Chapter 20 - Auto Insurance

Auto Insurance Overview

Learning Objectives

  • 20.1 Provide an overview of the Personal Auto Policy (P A P) including which vehicles are covered and the major parts of the policy.

  • 20.2 Describe the liability coverage in the P A P.

  • 20.3 Explain the medical payments coverage in the P A P.

  • 20.4 Describe the uninsured motorists coverage in the P A P.

  • 20.5 Explain the coverage for damage to your auto in the P A P.

  • 20.6 Explain the duties imposed on the insured after an accident or loss.

  • 20.7 Discuss P A P general provisions, including policy period, territory, and termination.

  • 20.8 Explain how motorcycles and other vehicles can be insured under the P A P.

Overview of Personal Auto Policy (P A P) (1 of 2)

  • The 2017 Personal Auto Policy (P A P) is widely used throughout the United States.

  • Major changes since the 2005 P A P include:

    • Exclusions for car sharing.

    • Use of the auto as part of a transportation network platform (e.g., Uber or Lyft).

Overview of Personal Auto Policy (P A P) (2 of 2)

  • Eligible vehicles include:

    • A four-wheeled motor vehicle owned or leased by the insured for at least 6 consecutive months.

    • A pickup or van with a gross vehicle weight rating of 10,000 pounds or less.

  • Autos covered by the policy include:

    • Any auto shown in the declarations page.

    • A newly acquired auto.

    • A trailer owned by the named insured.

    • A temporary substitute vehicle, defined as a nonowned auto or trailer used temporarily due to mechanical breakdown, repair, servicing, loss, or destruction of a covered vehicle.

Part A: Liability Coverage (1 of 7)

  • Liability coverage (Part A) is the most important part of the P A P: it protects a covered person against a suit or claim arising out of the ownership or operation of a covered vehicle.

  • Coverage is usually written in split limits:

    • The amounts of insurance for bodily injury liability and property damage liability are stated separately.

    • Alternatively, coverage can be written with a single limit applicable to both bodily injury and property damage liability.

Part A: Liability Coverage (2 of 7)

  • Liability coverage applies to:

    • The named insured and any resident family member.

    • Any person using the named insured’s covered auto.

    • Any person or organization legally responsible for any insured’s use of a covered auto on their behalf.

    • 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).

Part A: Liability Coverage (3 of 7)

  • The insurer agrees to provide defense and pay all legal defense costs for claims covered by the policy.

  • The policy allows for certain supplementary payments, including:

    • The cost of a bail bond, up to $250.

    • Premiums on appeal bonds and bonds to release attachments.

    • Interest accruing after a judgment.

    • Loss of earnings, up to $250 per day.

    • Other reasonable expenses.

Part A: Liability Coverage (4 of 7)

  • Exclusions to the coverage include:

    • Intentional injury or damage.

    • Property owned or transported.

    • Property rented, used, or in the insured’s care.

    • Bodily injury to an employee.

    • Use as a public or livery conveyance.

    • This exclusion was broadened to include liability while the covered auto is used as part of a transportation network platform.

Part A: Liability Coverage (5 of 7)

  • Additional exclusions include:

    • Vehicles used in the auto business.

    • Vehicles used in any other business.

    • Using a vehicle without reasonable belief of entitlement.

    • Vehicle covered under special nuclear energy contracts.

    • Vehicle with fewer than four wheels.

    • Vehicle regularly furnished for the insured’s use.

    • Vehicle owned by, furnished, or available for regular use of any family member.

    • Racing vehicle.

Part A: Liability Coverage (6 of 7)

  • The P A P policy is typically written with split limits.

    • Examples of split limits:

    • $250,000 for bodily injury to each person for any one accident.

    • $500,000 for bodily injury to all persons resulting from any one accident.

    • $100,000 for property damage resulting from any one accident.

Part A: Liability Coverage (7 of 7)

  • If an accident occurs in another state with higher liability limits than shown in the declarations, the P A P automatically provides the higher limits.

  • If more than one liability policy covers a loss:

    • The insurer pays its pro rata share of the loss for an owned vehicle.

    • The insurance coverage is excess over any other insurance for a nonowned vehicle.

