Risk Management for Auto Owners—Part I Chapter 13

1. Risk Management for Auto Owners—Part IChapter 13 ©2005, Thomson/South-Western

2. Chapter Objectives • Define the key terms in the personal automobile policy • Identify the major parts of the personal automobile policy • State four major exclusions of the personal automobile policy • Distinguish between collision and loss other than collision • State limitations on the insurance company’s right to cancel an auto insurance policy • Describe the various approaches to dealing with the problem of uninsured drivers • Describe the key factors that determine variation in auto insurance premiums across individuals

3. The High Cost of Automobile Losses • Automobile losses represent exposures to risk that nearly all individuals and risk managers must consider • Of the $377 billion spent by individuals and business on property-casualty insurance premiums in 2002 • About 43% was for auto insurance • The human toll of auto losses is very high • Over 40,000 Americans die every year in auto accidents • However substantial progress has been made over the years in improving the situation • Table 13-1 shows fatality rates for recent years • A disproportionate number of automobile accidents involve young drivers • Over the last several years falling accident rates indicate a significant improvement in driving records • May be explained by society’s greater emphasis on loss prevention and safer cars • And the reduction in the number of youthful drivers

4. Table 13-1: Death Rate per 10,000 Cars

5. Insurance Claims • Insurers have been faced with rising claims for most types of automobile insurance protection • Table 13-2 shows statistics illustrating the level to which claims have risen • Notice that the average property-related losses have risen steadily over the years • While average bodily injury losses have fluctuated • Average collision and property damage liability claims rose dramatically faster than inflation from 1992-2002 • While average bodily injury liability losses fell slightly over the same time period

6. Table 13-2: Average Insurance Claims

7. Insurance Claims • The federal government has adopted some minimum vehicle safety and antipollution standards • Aimed at improving the environment in which automobiles operate • Table 13-3 lists some 2000-2002 passenger autos with respect to injury claims frequency • These frequencies do not reflect only the actual safety of the vehicles—they also reflect who is driving the vehicle • Table 13-4 shows the relative average collision loss payment per insured vehicle • This number varies widely across different vehicles

8. Table 13-3: Relative Injury Claims Frequency per Insured Vehicle …

9. Table 13-4: Relative Average Collision Loss Payments per Insured Vehicle …

10. The Need for Insurance • What should the average driver do to protect against the financial consequences of the high cost of automobile accidents and the substantial probability of being involved in one? • Risk managers of large corporations that own many automobiles often retain the risk of physical damage to the vehicles • However, for nearly all individuals, the answer has been insurance • Despite its high cost • In many states auto liability insurance is a legal requirement • Self-insurance is not usually an option as few individuals own more than two or three automobiles

11. Personal Automobile Policy (PAP) • Introduced in 1977 as part of the consumer movement designed to produce easier-to-read insurance policies • Replaced the more difficult to read Family Automobile Policy • Eligibility • A car must be owned or leased by an individual or jointly owned by a husband and wife • PAP is primarily designed for private passenger cars used for pleasure or business • But a pickup truck or van used in farming may be insured as may a pickup truck or van that is used to deliver or transport goods

12. Definitions • You and your are used to refer to the named insured and spouse, if a resident of the same household • We, us, and our refer to the insurance company • No fault means that the insured does not have to prove another person negligent before compensation can be received from an insurer

13. Definitions • The term covered auto includes these categories • Any vehicle shown on the declarations page of the policy • Any of the following types of vehicles that you acquire ownership of during the policy period • A private passenger auto • A pickup truck or van meeting certain requirements • Any trailer you own • Any auto or trailer you do not own • While used as a temporary substitute for any other vehicle described in this definition that is out of normal use because of its breakdown, repair, servicing, loss, or destruction

14. Definitions • With respect to replacement vehicles • One must only notify the insurer in order to obtain coverage for physical damage to the auto • Liability protection is automatically provided for the policy term • The insurer must be notified to obtain physical damage coverage because there is a high probability that a greater exposure exists • A trailer is defined as • A vehicle designed to be pulled by a private passenger-type auto, pickup or panel track, or van • It also includes a farm wagon or farm implement towed by one of these vehicles

