Auto lecture

Personal Automobile Policy (PAP)

Introduction

• Personal auto insurance is crucial for vehicle owners, providing coverage for various potential losses.
• The state exam will heavily focus on this topic.
• The personal auto policy (PAP) combines property and casualty coverages.
• It covers costs for:
  • Repairing/replacing the insured's vehicle.
  • Medical expenses for the insured, family, and passengers.
  • Legal obligations to others due to the insured's fault.
• Unlike homeowner's insurance, PAP doesn't mandate physical damage coverage, but it's widely included.
• The Insurance Services Office (ISO) publishes the most common PAP, develops endorsements, collects loss data, and calculates rates.
• All states require proof of financial responsibility for registering a vehicle, typically through auto insurance.

Learning Objectives

• Explain the structure of a standard PAP.
• Describe major components of the auto insurance contract.
• Define common terms in auto insurance.
• Identify common policy conditions, exclusions, and endorsements.
• Explain coverages under the four main parts of a standard auto policy.
• Explain no-fault insurance, its benefits, and personal injury protection (PIP).
• Define an assigned risk plan and its use for high-risk drivers.

Overview of Personal Auto Insurance

• The PAP covers risks associated with car ownership.
• It includes four main types of coverage:
  • Liability insurance (Part A).
  • Medical payments (Part B).
  • Uninsured/underinsured motorist coverage (Part C).
  • Physical damage insurance for your auto (Part D).
• Parts A, B, and C are casualty coverages.
• Part D is first-party property insurance.
• Additional policy parts include:
  • Declarations.
  • Definitions.
  • Insured's duties after an accident (Part E).
  • General provisions (Part F).

Policy Structure

• Declarations
• Definitions
• Part A: Liability Coverage
• Part B: Medical Payments Coverage
• Part C: Uninsured/Underinsured Motorist Coverage
• Part D: Coverage for Damage to Your Auto
• Part E: Duties After an Accident or Loss
• Part F: General Provisions

Eligibility

• To be eligible for PAP coverage, a vehicle must:
  • Be a private passenger vehicle.
  • Have a gross vehicle weight (GVW) under 10,000 lbs.
  • Not be used for freight or delivery business.
  • Not be used as a public or delivery conveyance for passengers (e.g., taxi).
  • Not be rented to others.
  • Be owned or co-owned by an individual, spouses in the same household, or two individuals in the same household on the registration.

Vehicles NOT Eligible

• Vehicles for hire that transport people for a fee
• Vehicles with fewer than four wheels.

Credit Information

• Insurance Score:
  • Helps underwriters determine risk.
  • A low credit score contributes to a low insurance score.
  • Factors include age, marital status, gender, claims history, driving experience, and education.
  • Poor credit correlates with more frequent insurance claims.
• Fair Credit Reporting Act (FCRA) regulates the use of credit scores.

Definitions

Accident

• Includes continuous or repeated exposure to the same conditions resulting in bodily injury or property damage.

Assigned Risk

• Insurers must provide protection to high-risk applicants to be authorized.
• Also known as the auto insurance plan.

Auto

• A land motor vehicle, trailer, or semi-trailer subject to motor vehicle laws or designed for public road travel.
• Excludes mobile equipment.

Auto Designation Symbol Code

• A standard system of identifying a specific vehicle type using a one- or two-digit code.

Auto Insurance

• A contract to indemnify exposures of loss arising from the ownership, maintenance, or use of an automobile.

Bodily Injury

• Includes bodily harm, sickness, or disease, including required care, loss of services, and resulting death.

Collision Coverage

• Covers loss when the insured auto strikes another object or vehicle.
• May include upset or overturn of the insured auto.

Comprehensive Coverage

• Also called Other Than Collision Coverage (ODC).
• Covers all property losses except collision (e.g., fire, water, theft, hail).

Covered Auto

• Refers to specific cars listed on the declarations page, usually by vehicle identification number (VIN).

Deductible

• The portion of the insured loss in dollars paid by the policyholder.

