that a family member by definition is a relative by blood, marriage or adoption who resides in the household. Also, an insured is any other person (whichoccupying means in, upon, getting in, on, out or off) the named insured’s covered auto.

A third type of insured person is the person who may not be involved physically in an accident, but who is entitled to damages from the person or organization responsible for having caused bodily injury to an insured of either kind described previously. This type of covered person, often called a , might be the husband of an injured wifederivative insured claiming damages for loss of consortium, or the father of an injured child claiming damages for medical expenses.

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Uninsured motorists coverage, like the medical payments coverage of the personal auto policy, is available to persons only whileother than the named insured or a family member occupying the named insured’s covered auto. Even if a named insured chooses to buy uninsured motorists insurance, a possible gap in coverage can arise.

. Tom is an insured under a personal auto policy with an uninsuredExample motorist limit of $100,000 and Tom is injured by a negligent driver, William, whose $15/30,000 bodily injury limits satisfy the applicable state financial responsibility law. Tom’s policy, therefore, does not consider William’s car as an uninsured motor vehicle. William has insurance, but at a minimum level. Even if Tom’s expenses exceed William’s liability limits, Tom cannot collect uninsured motorists insurance.

To remedy this potential area of disappointment, the motorists coverageunderinsured endorsement may be attached to the personal auto policy. While there is a general version of the underinsured motorists coverage endorsement, many states have state-specific endorsements that offer the underinsured motorists coverage but with due deference to the specific state’s laws and regulations.

The insuring agreement of the underinsured motorist endorsement is similar to that of the uninsured motorist agreement, except that it promises compensatory damages because of bodily injury sustained by an insured and caused by an accident arising out of the ownership, maintenance, or use of an motor vehicle. It should be notedunderinsured that the insurer pays the limits of liability under any applicable bodily injury bondsonly after or policies have been exhausted by payment of judgments or settlements, or a tentative settlement has been made between an injured insured and the insurer of the underinsured motor vehicle. In this latter instance, the insurer of the injured claimant must have been given prompt written notice of the tentative settlement and must have advanced payment to its injured insured in an amount equal to the tentative settlement within thirty days after receipt of the notification.

is defined as “a land motor vehicle or trailer of any type toUnderinsured motor vehicle which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage.” This, in effect, allows an insured to recover, up to the limit of liability scheduled for underinsured motorists coverage, the difference between his or her actual damages for bodily injury and the amount of the liability insurance carried by the at-fault driver.

. Recalling the facts from the previous example, if Tom’s actualExample damages for bodily injury are $50,000, his underinsured motorists coverage will pay $35,000, the difference between Tom’s damages and William’s $15,000 limit of liability.

The importance of uninsured and underinsured motorist protection cannot be

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emphasized too strongly. All too often another driver is legally responsible for an insured’s bodily injury, but when the other driver’s insurance coverage is depleted, securing a judgment might well be futile.

Medical Payments Coverage

The insurer promises to pay reasonable expenses incurred for necessary medical and funeral services because of bodily injury that is caused by accident, and sustained by an insured. In this coverage, an is: the named insured or any family member injuredinsured while occupying, or as a pedestrian when struck by a motor vehicle designed for use mainly on public roads or a trailer of any type. Included as well, is any person occupying the named insured’s covered vehicle. As used in this coverage, “pedestrian” is intended to include a bicyclist.

The insurer will pay only those expenses incurred for services rendered within three years from the date of the accident.

As is the case with the other coverages, exclusions apply. For example, there is no coverage for any insured for injury incurred while riding a vehicle having fewer than four wheels. There is no coverage for bodily injury occurring during the course of employment if workers compensation benefits are required or available.

Sometimes, in an attempt to save money, insureds will select the minimum limit available (usually $1,000) or drop the coverage altogether, particularly if they have medical insurance. This cost saving should be offset against the peace of mind in knowing that the coverage will apply to any nonfamily passengers in an insured auto. For example, Tom and his friend Mike are on their way to the golf course when an accident occurs. Both men sustain injuries. Medical payments coverage will apply to both Tom and Mike. Having this “first dollar” coverage can often prevent a time-consuming lawsuit for a small amount of money.