15. Definitions • A family member is defined by the PAP as • A person related to you by blood, marriage, or adoption who is a resident of your household • Occupying is defined as • In, upon, getting in, on, out, or off • In the PAP, bodily injury means bodily harm, sickness, or disease, including any death that results • Business means trade, profession, or occupation • Property damage is defined as physical injury to, destruction of, or loss of use of tangible property

16. Personal Auto Policy Components • PAP has six major components • Liability • Medical payments • Uninsured motorist • Physical damage to your auto • The first four sections provide four different coverages • The definitions of terms may vary between sections • Duties after an accident or loss • General provisions • Insurance policies must be read very carefully in order to be properly understood

17. Liability • The insurer promises to pay bodily injury and property damage claims for which any insured becomes legally responsible due to an auto accident • The insurer will either settle or defend, at its own discretion, any covered claim or suit • The insurer agrees to pay for all defense costs, and these are paid in addition to the policy limits • There is no duty to defend the insured in situations where the coverage is excluded • Or after the limits of liability for direct damages have been reached • Many courts have held the insurance company’s duty to defend is greater than the duty to pay damages

18. Liability • The policy defines the insured as follows • For the ownership, maintenance, or use of any auto or trailer, you or any family member • Any person using your covered auto • For your covered auto, any person or organization • But only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under liability coverage • Would apply when a fellow employee drives your car on company business • Your employer is covered under your policy if an accident occurs and your employer is sued • For any auto or trailer, other than your covered auto, any person or organization, but only with respect to legal responsibility for acts and omissions of you or any family member for whom coverage is afforded under liability coverage • This provision applies only if the person or organization does not own or hire the auto or trailer • Would apply when you drive a fellow employee’s car and have an accident • The employer is covered under your policy if a lawsuit results

19. Supplementary Benefits • In addition to the policy limits • Bail bonds up to $250 are covered for an accident resulting in bodily injury or property damage • A bail bond posted for a speeding violation or driving while intoxicated is not covered unless bodily injury or property damage occurs • Premiums on appeal bonds and bonds to release attachments are insured • Interest that accrues after a judgment and reasonable expenses incurred at the insurer’s request are also included • Up to $200 per day is available for loss of earnings resulting from attending trials or hearings at the insurer’s request

20. Limit of Liability • Defined using the “split limits” approach • The limit is described by three numbers • Such as $100,000/$300,000/$50,000 • The first number is the maximum limit of liability for all damages arising out of bodily injury to any one person • The second number is the maximum limit for all damages for bodily injury resulting from any one accident • Regardless of the number of persons involved • The third number is the limit of liability for all property damage resulting from any one accident

21. Exclusions • No coverage exists for persons who intentionally cause a loss • Damage to property owned or being transported by an insured is excluded • As is property rented to, used by, or in the care of an insured • Except for damage to a residence or private garage • Vehicles operated as a public or livery conveyance are not covered • However share-the-expense car pools are not affected by this exclusion

22. Exclusions • If an employee of the insured is injured, the insured’s PAP does not provide liability coverage • Unless the injury is to a domestic employee for whom workers’ compensation is not required • No protection is given to someone in the automobile business unless the insured’s covered auto is being driven by • The insured • A family member • Any partner, agent, or employee of the insured or any family member

23. Exclusions • For those in any other type of business, liability coverage is provided for the business use of private passenger cars and pickup trucks and vans • No requirement is made in the PAP that the insured have permission to operate the vehicle involved in an accident • However, the policy excludes liability coverage for anyone using a vehicle without reasonable belief that he or she is entitled to do so • Another exclusion excludes coverage for injury or damage for which the insured has coverage under a nuclear energy liability policy