Diminution in Value

• The actual or perceived loss in market or resale value resulting from a direct and accidental loss.

Effective Date

• The date on which a policy takes effect.

Financial Responsibility Law

• State laws requiring owners/operators to provide evidence of funds to pay for automobile losses they may be liable for.
• Insurance is the usual method for providing this evidence.

Insured

• Any person or organization qualifying as an insured in the "who is an insured" provision of the applicable coverage.

Loss

• A direct financial loss of value as a result of situations covered by the policy.

Mobile Equipment

• Land vehicles including attached machinery/equipment like bulldozers, farm machinery, forklifts, vehicles used off-road, vehicles on crawler treads, and vehicles to provide mobility to permanently mounted power cranes, shovels, loaders, diggers, drills, or road construction equipment.

Newly Acquired Auto

• A private passenger auto, pickup, or van that you become the owner of during the policy period.

Personal Auto Policy

• Easy-to-read auto policy providing broad coverage for owned and non-owned autos used by the insured and family.

Pollutants

• Any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, paper, soot, fumes, acids, alkalis, chemicals, and waste.
• Waste includes materials to be recycled, reconditioned, or reclaimed.

Private Passenger Type

• A private passenger or station wagon type auto, including a pickup or van not used for business purposes.

Property Damage

• Liability for damage to property of others or loss of use of tangible, physical property.

Subrogation

• The transfer to the insurance company of the insured's right to collect for damages. The company stands in the place of the insured ensuring the negligent party, thus preventing the insured from collecting twice.

Suit

• Civil proceedings due to alleged bodily injury, property damage, or personal and advertising injury.

Trailer

• Includes semi-trailer or a dollar used to convert a semi-trailer into a trailer (for trailer interchange coverage only). Trailer also includes a container.

Personal Automobile Policy: Definitions

The definition section includes key terms used throughout the contract:

• Covered Auto
• Family Member
• Occupying an Auto
• Bodily Injury
• Property Damage

Covered Auto

A covered auto under the PAP means:

• Any vehicle listed in the declarations.
• A newly acquired auto.
• Any trailer that the insured owns.
• Any auto or trailer the insured does not own while used as a temporary substitute for any vehicle described in this definition that is out of normal use because of its breakdown, repair, servicing, loss, or destruction.

Family Member

• Includes any person related to the insured by marriage, blood, or adoption who resides in the same household as the insured.
• This also includes foster children, wards, and children away at college.

Occupying

• To be considered as occupying a vehicle, an individual must be in or on the vehicle or be in the process of entering or exiting it.
• Occupying does not include under the vehicle.

Bodily Injury

• Defined as bodily harm, physical injury, sickness, or disease, including death.
• Legal restitution includes medical costs, financial losses due to disability, loss of services, associated expenses, and pain and suffering.

Property Damage

• The physical injury, damage, or destruction of tangible property resulting in costs for repair or replacement.
• Legal restitution includes financial losses from an inability to use the property for a given period.
• The inability to use the property for a given period is referred to as loss of use or a time element loss and is considered an indirect loss.

Who Is an Insured?

• The named insured shown in the declarations and their spouse, as long as they reside in the same household.
• If the spouse ceases to be a resident, coverage ends when the coverage period ends, the spouse becomes the named insured on their policy, or 90 days elapse from the change of residency.
• Insured also includes any other person while occupying your covered auto or, under part c, uninsured/underinsured motorist coverage, any person for damages that person is entitled to recover because of bodily injury to which this coverage part applies sustained by a person described above..
• Any person qualifies as an insured while using a covered auto with the owner's permission.
• Insurance follows the vehicle.

