REVIEW SUMMARY FOR
PERSONAL AUTO INSURANCE
CHAPTER 1
Demographics Affected by Auto Industry
Autos virtually reconstructed the landscape of America. Autos
gave rise to suburban lifestyle. People could live away from the
rush of the city but still enjoy the conveniences of city life.
Shoppers looking for a change of scenery from the downtown
department stores could head out to the mall.
The fast food industry would not exist, as we know it today,
without autos.
The impact of the automobile continues. Automatic Teller
Machines are replacing drive-thru tellers. The arrival of the automobile brought more than just mobility; it spawned an entirely new
lifestyle and opened new business opportunities.
Driving is Hazards
The year 1963 brought traffic death to an all-time high of
40,804. While many of these fatalities were due (as expected) to
driver error, a very large portion were caused by mechanical defects
or, even more significantly, design defects.
Origins of Personal Auto Insurance
In the beginning, auto policies were liability policies that were
used to insure liability arising out of collision with horses.
This beginning was followed by an era of total confusion as the
industry saw each company design its own unique policy. Every
company had its own policy, rating manual and their own way of
providing auto coverage.
1
Since these were new policies, the law of large numbers (loss
statistics become more predictable as the number of similar
exposures to loss increase) was not prevalent.
By the end of the 1920's, the insurance companies realized
that the use of one standard automobile policy, by all those
insurers marketing auto insurance, would be in the best interests of
both themselves and the consumer. This idea developed into the
drafting of the Basic Standard Automobile Policy, completed in
1935. The Standard Auto Policy stood for 20 years.
The following years saw the introduction of two other Standard
Auto Policies. The Comprehensive Automobile Policy (1940) and the
Family Automobile Policy (1956).
In the late 1970's, the states began to mandate clearer
language in policies and requested insurance companies to become
more contemporary. The Personal Auto Policy was introduced.
The Personal Automobile Policy was developed by Insurance
Services Office (ISO), the largest insurance rating and advisory
organization in the United States.
Nature of Automobile Insurance Problem
With the popularity of the automobile came many problems.
Millions of motorists are injured or disabled each year.
The high cost of medical expense, pain and suffering, the
unexpected death of a family member and damage to or loss of an
automobile has a profound impact on the family.
In addition, society must deal with the problem of
compensating innocent automobile accident victims for their bodily
injuries or property damage caused by negligent drivers.
High Frequency of Automobile Accidents
American motorists are smashing into each other at an
alarming rate. Example: in 1993 motorists were involved in 36
million motor vehicle accidents.
2
Most fatal accidents are due to two major causes: (1) improper
driving, (2) alcohol.
High Costs of Automobile Accidents
The economic costs of motor vehicle accidents are staggering.
The economic loss includes the cost of property damage, medical
costs, lost productivity, emergency services, legal and court costs,
public assistance programs and insurance administration expenses.
The cost of Automobile Insurance Claim Settlements and court
awards has also increased sharply in recent years.
Irresponsible drivers are another part of the overall automobile
insurance problem.
Substantial-underwriting losses experienced by automobile
insurers are another part of the overall problem.
The problem is that some uninsured drivers cause accidents
that injure other people and cannot pay for the injuries or property
damage they have caused.
Drunk Drivers
There is wide spread drug and alcohol abuse in the United
States and drunk drivers are estimated to be involved in about half
of all fatal automobile accidents.
Drunk drivers are also
responsible for a disproportionate number of non-fatal automobile
accidents.
High-Risk Drivers
High-risk drivers are motorists who habitually violate traffic
laws.
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Availability and Affordability of Automobile Insurance
A final part of the problem is that some groups are unable to
purchase automobile insurance contracts at affordable premiums.
Both automobile insurers and society have enacted insurance
plans that make automobile coverages available to the high-risk
groups.
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CHAPTER 2
Insurance Basics: Law and Liability
It is important to remember that Automobile Insurance deals
with both issues of law and liability.
Insurance exists because the world is filled with uncertainty.
Some of these uncertainties can lead to financial loss.
Loss Exposures
A Loss Exposure exists if there is a possibility of a loss
occurring and if each an occurrence would cause a financial loss.
Techniques for Treating Loss Exposures
*
*
*
*
*
avoidance
Loss Control
Retention
Transfer Other-Than-Insurance
Insurance
Avoidance
To avoid the auto loss exposure, one must not drive or own a
car!
Loss Control
1.
loss prevention (lowering the frequency of
loss).
2.
loss reduction (lowering the severity of the losses).
3.
a combination of 1 and 2.
Retention
Retention means keeping or absorbing all or part of the
financial impact of a loss.