24. Exclusions • No coverage is provided for the use of any vehicle with fewer than four wheels • Thus, motorcycles are not covered • An auto (other than the covered auto) that is owned by you or furnished or made available for your regular use is excluded • Any vehicle, other than the covered vehicle, that is owned by, furnished to, or available for the regular use of any family member is excluded • An exception to this exclusion exists when such a vehicle is driven by the named insured or spouse • Liability coverage is excluded for any vehicle participating in an organized racing or speed contest while located inside a racing facility

25. Other Liability Conditions • Another provision in the PAP is out-of-state coverage • Including coverage in a Canadian province • If you have an accident in a state having higher required liability limits than your state • The policy will pay up to the higher limits • PAP liability coverage can be primary or excess • When your owned auto is involved your policy is primary • When your policy applies to a nonowned vehicle, it is excess • If two policies are applicable to the same owned auto • The PAP will pay its pro-rata share of the loss

26. Medical Payments • PAP will make medical payments on a no-fault basis for reasonable and necessary medical expenses caused by an auto accident and sustained by an insured • Such expenses must be incurred and paid within three years of the accident • If more treatment is needed but has not yet been paid, the policy will not cover it • For medical payments, insured means • You or any family member when occupying, or as a pedestrian when struck by, a motor vehicle designed for use mainly on public roads or by a trailer of any type • Any other person while occupying your covered auto

27. Exclusions • The medical payments coverage does not apply to any injuries sustained when riding a motorcycle • But if a motorcycle collides with you or your vehicle, you are insured • No protection is available while your vehicle is used to carry people or property for a fee • Share-the-expense carpools are exempted from this restriction • Any bodily injury received while occupying a vehicle located for use as a residence or premises is also excluded

28. Exclusions • No coverage is available for injuries occurring in the course of employment if workers’ compensation is supposed to provide benefits • No protection exists while occupying an owned auto (other than your covered auto) or one furnished or available for your regular use • No coverage exists while occupying a vehicle without a reasonable belief that you are entitled to do so • Injuries sustained by occupying a vehicle while it is being used for business is excluded unless the vehicle is • A private passenger auto • An owned pickup or panel truck or van • A trailer used with a vehicle described in the first two • Other exclusions are losses due to war, radiation, and racing

29. Other Conditions • The medical payments limits are on a per-person basis • PAP specifically states that the maximum amount receivable is the per-person limit stated on the declarations page • This limit is the maximum, regardless of the number of autos insured • The policy states that no one can collect under the medical payments portion of the policy as well as under the liability or uninsured motorists portion • PAP pays on a pro-rata basis in cases where other insurance applies on an equal basis • However, with respect to nonowned automobiles, it is always excess

30. Uninsured Motorist • Pays for your bodily injuries that result from an accident with another vehicle if the other driver is negligent and does not have any insurance • Or has insurance less than that required by law • Punitive damages are not covered • Insured persons include • The named insured and family members • Any person occupying your covered auto • Other persons who are entitled to recovery because of injury in the first two categories • Insureds purchase uninsured motorist insurance to protect themselves against other drivers who are uninsured • While many states require or strongly encourage liability insurance, many people do not purchase it • Table 13-5 gives the uninsured motorist rates for the nine highest-rate states

31. Table 13-5: State Uninsured Motorist Rates (in %)

32. Uninsured Motor Vehicles • A land motor vehicle or trailer of any type with the following specifications • One to which no bodily injury liability bond or policy applies at the time of the accident • One to which a bodily injury liability bond or policy applies at the time of the accident • But with a limit for liability less than the minimum limit specified by the financial responsibility law of the state in which your covered auto is principally garaged • One that is a hit-and-run vehicle whose operator or owner cannot be identified and that hits you or any family member, a vehicle occupied by you or any family member, or your covered auto • One to which a bodily injury liability bond or policy applies at the time of the accident • But that is covered by a bonding or insuring company that denies coverage or becomes insolvent

33. Uninsured Motor Vehicles • None of the following is considered an uninsured motor vehicle • One owned by, furnished to, or available for the regular use of you or any family member • One owned or operated by a self-insurer under any applicable motor vehicle law unless the self-insurer becomes insolvent • One owned by any government unit or agency • One operated on rails or crawler treads • One designed mainly for use off public roads while not on public roads • One located for use as a residence or premises