Personal Injury Protection

Many states have gone to a system of no-fault auto insurance. This is a system under which a person injured in an auto accident receives compensation for his or her economic loss from his or her own insurer, regardless of fault. Some states have an unrestricted right to sue; others have a monetary or verbal threshold. Monetary thresholds are stated as injuries over a certain dollar amount, and a verbal threshold is the level of disability caused by the accident. The loss of a limb, or use of a limb, or permanent impairment are examples of verbal thresholds. Some states allow insureds to reject this coverage. Clients should discuss this option and any questions about the coverage with their agents.

Physical Damage Coverage

Under the terms of the insuring agreement, the insurer will pay for direct and accidental loss to covered autos or any nonowned auto (see below), including the equipment. Any applicable deductible that is shown in the declarations is subtracted from the loss payment. Also, if there is a loss to a nonowned auto, the insurer will provide the broadest coverage that is applicable to any covered auto shown in the declarations. If, for example, a policy

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insures one owned auto for collision and comprehensive and another owned auto for comprehensive only, a nonowned auto will be covered for both comprehensive and collision if a loss occurs. And, with reference to the deductible, if there is a loss to more than one covered auto or nonowned auto resulting from the same collision, only the highest applicable deductible will apply.

. Julie and John are a married couple. One evening when returningExample home from a family outing in separate vehicles, John fails to stop in time at a light and collides with Julie’s car. Here both cars are on the policy, so the highest deductible will be applied only one time.

The term includes any private passenger auto, pickup, van, or trailer notnonowned auto owned by, or furnished, or available for the regular use of the named insured or any family member, while in the custody of or being operated by the named insured or any family member. There is no requirement that the insured be legally liable for damage to the auto; the insured must only have been operating the auto or had it in his custody at the time of loss.

The term also includes any nonowned auto or trailer used as a temporary substitute for a covered auto that is out of normal use because of its breakdown, repair, servicing, loss, or destruction. One of the more common questions that arise about nonowned autos is rental cars. The insured goes on vacation and rents a car at the airport; is there coverage for the rental vehicle under the insured’s policy? The answer is yes. The rental is not owned by the insured, and as the insured is driving it only for a short period of time, it is not available for the insured’s regular use.

The traditional division of automobile physical damage insurance into collision and comprehensive is maintained in the personal auto policy, but without any mention of the word comprehensive. If “other than collision loss” coverage is indicated in the declarations of a personal auto policy, any damage to the covered auto besides collision is covered on an open perils basis—subject to any deductible listed in the declarations, to the insuring agreement’s stipulation that damage be “direct and accidental” and, of course, to any applicable exclusions.

The policy defines collision as the upset of the named insured’s covered auto or a nonowned auto or the impact with another vehicle or object. The vehicle does not have to be in motion for a collision to occur; damaging the paint while scraping ice and snow off the vehicle is a collision loss. There was an impact with an object, the ice scraper.

Listed as not being collision—and thus constituting “other than collision”—is loss caused by missiles, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, contact with a bird or an animal, or the breakage of glass. Although breakage of glass is listed as not being loss by collision, the policy states that if glass breakage is caused by collision, the named insured may elect to have it considered loss by collision. Without this qualification, a named insured whose car has deductibles on both collision and comprehensive coverage would become responsible, technically, for paying both deductibles after a collision involving body damage and glass breakage to the car. So, basically, the insured can claim glass breakage

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as either collision or other than collision, depending on which is more advantageous to the insured.

It should be noted that the list of items that are not to be considered “other than collision” is not intended to imply that these and only these are “other than collision.” They are examples of what is not a collision. For the most part other than collision losses are the result of actions that are unpredictable and not within the control of people. We cannot control earthquakes, floods, windstorms or animals. Without the list, it might be possible to say that a falling boulder damaging a car was really a collision loss and subject to a higher deductible.