Types of Autos

• Owned Autos (Your Covered Auto)
  • Any four-wheel motor vehicle, pickup truck, or van owned or leased with a gross vehicle weight under 10,000 pounds. A leased vehicle must be leased for a continuous term of six months or more to be considered owned.
  • Cannot be used in one's business except for farming or ranching.
  • Must be listed in the policy declarations page.
  • Typically identified by make, model, and VIN.
• Non-Owned Autos
  • Any private passenger auto, pickup truck, van, or trailer not owned by the insured or furnished for the insured's regular use.
  • Typically vehicles the insured has rented or borrowed.
  • The PAP covers incidental rental vehicles.
• Hired Autos
  • Not defined in PAP but on commercial auto policies instead.
  • Some exams may use them as an incorrect answer option on the licensing exam.
  • Hired Auto Coverage provides coverage for employees while they are driving on behalf of and participating in work-related activities for their employer through the vehicle's use. The insurance does not cover an employee's personal use of the vehicle.
• Newly Acquired Autos
  • One the insured becomes the owner of during the policy period.
  • Coverage is automatically provided.
  • Temporary coverage, and the insured must notify the insurer within 14 days after acquiring the new vehicle if they wish for coverage to continue.
  • Coverage for a newly acquired vehicle in the 14-day time limit begins the day the insurer takes ownership of the vehicle.

Note: If no coverage is currently applicable to at least one auto, coverage must be requested within four days instead, with a 500 deductible for losses within this window.

Part A: Liability Coverage

• The state determines financial responsibility requirements and coverage amounts.
• Automatically extends to any towed vehicle or trailer.

Bodily Injury and Property Damage

• Bodily Injury: Bodily harm, sickness, or disease, including death.
• Property Damage: Physical injury, destruction, or loss of use of tangible property.
• Liability coverages pay for losses the insured causes to others.

Insuring Agreement

• The insurance company pays for all damages for which the insured becomes legally liable due to the insured's use of the automobile up to the stated policy limit for bodily injury (BI) and property damage (PD).
• Pays loss only to third parties, never to the insured.
• The limit of liability is expressed as either a split limit or a combined single limit.
• The insurer commits to either settle or defend any claim for damages, whichever it considers appropriate.
• The insurer will pay all the legal defense costs if the lawsuit is filed in connection with the claim.
• The insurer additionally has no duty to defend or settle any claim for bodily injury or property damage not covered under the policy and listed under the exclusion section

Limit of Liability

Split Limit

• Establishes three separate loss categories, each with its own specific limit expressed in thousands of dollars.
• The first two dollar limits apply to bodily injury, while the third dollar limit applies to property damage.
• A split limit is stated as three numbers separated by slash marks (e.g., 250/500/100).
  • First number: The dollar limit in thousands per person per accident. (In the example 250,000)
  • Second number: The bodily injury dollar limit in thousands for all persons injured in a single accident combined. (In the example 500,000 )
  • Third number: Refers to property damage and is the dollar limit in thousands for all property damage caused in one accident. (In the example 100,000)
    #### Combined Single Limit
• Expresses the loss limit for both bodily injury and property damage losses as single dollar amount per accident, which is the most an insurer will pay for one accident regardless of the number of insureds, claims, or vehicles involved.

Out-of-State Coverage

• Part A limits will automatically increase up to limits required in another state or province of Canada.
• Extends to financial responsibility and no-fault compliance.
• Extends to all U.S. states, territories, possessions, and Canadian provinces.

Duty to Defend

• The insurance company must defend the insured named in a civil lawsuit but can settle without the insured's permission.
• Pays all legal defense costs in addition to the liability coverage limits.
• Does not have to defend once policy limits have been met.
• Insurance companies can legally settle a lawsuit against the insured for more than the policy limits.
• Consider buying an excess liability insurance policy (umbrella policy).

Primary vs. Excess Liability

• Part A coverage follows the car and acts as primary liability coverage.
• If the borrower also has a PAP, it provides excess coverage.
• Coverage extends to a trailer attached to a covered auto listed in the declarations.

Supplementary (Additional) Payments

• Paid in addition to the limits of liability and do not reduce those amounts when settling a claim.
• Up to 250 per day for lost wages when the insured attends a legal hearing or trial at the insurer's request.
• Bail bonds that cost up to 250 if an accident results in bodily injury or property damage.
• Premiums on appeals bonds and bonds to release attachments in which the insurer defends the insured.
• The insurer pay the 80,000 judgment plus interest if the insurer is defending a lawsuit.