34. Exclusions • In addition to the exclusions under the definition of an uninsured motor vehicle • The uninsured motorist coverage has five exclusions for bodily injury • If the injury is sustained while occupying, or when struck by, a motor vehicle or trailer of any type owned by you or any family member that is not insured for this coverage • If the claim is settled by the insured or the insured’s legal representative without consent of the insurer • If the injury is sustained while occupying your covered auto when it is being used to carry people or property for a fee • If the injury is sustained while using a vehicle without reasonable belief that you are entitled to do so • If the coverage directly or indirectly benefits any insurer or self-insurer under any workers’ compensation, disability benefits, or similar law

35. Other Conditions • The maximum limit of liability is the amount shown on the declarations page • Split limits are used • The number of persons or vehicles insured does not affect this limit • No stacking is allowed • Coverage is excess on nonowned vehicles • When a dispute develops between the insured and the insurer on a claim • The policy gives either party the right to ask for binding arbitration

36. Physical Damage to Autos • The insurer provides protection for direct accidental loss to the covered auto or to a nonowned auto • A nonowned auto is defined as any private passenger auto, pickup truck, van, or trailer not owned or furnished for the regular use of you or any family member while in the custody of or being operated by you or any family member • As well as any auto or trailer while used as a temporary substitute for your covered auto while it is out of normal use • Coverage for a nonowned auto is equal to the broadest protection provided for any covered auto

37. Physical Damage to Autos • Coverage is separated into two sections • Collision • Defined as upset of your covered auto or nonowned auto or its impact with another vehicle or object • Definition is new to PAP • It clarifies what some persons thought was awkward in the old definition • Which used the word collide to define the term collision • Other than collision • Losses to an auto 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 other animal, or breakage of glass

38. Physical Damage to Autos • If breakage of glass is caused by a collision • You may elect to have it considered a loss caused by collision • Without this alternative approach on glass • A deductible could be required for the collision loss and another deductible on other than collision for the glass • The advantage to the insured for not having the preceding perils considered collisions is • Coverage for other than collision usually has a lower deductible than collision coverage • Additionally, other-than-collision claims often will not raise an insured’s rates • Whereas collision claims usually will

39. Exclusions • The physical damage section excludes loss resulting from the operation of a vehicle used to carry persons or property for a fee • Damage resulting from war, radioactive contamination, and discharge of any nuclear weapon is excluded • Loss to equipment designed for the reproduction of sound • Unless the equipment is permanently installed in or designed to be solely powered by the electrical system of your covered auto • Loss to any of the following or their accessories • Citizens-band radio • Two-way mobile radio • Telephone • Scanning monitor receiver • Television monitor receivers • Video cassette recorders • Audio cassette recorders • Personal computers

40. Exclusions • Loss to tapes, records, discs or other media used with the equipment described previously • Loss to laser or radar detection equipment • Loss to a camper body, trailer, or motor home not shown in the declarations, as well as associated equipment • Loss to custom furnishings or equipment in or upon a pickup or van

41. Exclusions • No coverage is given for a nonowned or temporary substitute vehicle used by you or a family member without a reasonable belief that the person is entitled to do so • Rental car companies are not covered for coverage on a car you rent from them unless you can be held liable under the rental agreement or a state statute • Damage from wear and tear, freezing, mechanical or electrical breakdown or failures, and road damage to tires

42. Transportation and Towing • PAP will pay up to $20 a day for temporary transportation expenses incurred by you in the event of a covered loss to your auto • In the case of theft, you must wait 48 hours in order to recover • For an additional premium, towing and labor cost coverage may be added • The insurer’s limit of liability is generally about $50 • All labor must be performed at the site of the disablement • Given the roadside assistance plans that accompany many car purchases • Most persons probably do not need this coverage • But because the premium is so low many purchase it