  • Exhibit 20.1 Primary and Excess Insurance Example:

    • Philip (named insured) borrows Nicole’s car with her permission.

    • Philip has $50,000 liability and Nicole has $100,000 limit.

    • Both policies cover any loss.

    • Damages of $125,000 created by Philip’s negligence:

    • Nicole’s insurer pays $100,000 (primary).

    • Philip’s insurer pays $25,000 (excess).

    • Total payment: $125,000.

Part B: Medical Payments (1 of 3)

  • Medical payments coverage pays all reasonable medical and funeral expenses incurred by an insured for services rendered within three years from the date of the accident.

    • Coverage is not based on fault.

  • Coverage includes:

    • The named insured and family members are covered while occupying any motor vehicle or as pedestrians struck by a vehicle.

    • Other persons occupying a covered auto are covered, but only in an owned vehicle.

Part B: Medical Payments (2 of 3)

  • Exclusions to the coverage include injuries sustained:

    • While occupying a vehicle with fewer than four wheels.

    • When operating the vehicle as a public or livery conveyance, or while logged into a transportation network platform.

    • If the vehicle is used as a residence.

    • If using the vehicle for business.

    • If used without reasonable belief of permission.

    • Injuries from a nuclear weapon or war.

    • When competing in a race.

Part B: Medical Payments (3 of 3)

  • If more than one auto policy covers a loss:

    • The insurer pays its pro rata share of the loss for an owned vehicle.

    • The insurance coverage is excess over any other insurance for a nonowned vehicle.

Part C: Uninsured Motorists Coverage (1 of 6)

  • Uninsured motorists coverage pays for bodily injury caused by:

    • An uninsured motorist.

    • A hit-and-run driver.

    • A negligent driver whose insurer is insolvent.

  • In some states, property damage is also covered.

  • The uninsured motorist must be legally liable.

  • The insurer’s maximum limit of liability for any single accident is as shown in the declarations.

Part C: Uninsured Motorists Coverage (2 of 6)

  • The claim is subject to arbitration if the insured and insurer disagree over the amount of damages.

  • Coverage applies to:

    • The named insured and family members.

    • Another person while occupying a covered auto.

    • Any person legally entitled to recover damages.

Part C: Uninsured Motorists Coverage (3 of 6)

  • Four groups of vehicles considered uninsured include:

    • A motor vehicle or trailer for which no bodily injury liability insurance policy applies at the time of the accident.

    • An insured vehicle with less coverage than required by the state’s financial responsibility law.

    • A hit-and-run vehicle.

    • A vehicle covered by an insurer that denies coverage or becomes insolvent.

Part C: Uninsured Motorists Coverage (4 of 6)

  • Coverage exclusions may include:

    • No uninsured motorists coverage on the vehicle.

    • Primary coverage under another policy.

    • The insured settles a claim without the insurer’s consent.

    • The vehicle is used as a public or livery conveyance.

    • No reasonable belief of entitlement to use the vehicle.

    • Workers compensation benefits applicable.

Part C: Uninsured Motorists Coverage (5 of 6)

  • The P A P excludes payment for punitive or exemplary damages.

  • Limitations on multiple uninsured motorists coverage provision apply:

    • If an insurer provides coverage on a vehicle not owned by the named insured, the insurance is excess over any primary insurance.

Part C: Uninsured Motorists Coverage (6 of 6)

  • Underinsured motorists coverage can be added to the P A P for enhanced protection:

    • Maximum amount paid is the underinsured motorist’s coverage limit stated in the policy less the amount paid by the negligent driver’s insurer.

    • Coverage can typically be added as an endorsement.

    • Some states mandate coverage while others offer it as optional.

Part D: Coverage for Damage to Your Auto (1 of 7)

  • Coverage for damage to your auto involves the insurer agreeing to pay for any direct and accidental loss to a covered or nonowned auto.

  • Definition of collision:

    • The upset of your covered auto or nonowned auto or its impact with another vehicle or object.

  • Collision losses are paid regardless of fault.

Part D: Coverage for Damage to Your Auto (2 of 7)

  • Definition of other-than-collision loss:

    • Losses due to perils such as:

    • Missiles or falling objects.