PEP Exclusions (Part A)

• Bodily injury to an employee of the insured during employment (exception: domestic employee unless required to be covered by workers' compensation).
• Intentionally caused property damage or bodily injury.
• Damage to property the insured rents, uses, or has in their care.
• Bodily injury or property damage covered by a nuclear energy liability policy.
• People employed in the business of selling, repairing, servicing, storing, or parking automobiles.
• Any vehicle being maintained or used for regular business purposes (other than farming or ranching).
• Liability arising out of carrying people or property for a fee (except carpools).
• Damage to property owned or being transported by the owner.
• Use of a vehicle without a reasonable belief of permission.
• Theft (except by a family member using a covered auto owned by the named insured).
• Vehicles with fewer than four wheels or designed for off-public road use (except in a medical emergency).
• Any trailer or a non-owned golf cartany vehicle other than the insured's covered auto, which is owned, furnished to, or available for the regular use of the insured, or any family member.
  *Liability loss created by a racing a covered vehicle inside of a racing facility.

Conditions

Out-of-State Coverage

Liability coverage section also affords what is called out of state coverage when the insured is operating the vehicle temporarily in another state or province of Canada

Other Insurance

• If more than one policy covers a loss, the policy will only pay its proportional share.
• The Policy share of the losses is the proportion that the policy's limit of liability bears in relation to all limits that are applicable to the loss.

Note : You must be able to calculate one insurer's financial liability if given a question about the other insurance provision

Financial Responsibility

• When the policy is certified as proof of financial responsibility, the policy automatically complies with the financial responsibility law of the insured state.
• Financial responsibility laws do not actually require an individual to purchase auto insurance. Just to demonstrate the financial capacity to pay the full amount of damages they cause up to the minimum amount set by state law. However, the most common way for individuals to comply with such laws is through the purchase of auto insurance.

Part B: Medical Payments Coverage

Insuring Agreement

• The insurer will pay reasonable expenses for necessary medical and funeral expenses incurred by the insured for bodily injury caused by accident and sustained by an insured.
• The insurer will only pay those medical expenses incurred for services rendered within three years from the date of the accident.
• Pays for first-party losses.
• No requirement that negligence be assigned before payment.

Limit of Liability

• The limit of liability shown in the declarations for part b is the maximum limit of liability per person injured in any one accident.
• The most an insurer will pay regardless of the number of insureds, claims, or vehicles involved in an accident.
• Medical payments coverage is stated as a single limit of liability with a minimum of 1,000 and may be increased to higher limits if offered by the insurer typically. The maximum is 100,000.
• No individual may receive duplicate payments under part a. Liability or part c uninsured motorist coverage for the same loss. Paid can claim benefits up to the limits of Michael's uninsured motorist coverage if damages exceed the amount paid by part b.

The Insured

• The named insured or family members while occupying a covered vehicle
• The named insured or a family member that is struck by an auto while a pedestrian (includes bike, skateboarding, etc.)
• Anyone else occupying the covered auto with the insured.

Exclusions

• Bodily injury while working at a job covered by workers' compensation.
• While in a vehicle being used for the business of the insured while carrying people or property for money or a fee call delivery or taxi service. This exclusion does not apply to carpools.
• Using a vehicle as a residence.
• If the insured owns the vehicle but it is not listed in the declarations without a reasonable belief that they have permission to do so, theft.
• Being injured in a vehicle with fewer than four wheels.
• While occupying any vehicle located inside a facility designed for racing, speed contests, or driver skill training.
• When harmed by a nuclear reaction, contamination, or radioactivity.

Part C: Uninsured/Underinsured Motorist Coverage

Insuring Agreement

• UMC is liability insurance if an insured suffers bodily injury resulting from an accident caused by the operator of an uninsured vehicle.
• Promises to pay the insured the compensatory damages that should have been collectible from the uninsured driver's insurance company had that driver been insured. the uninsured party's liability for the bodily injury resulting from an accident must arise out of the ownership, maintenance, or use of the uninsured vehicle.
• The insurer is able to recover the amount paid for an uninsured motorist claim from the at-fault party.