Vehicle Telematics

In recent years insurers have developed programs that use vehicle telematics to provide information about how a vehicle is driven by its operator. This information is used by the insurer when setting rates, and provides a significantly more accurate measurement of a vehicles operational patterns than the responses that insurers get from prospective policyholders. Typically the information about the vehicle’s operation is gathered by a small device that the vehicle’s owner plugs into a port in the passenger compartment. The device automatically monitors and records information about the vehicle’s usage, including time and distance traveled and speeds attained. This information is transmitted wirelessly back the insurer, where it is used to set rates on the auto policy. Some insurers have even started to offer “pay per mile” insurance that offers considerably cheaper premiums to policyholders who drive very little.1

RECREATIONAL VEHICLE COVERAGE

Many persons mistakenly think that motorcycles are automatically covered by their auto policy, just as many think that homeowners insurance will cover an all-terrain vehicle (ATV). Clients should be aware that, as noted previously, an auto policy will not respond to liability arising out of use of a vehicle having fewer than four wheels. Some carriers provide specialized policies for motorcycles, and others use endorsements. (Note that the Insurance Services Office has issued a personal motorcycle policy with an edition date of December 2013 in order to provide coverage for that type of vehicle.) Homeowners policies provide limited liability for use of a snowmobile or ATV but no physical damage coverage at all. Motorized vehicles from motor homes to golf carts, therefore, often require special coverage. The method for insuring these vehicles is either to attach an endorsement to the auto policy, or, in some cases, to the homeowners policy.

If the auto policy is modified, it is through use of endorsement PP 03 23 miscellaneous type vehicle, which may be used to insure motor homes, travel trailers, motorcycles (including motor scooters, motorbikes, and go-carts), snowmobiles and ATVs, golf carts, dune buggies, antique and classic vehicles, and electric autos. The endorsement allows the vehicle to be described, and liability, uninsured and underinsured motorist, physical damage, and medical payments coverages to be indicated. Because motorcyclists, snowmobilers, and ATV riders frequently carry passengers, one of the most important coverages with these vehicles is to make sure that the “passenger hazard” exclusion is deleted—that is, that there be liability coverage for your clients in the event of an injurywill to a passenger.

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Boatowners Coverage

Homeowners policies provide limited liability and physical damage coverage for watercraft. For any client owning more than a canoe or rowboat, an insurance agent should review and discuss additional coverage as necessary. Boatowners policies are similar in format to auto policies.

WHERE CAN I FIND OUT MORE?

1. (Cincinnati, OH: The National Underwriter Company, updatedThe FC&S Bulletins monthly).

2. Eric Wiening and David Thamann, (Cincinnati, OH:Personal Auto Coverage Guide The National Underwriter Company, 2014).

FREQUENTLY ASKED QUESTIONS

– What is the difference between and Question liability protection physical damage as it applies to the Personal Auto Policy?protection

– Liability protection generally pays for damages that the insured becomes legallyAnswer obligated to pay to a third party because of property damage or bodily injury that he causes. Physical damage protection covers the actual damage to the covered auto.

– What is no-fault auto insurance?Question

– No-fault insurance is a system under which a person injured in an auto accidentAnswer receives compensation for economic loss from his or her own carrier.

– Why should special coverage be arranged for recreational vehicles, such as anQuestion ATV or motorcycle?

– Common auto and homeowners policies will not respond to accidents involvingAnswer these vehicles under most circumstances. The auto policy, for example, states that it does not provide liability protection for vehicles having fewer than four wheels, or that are designed mainly for use off public roads. The homeowners policy will not provide physical damage coverage for any motorized vehicle other than one used to service the insured’s residence, and will only provide limited liability coverage.

– What is the difference between and Question comprehensive coverage collision ?coverage

– Comprehensive coverage is the insurer’s promise to pay for loss to a coveredAnswer auto or its equipment that results from any cause other than collision with another object or if the auto overturns. Collision coverage applies only to the covered auto’s loss due to a collision with another object or if the auto overturns. A collision does not have to be with another vehicle or a moving object.

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CHAPTER ENDNOTES . Joseph Jaafari, “Pay-per-mile is here: Metromile introduces usage-based auto insurance for1

Uber drivers” PropertyCasualty360. com (Feb. 13, 2015).

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