5
Transfer Other-Than-Insurance
Transfer Other-Than-Insurance occurs when the loss exposure
of one person or organization is assumed by another, usually
through a contract such as a "Hold Harmless Agreement".
Insurance
Insurance is a system that enables a person, business or
organization to transfer a Loss Exposure to an insurance company.
By transferring their Loss Exposure to insurance companies,
insureds exchange the possibility of a large loss for the certainty of
a much smaller, periodic premium. The transfer is accomplished
through Insurance Policies.
Sharing the Cost of Losses
Sharing, like transfer, is another element of insurance. Each
insured pays its insurance premium to the insurance company that
"pools" the premium into a loss fund. The total cost of losses is
spread among all insureds insurance companies who predict future
losses and expenses to determine how large a pool of funds will be
necessary. They can do this because of the Law of Large Numbers,
the foundation of insurance operations.
The Law of Large Numbers enables insurance companies to
improve the predictability of losses by pooling a large number of
similar independent exposure units.
Benefits of Insurance
The most obvious benefit of purchasing insurance is that it
provides payments for losses and reduces uncertainty.
Although there are numerous types of insurance to protect the
needs of individuals, we will focus on two which are pertinent to our
subject matter: Property Insurance and Liability Insurance.
6
Property Insurance covers accidental losses resulting from
damage to property of the injured.
Liability Insurance
Can involve three parties: the insured, the insurance company
and someone who is injured or whose property is damaged by the
insured.
Auto Liability Insurance covers losses due to the insured's
liability for bodily injury to others or damage to property of others
caused by an auto accident. The legal costs of defending the
insured are also covered.
LAW AND LIABILITY
Nature of the Law
It is the legal system that enforces obligations.
Laws exist in a civilized society to enforce certain standards of
conduct.
An important distinction exists in the American Legal System
between criminal Law and Civil law.
Criminal Law
Certain kinds of conduct so endanger the public welfare that
society makes laws to prohibit them.
Civil Law
Actions that are not necessarily crimes can still cause
considerable harm to other people. Civil Law serves to settle disputes and to repress wrongs against individuals.
Civil Law enforces rights. People are more willing to make
agreements of contracts with one another when they know that
those contracts are, in fact, enforceable.
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Sources of Law
There are essentially four sources of law. Constitutional Law,
Statutory Law, Common Law and Administrative Law.
Constitutional Law
The constitution specifies the structure of the federal
government and outlines the respective powers of the legislative,
executive and judicial branches of the government. Our courts
interpret the Constitution to decide Constitutional issues that may
arise.
Statutory Law
Legislatures at national, state, and local levels enact laws or
statutes to deal with perceived general problems.
Common Law
In contrast, the Common Law has evolved in the courts by the
force of custom.
Common Law principles guided judges not only in England
but also in the English colonies in America.
Administrative Law
Final sources of the law are the numerous federal, state and
legal governmental agencies that have regulatory powers derived
from Statutory Law.
Elements of a Liability Loss
The factors involved in a Liability Loss include:
*
a legal basis for a claim of one party against another.
*
a definite injury or harm to the party making the claim.
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*
some conduct by one party for which the other party is
responsible.
*
an agreement of the parties or a judgment of the court
concerning the form or the amount of the restitution
owed to the injured party.
Torts
Tort Law is that branch of Civil Law that deals with wrongs
other than Breaches of Contract.
Tort Law provides three possible standards for a finding of
legal liability: if a tort is intentional, the liability for the consequence
follow, if a tort is unintentional, negligence may be grounds for a
finding of legal liability. Finally, some activities are so inherently
dangerous that Absolute Liability for any resulting injury may exist
even though no harm is intended and no Negligence is involved.
Intentional Torts
Deliberate acts that cause harm to another person.
Absolute Liability
Some activities are so inherently dangerous that Absolute
Liability for any of these actions that result in an injury may exist
even though no harm is intended and no negligence is involved.
Negligence
The greatest numbers of liability cases arise from Negligence.
Negligence occurs when one fails to exercise the appropriate degree
of care.
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Elements of Negligence
A liability judgment based on Negligence depends on four
elements:
1.
2.
3.
4.
Duty To Act that is owed to another
person.
A Breach of that Duty.
The occurrence of an Injury.
An Unbroken Chain of Events leading to that injury.
Responsibility of Negligence
Individuals, business firms and other organizations may be
held responsible for the negligence. Generally one expects the
person whose conduct is negligent to be responsible for the
consequences.
Vicarious Liability
Exists when one is held liable for the actions of another
person. Such situations extend liability to include not only the
actual wrongdoer but also a person or organization responsible for
the wrongdoer.