Insureds

• The named insured or any family member while occupying a motor vehicle or hit as a pedestrian.
• Anyone else occupying a covered vehicle with permission.
• The estate of a deceased insured killed in an accident caused by an uninsured motorist.

Definitions

*An uninsured motor vehicle means:

• A land motor vehicle or trailer of any type that is not covered by a liability insurance policy or bond at the time of the accident.
• Covered by a liability policy or bond with limits that are less than those required by state law.
• Covered a liability policy or bond, the insurer or bonding company denies coverage or becomes insolvent
• A hit-and-run vehicle whose operator or owner cannot be identified.

Exclusions

• Any vehicle or equipment not subject to motor vehicle registration laws.
• Owned by or furnished or available for the regular use of the named insured or any family member.
• Owned by a self insurers that are all by law
• Owned by any unit or agency of the government.
• Operating on rails or crawler threads
• Designed mainly for used off public roads while not on public roads
• Or used as a residence or premises.

Application and Limits of UMC

*Any claim presented under this coverage must establish that the uninsured motorist was at fault for the accident
*Uninsured motorist coverage with a combined single limit of 300,000 will pay all losses up to that amount regardless of how many people are injured.

Required Limits

An insured cannot carry a higher limit for uninsured motorist coverage than the amount selected for Part A liability coverage.

Exclusions

• Losses while occupying or struck by any motor vehicle owned by the insured and covered by another auto insurance policy.
• Losses if the insured or legal representative settles the bodily injury claim without the consent of the company.
• Losses while occupying a covered auto being used for a public or delivery purpose.
• Losses when one is using a vehicle without a reasonable belief that one is entitled to.
• Losses if the person is entitled to benefit under worker compensation or disability benefit law, and punitive or exemplary damages.

Conditions

• The insurer and the company are technically opponents since the insured driver is seeking funds from the insurer for a negligent act when dealing with this type of conflict. An insured presenting an uninsured motorist claim must convince their insurance company based on the evidence that the uninsured driver was at fault in the accident. Once that standard is met, the insured has to reach a settlement with their own company

Underinsured Motorist Coverage

*UIM pays bodily injury damages caused by motor vehicles that are underinsured.
*Allows a covered person to be paid the difference between what the actual damages for bodily injury were and what the limit of the other driver's insurance was at the time of the accident.
*UIM payment equals: insured's UIM limit + at fault driver's BI limit.

Part D: Coverage for Damage to Your Auto

*Part D is the property insurance section of the personal auto policy and provides coverage against physical damage that may occur to a covered auto.
*It is a first party coverage that reimburses the insured for financial loss suffered when your covered auto is damaged and may be used regardless of who is at fault in an accident.

Covered Limited Liability

The limit of liability for a collision or other than collision loss under Part D is determined in a different manner than liability coverages and is based on the covered auto's value.
*The PEP gives the insurer the option to settle Part D losses for the lesser of the property's actual cash value ACV or the amount required to repair or replace damaged property with other property of like kind and quality.
*The most the policy will pay for a total loss of the covered auto is the actual cash value, which is the standard basis of valuation for automobiles.

Specified Perils Insuring Agreement

*The insurer will pay for direct and accidental loss to the insured's covered auto or any unknown auto, including equipment minus any applicable deductible shown in the declarations.
*Optional Coverage offers two separate physical damage coverages for property, collision and other than collision ODC, or comprehensive coverage

Note: If damage due to an animal results, then any resulting damages are covered under comprehensive ODC and not under the collision coverage

Deductible

*The standard deductible for collision and other than collision (comprehensive) is 500. Although one can choose a different deductible for one or both of these coverages.

Collision

*Defined as an impact with another vehicle or object such as a tree, traffic signal, or building that causes physical damage.
*Also includes damage that occurs when a covered vehicle overturns while it is being driven.