43. Other Provisions • The insurer limits its liabilities to the actual cash value of the loss • Or the amount necessary to repair or replace the property, whichever is less • Actual cash value includes an adjustment for depreciation and the physical condition of the auto • In the case of antique or customized automobiles • A stated-amount endorsement may be used • The insurer reserves the right to pay for the loss in money, repair, or replacement of the damaged or stolen property • If the car is stolen, the insurer will pay for the cost of returning the vehicle to the owner • If the cost of repair or replacement is greater than the value of the property • The insurer may declare the loss a total loss and pay the actual cash value of the vehicle

44. Other Provisions • New wording in the policy states that if the repair or replacement results in betterment of the property • The insurer will not pay for the amount of the betterment • The betterment provision and the used of “aftermarket” parts has caused significant concern to consumers and insurance companies • Insurers have argued that aftermarket parts are just as good as those made by the auto manufacturer • They cost less so everyone wins because of lower premiums to insureds and lower costs to insurers • Another provision states that the insurance shall not directly or indirectly benefit any carrier or bailee • Such persons include a railroad or shipping line that transports your vehicle as well as a parking lot operation • This allows the insurer to subrogate against the bailee when the bailee is negligent in damaging your auto • All coverage for nonowned autos is excess over any other collectible insurance

45. Duties after an Accident or Loss • The insured must promply notify the insurance company of how, when, and where the accident or loss occurred • Typically, reporting such information to your agent is considered reporting it to the company • Any person seeking coverage under the PAP must be willing to • Cooperate with the company in the investigation, settlement, or defense of any claim or suit • Promptly send the company copies of any notices or legal papers received in connection with the accident or loss • Submit, at the company’s expense and as often as reasonably required, to physical examinations by physicians selected by the company and to examination under oath • Authorize the company to obtain medical reports and other pertinent records • Submit a proof of loss when required by the company

46. Duties after an Accident or Loss • A person seeking uninsured motorist coverage must also be willing to • Notify the police promptly if a hit-and-run driver is involved • Send copies of the legal papers to the company if a suit is brought • When a claim is made under the coverage for damage to your auto, you must • Take reasonable steps after a loss, at company expense, to protect your covered auto and its equipment from further damage • Notify the police promptly if your covered auto is stolen • Permit the company to inspect and appraise the damaged property before its repair or disposal

47. Duties after an Accident or Loss • If you have an accident, the insurer will pay towing expenses • If the disabled vehicle was left at the scene of the accident • There is a chance that someone will strip it of its salable parts • Promptly notifying the police when theft occurs increases the probability of recovery • It also reduces the moral hazard of an insured’s selling or hiding the vehicle and reporting it as stolen to the insurer

48. General Provisions • The policy states that its territorial limits are the U.S. and Canada • Transportation of the auto between any of these points is also covered • Note that Mexico is not a covered territory • All policy modifications must be in writing • When a policy is changed to give greater coverage without additional charge • The insured’s policy is automatically modified • The insured cannot start legal proceedings until full compliance with all policy terms has been met • The policy cannot be assigned without the written permission of the insurer • Bankruptcy of the insured does not relieve the insurer of its obligation

49. Policy Cancellation Provisions • The PAP policy has a rather lengthy termination provision • The insured can cancel at any time by returning the policy or giving written notice of the time when the insured intends to cancel • Termination by the company is more complex • During the first 60 days of the policy the insurer may cancel for any reason • It may cancel for nonpayment of premium at any time

50. Policy Cancellation Provisions • The insurer has 60 days to investigate the insured and make its underwriting decision • During the first 60 days, the insurer must give ten days notice before canceling • After the policy has been in effect for 60 days the insurer can cancel only • For nonpayment of premium • If the insured or a resident of the household, or someone who regularly uses the auto, has his or her license suspended or revoked • If the policy was obtained through material misrepresentation • If your state requires longer notice than the PAP gives • Your state law will determine the notification period • The insurance company is obligated to give you a refund of the premium if one is due • However, it is not required to tender the refund when it cancels • You may have to ask for it