Vicarious Liability often arises in business situations from the
relationship between employer and employee.
Since an employer could be Vicariously Liable for the acts of
the employee, an injured party might bring suit against both the
employee and the employer.
Absolute Liability
Although most cases arise from Negligence, liability under Tort
Law is not entirely limited to cases of injury caused by deliberate or
negligent conduct. In these inherently dangerous situations, there
is Absolute Liability for any injury regardless of the intent or the
carefulness of the person held liable.
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Strict Liability
A similar but slightly different concept often applies in cases of
injury involving defective products.
Contracts
Contract Law enables an injured party to seek restitution
because the other party has breached a duty voluntarily accepted in
a contract.
Statutes
Liability may also exist because of a specific Statute.
Automobile Liability Laws
Specific statutes now modify many of the Common Law
Principles of Negligence that apply to the Common Law Principles of
Negligence.
Damages
For a Liability Loss to occur there must be some definite harm
sustained by another person.
Bodily Injury
Bodily injury is a physical injury to a person.
Property Damage
Property Damage Losses occur when a person causes direct or
indirect damage (such as loss of the use of property) to another
person's property.
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CHAPTER 3
The Insurance Contract and The Personal Auto Policy
Automobile Insurance cannot prevent automobile accidents
from occurring but it can sure help take the "sting" out of the
potential financial loss. Let's take a closer look at contracts and
their use in providing protection through the Personal Auto Policy.
The Contract
In order to form a legally enforceable contract, an offer must
be accepted; the parties must give genuine assent, the parties must
be competent, the contract must be for a legal purpose and the
contract must involve consideration.
An Insurance Policy is a written document that contains words
expressing the agreements of the parties to the Insurance Contract.
Special Characteristics of Insurance Contracts





a
a
a
a
a
conditional contract
contract involving the exchange of unequal amounts
contract of utmost good faith
contract of adhesion
contract of indemnity
Conditional Contract
An Insurance Policy is a conditional contract because the
insurer has to perform only under certain conditions.
Because they are conditional, Insurance Contracts involve an
exchange of unequal amounts. This often times is referred to as
aleatory.
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The premium paid by the insured for a particular policy does
not equal the amounts paid by the insurer to, or on behalf of, the
insured.
Because insurance involves an intangible promise, it requires
complete honesty and disclosure of all relevant facts between the
parties. This is the reason insurance contracts are considered contracts of utmost good faith. An insurance company may be released
from a contract on the grounds of Concealment, Misrepresentation
or Breach of Warranty.
Concealment
Is the failure to disclose information that could and should
have been given.
A misrepresentation is a false statement of a material fact.
Breach of Warranty
A warranty is a statement that someone holds to be true.
Contracts of Adhesion
The wording in Insurance Contract are drafted by the Insurance Company. The insured has little choice but to "take it or leave
it". That is, the insured must adhere to the contract drafted by the
insurer.
Contracts of Indemnity
Most Property and Liability Insurance Policies are Contracts of
Indemnity. With a Contract of Indemnity, the amount paid by the
insurer depends on the amount lost by the insured.
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INSURANCE CONTRACTS
General Provisions of Insurance Contract
Certain matters must be addressed in every Insurance Policy in
order to define the coverage provided. These are critical elements in
the content of any Insurance Policy.
Content of Insurance Policies
An Insurance Policy specifically defines the coverage it
provides. Since no Insurance Policy covers every single contingency, the policy must describe its limitations, restrictions and
exclusions as clearly as possible.
Names of Insurance Company and Insured
An Insurance Policy must identify the parties to the agreement.
The name of the insurer and the names of the insureds are usually
shown in the first sheet of paper that forms a part of the policy.
This sheet may be called the declaration's page.
Policy Period
Insurance Policies usually provide coverage for a specified
period of time.
Consideration
The insured's consideration is the payment of premium, and
the insurer's consideration is its promise to make payments if an
insured loss occurs.
The policy declaration page normally shows the premium
amount.
Definitions
Many policies contain a separate section labeled "definitions".
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Insuring Agreements and
Exclusions
An Insurance Policy contains specific statements regarding the
nature of the insurer's promise.
 An Insuring Agreement is the statement in which the insurer
agrees to provide coverage. The insurer's promise is then limited
by Exclusions, which eliminate some of the things that would
otherwise be covered by the broad insuring agreement.
Insurance Policies contain Exclusions for several reasons.
Limits and Valuation Provisions
An insurance policy must specify exactly how to determine the
amounts the insurer must pay if a loss does occur.
Duties of Insurer and Insured
Both insurer and insured must fulfill certain duties for the
insurance to function as intended.