Other Than Collision

*Defined as loss due to physical damage to a covered vehicle caused by an accident other than a collision, upset, or overturn. Here are the specified perils causes of a loss that are covered under LDC coverage

1. Missiles (projectile flying through the air) or falling objects, such as an airplane part or tree limb.
2. Fire
3. Theft or larceny
4. Explosion or earthquake
5. Windstorm
6. Hail
7. Water
8. Or Flood
9. Malicious mischief or vandalism
10. Riot or civil commotion
11. Contact with a bird or animal (Deer, bird, or squirrel)
12. And breakage of glass

*Newly acquired vehicles are automatically covered but must be reported to the company within 14 days

Transportation Expenses

• Pays a daily benefit for each day insured is deprived of the use of a vehicle due to a covered peril

1. Transportation expenses temporary transportation expenses the insured incurs when there is a loss to a covered auto, fees for buses, cabs, trains, car rental, etcetera, and loss of use expenses for which the insured becomes legally responsible in the event of loss to on phone vehicle.

2. The rental car of an insured is put out of service due to lost cost by the insured, which pays the car rental agency for their lost income. if the loss is caused by theft, there is a 48-hour waiting period before transportation expense is paid and the payments will end when the vehicle is returned, or the loss is settled

3. If the loss is caused by a reason other than theft, then the waiting period is only 24 hours.

Towing and Labor Costs

*The towing and labor costs endorsement pays each time a covered or an unknown auto is disabled and needs towing, including the cost of labor. 
*When an unknown auto is towed, the company provides the broadest coverage applying to any covered auto listed in the declarations
* The company only pays for labor costs incurred at the place where the vehicle became disabled.

*Once the vehicle is towed to the garage or repair facility, labor costs are not covered

Exclusions

• Does not pay for losses that occur inside a facility designed for racing.
  *Does not cover operating or using a Taxi
  *Wear and tear damage is not covered

Other Provisions

Subrogation

If an insurer makes a payment under the PAP and the person receiving payment has a right to recover damages from a third party. The must reimburse the insurer. The insurer cannot keep what amounts to double payment of a claim.

Conditions

Cancellation

The named insured may cancel the policy at any time by returning the policy to the insurer or giving the insurer advance written notice of the day cancellation is to take effect.

Non Renewal

If an insurer decides not to renew a policy, it must mail a written notice to the named insured at the last address shown in the policy at least twenty days before the end of the policy period

Additional Concepts

No Fault insurance

*Referred to as personal injury protection PIP, helps pay for the insured's medical costs and lost wages regardless of fault on a first party basis
*PIP insurance does not cover property damage, all provisions are generally subject to limitations set by the states under their own no fault laws
*Purpose is to decrease the number of auto liability suits filed, as well as pain and suffering awards

Personal Injury Protection (PIP) Coverage

*Provides coverage for:

• Medical expenses
• Loss of income
• Funeral costs
• Essential services

PIP Exclusions

*Driving while intoxicate or impaired through the use of a drug that contributes to the accident
*Intentionally causing one's own injury
*Riding an all-terrain vehicle ADV or a motorcycle is an operator passenger

Assigned Risk Insurance

If a vehicle owner is unable to obtain auto insurance through a private insurer due to excessively high risk or other factors, a state. Risk insurance pool provides minimum coverage to ensure the driver meets minimum liability requirements

Selected Endorsements

*Miscellaneous Type Vehicle (MTV)
The MTV endorsement lists a description of vehicles to be covered that are otherwise excluded from an unendorsed PAP.
*The endorsement can provide liability coverage, medical payments, uninsured motorist insurance, and physical damage coverage, including both collision and other than collision

• The endorsement also notes that the exclusion for medical payments for vehicles with fewer than four wheels no longer applies.

  • Clothing, luggage, business or office equipment, and articles of sales samples used in exhibitions are included as exclusions.

Waiver of Deductible

Along with part D Collision coverage insurance pays for first party damage to the covered vehicle regardless of fault.

Towing and Labor costs

Will State the limit of covered towing and labor costs along with the premium charge.
*The endorsement pays each time a covered or non owned auto is disabled and needs towing, including labor costs.