    • Hail, water, flood, fire, windstorm.

    • Theft or larceny.

    • Explosion or earthquake.

    • Malicious mischief or vandalism.

    • Riot or civil commotion.

    • Contact with birds or animals.

    • Glass breakage.

Part D: Coverage for Damage to Your Auto (3 of 7)

  • Coverage extends to a nonowned auto:

    • A nonowned auto is a private passenger auto, pickup, van, or trailer not owned by or made available for the regular use of the named insured or family member.

    • Coverage also applies to a temporary substitute vehicle.

    • A collision damage waiver (C D W) may not be needed on a rental car if collision and comprehensive coverage is carried on the insured's own car.

Part D: Coverage for Damage to Your Auto (4 of 7)

  • Coverage typically has separate deductibles for collision and other-than-collision losses.

  • Part D also provides for temporary transportation expenses resulting from a covered loss:

    • Subject to daily and total limits.

    • Includes charges from rental car companies for loss of daily rental.

    • Coverage for towing and labor costs can be added.

Part D: Coverage for Damage to Your Auto (5 of 7)

  • Coverage exclusions include:

    • Use as a public or livery conveyance or when logged into a transportation network platform, regardless of passenger occupancy.

    • Damage from wear and tear, freezing, mechanical or electrical breakdown.

    • Radioactive contamination or war.

    • Specific electronic equipment (e.g., radios).

    • Accessories like tapes, records, and disks.

    • Government destruction or confiscation.

    • Damage to trailers, campers, or motor homes.

    • Racing vehicles.

Part D: Coverage for Damage to Your Auto (6 of 7)

  • For a total loss, the policy pays the actual cash value minus the deductible.

  • For a partial loss, it pays only the necessary amount to repair or replace the damaged property of like kind and quality:

    • Can involve parts manufactured by Original Equipment Manufacturer (OEM) or generic auto parts (aftermarket).

  • Insurers may use an endorsement to exclude coverage for depreciation in value from direct and accidental physical damage loss.

  • Gap insurance can also be purchased.

Part D: Coverage for Damage to Your Auto (7 of 7)

  • If multiple auto policies cover a physical damage loss:

    • The insurer pays its pro rata share for an owned vehicle.

    • Coverage is excess over any other insurance for a nonowned vehicle.

  • The policy includes an appraisal provision for disputes over physical damage loss amounts:

    • Either party can demand an appraisal of the loss.

Part E: Duties after an Accident or Loss

  • After an accident, the insured must perform certain duties, including:

    • Promptly notifying the insurance company or agent.

    • Cooperating with the insurer in investigations.

    • Sending copies of any legal notices received related to an accident to the insurer.

    • Taking a physical exam if required.

  • The police must be notified if a hit-and-run driver is involved.

  • The insurer is allowed to inspect your vehicle if seeking coverage under Part D.

Part F: General Provisions (1 of 2)

  • States restrict the insurer's right to cancel or nonrenew coverage:

    • Cancellation provision:

    • The named insured can cancel at any time by returning the policy or providing written notice.

    • If in force for more than 60 days, the insurer can cancel only if:

      • The premium has not been paid.

      • Any insured's driver’s license has been suspended.

      • The policy was obtained through material misrepresentation.

Part F: General Provisions (2 of 2)

  • Nonrenewal: If an insurer decides to discontinue coverage, the insured must be notified at least 20 days before the end of the policy period.

  • Automatic termination: A policy automatically terminates if the insured declines the offer to renew.

  • The P A P provides coverage in the U.S., U.S. territories, Puerto Rico, and Canada.

Insuring Motorcycles and Other Vehicles

  • A miscellaneous-type vehicle endorsement can be added to the P A P to insure:

    • Motorcycles.

    • Mopeds.

    • Motor scooters.

    • Golf carts.

    • Motor homes.

    • Dune buggies, etc.

  • Exclusions:

    • Snowmobiles are not covered.

    • Liability coverage does not apply to nonowned vehicles.

    • A passenger hazard exclusion can be elected, excluding liability for bodily injury to any passenger on a motorcycle.

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