Dispute Resolution
Last in the question of what to do if there is a disagreement
between the insurer and the insured.
PERSONAL AUTO POLICY AND ITS ORGANIZATIONAL
FORMAT
Property Insurance Characteristics
In the Auto Physical Damage section, three degrees of coverage
may be available:
 All Risks
 All Risks excluding Collision
 specified causes of loss (with or without Collision)
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Liability Insurance Characteristics
Liability Insurance differs from Property Insurance in many
ways. Liability Insurance claims involve three parties, the insurer,
the insured and a "third party".
Liability Insurance covers claims against an insured arising
out of the insured's legal liability for a covered activity or situation
involving covered expenses or damages, provided the event that
"triggers" coverages occured during a covered time period. Most
liability insuring agreements make essentially the same broad promise: to pay damages for which an insured becomes legally
responsible and to which the coverage applies. The insurer also
promises to pay related defense costs.
Eligible Vehicles
The Personal Auto Policy is designed to insure only certain
types of motor vehicles. The vehicle must be owned, or leased for a
minimum of six months, by an individual or by a husband and wife
residing in the same house. An eligible vehicle is a four-wheel
vehicle. Thus, a private passenger automobile, station wagon, or
jeep owned by the insured is eligible for coverage.
Summary of Coverages
The Personal Auto Policy consists of a declaration page, an
agreement and definition page and six separate parts. The six parts
are:






Part
Part
Part
Part
Part
Part
A - Liability Coverage
B - Medical Payment Coverage
C - Uninsured Motorists Coverage
D- Coverage for damage to your auto
E - Duties after an accident or loss
F - General Provisions
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Declarations
The declarations page provides information about the insured,
a description of the insured automobile, a schedule of coverage and
other important details.
Rating Information
The rating class in which the vehicle is placed and any
applicable credits and discounts are shown.
Agreements and Definitions
The first page of the Personal Auto Policy contains the
insuring agreement and definitions of several terms used
throughout the policy.
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CHAPTER 4
PART A – LIABILITY COVERAGE and
PART B – MEDICAL PAYMENTS COVERAGE
We will begin our examination of the Personal Automobile
Policy by reviewing the first two parts of the policy.
 Part A - Liability Coverage
 Part B - Medical Payment Coverage
PART A - LIABILITY COVERAGE
It provides protection against legal liability arising out of the
ownership or operation of an automobile. Keep in mind that Part A
only pays for damage the insured causes to others. It does not
pay for the insured's own injuries or damage to the insured's car.
Insuring Agreement
In the insuring agreement, the company agrees to pay for
Bodily Injury or Property Damage for which the insured is legally
responsible because of an automobile accident. The liability limit is
written as a single limit that applies to both Bodily Injury and
Property Damage.
The insurer also agrees to defend the insured and pay all legal
defense costs. The defense costs are in addition to the policy limits.
Insured Persons
The following four groups are insured for Liability Coverage
under the Personal Auto Policy:
 the named insured and any family member.
 any person using the named insured's covered auto.
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 any persons or organizations but only for legal liability arising
out of an insured person's use of a covered auto on behalf of that
person or organization.
 any person or organization legally responsible for the named
insured's or family member's use of any automobile or trailer.
Supplementary Payments
The following supplementary payments are paid in addition to
the liability limits and legal defense costs:





bail bonds
premiums on appeal bonds and bonds to release attachments
interest accruing after a judgment
loss of earnings
other reasonable expenses
Liability Coverage Exclusions

A lengthy list of exclusions applies to the Liability Coverage
under the Personal Auto Policy. Exclusions simply identify
types of losses that are not covered by the policy.
The major exclusions are:
Intentional Injury
Property Owned or Transported
Property Rented, Used or in the Care of the Insured
Bodily Injury to an Employee of a Covered Person
Public or Livery Conveyance
Garage Business Exclusion
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Other Business Use
Using a Vehicle Without Reasonable Belief or Permission
Nuclear Energy Liability Loss
Motorized Vehicles with Fewer Than Four Wheels
Vehicles Furnished or Available for Regular Use
Vehicle Furnished or Available for Regular Use of Any Family
Member
Limit of Liability
The Personal Auto Policy also states that regardless of the
number of insureds involved in an accident, the Limit of Liability for
the policy will not be increased. The most any claimant can recover
for one accident is the limit stated in the declarations.
Out-of-State Coverage
If the accident occurs in a state that has a Financial
Responsibility Law, or similar law that requires higher liability
limits than the limits shown in the declarations, the Personal Auto
Policy automatically provides the higher required limits.
The Personal Auto Policy also has a provision that applies
when more than one automobile policy covers a liability claim. If
there is other applicable Liability Insurance to an owned vehicle,
the insurer pays only its pro rata share of the loss.
Compliance with Financial Responsibility Law
Many states have Financial Responsibility Laws that require
proof of financial responsibility after an accident occurs. When the
Personal Auto Policy is used to demonstrate proof of Financial
20
Responsibility, the Personal Auto Policy will comply with the law to
the extent required.
PART B - MEDICAL PAYMENTS COVERAGE
Medical Payments Coverage is an accident benefit that can
optionally added to the Personal Auto Policy. This benefit pays the
medical expenses up to a certain specified limit of insureds that are
injured in an automobile accident.
Insuring Agreement
The insurer will pay all Reasonable and Necessary Medical and
Funeral Expenses incurred by an insured because of bodily injury
caused by an accident. The company will pay only those expenses
incurred within three years from the date of the accident.
Medical Payments Coverage applies without regard to fault.
Insured Persons
Two groups of persons are considered insured persons for
Medical Payment Coverage. They are (1) the named insured and
family member, and (2) any other person while occupying a covered
auto.
Medical Payments Exclusions
Numerous
coverage.
exclusions
also
apply
to
medical
Vehicles with Fewer Than Four Wheels
Vehicles Used as a Residence or Premises
Injury during the Course of Employment
Vehicle Furnished or Available for Regular Use
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payments
Using a Vehicle Without Reasonable Belief of Permission
Vehicle Used in the Business or Occupation of an Insured
Bodily Injury from Nuclear Weapons or War
Limit of Liability
The Limit of Liability for Medical Payments Coverage is stated
in the declaration. This limit is the maximum amount that will be
paid to each injured person in a single accident regardless of the
number of injured persons, claims made, vehicles or premiums
shown, or vehicles involved in the auto accident.
Other Insurance
If other automobile Medical Payments Insurance applies to a
covered auto, the company pays its pro-rata share based on the
proportion that its Limit of Liability adheres to the total of
applicable limits.
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CHAPTER 5
PART C – INSURED MOTORIST COVERAGE
and
PART D – COVERAGE FOR DAMAGE TO YOUR AUTO
PART C – UNINSURED MOTORISTS COVERAGE
The Uninsured Motorists Coverage is designed to meet the
problem of Bodily Injury caused by an uninsured motorist. The
Uninsured Motorist Coverage pays for Bodily Injury of a covered
person who is injured by an uninsured motorist, a hit-and-run
driver or by a driver whose insurer is insolvent.
Insuring Agreement
The insurer agrees to pay compensatory damage that the
insured person is legally entitled to recover from the owner or
operator of an uninsured motor vehicle because of Bodily Injury
caused by an accident.
Insureds
The groups that are considered insureds under the Uninsured
Motorist Coverage: (1) the named insured and family members, (2)
any other person occupying a covered auto, and (3) any person
legally entitled to recover damages.
Uninsured Vehicles
The Uninsured Motorists Coverage clearly specifies the types
of vehicles that are considered uninsured vehicles.
Uninsured Motorists Exclusions
1.
No Uninsured Motorist Coverage on vehicles. There is no
coverage for bodily injury sustained by any person who occupies or
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is struck by a motor vehicle or trailer owned by the named insured
or family member if that vehicle does not have Uninsured Motorists
Coverage under the policy.
2.
Settling the claim without insurer's consent.
The
Uninsured Motorists Coverage does not apply if a Bodily Injury
Claim is settled without the insurer's consent.
3.
Public or Livery Conveyance.
4.
Using a vehicle without belief of permission.
5.
Cannot benefit Workers’ Compensation Insurer.
6.
Punitive damage not paid.
Limits of Liability
The minimum amount of Uninsured Motorists Coverage
available under The Personal Auto Policy is equal to the amount
required by the Financial Responsibility or Compulsory Insurance
Law of the state in which the named insured's covered auto is
principally garaged.
The Limit of Liability for Uninsured Motorists Coverage is
shown in the declarations and is the maximum amount that will be
paid for all damages resulting from any one accident.
Other Insurance
If other insured motorists coverage applies to the loss, the
Personal Auto Policy pays only its pro-rata share of the loss.
Arbitration
If the insurer and the insured cannot agree as to whether the
insured is entitled to recover damages, or on the amount, the
dispute may be settled by Arbitration.
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PART D – COVERAGE FOR DAMAGE TO YOUR AUTO
Part D of the Personal Auto Policy provides Physical Damage
Insurance for the damage or theft of a covered auto.
Insuring Agreement
In the Insuring Agreement, the insurer agrees to pay for any
direct and accidental loss to a covered auto or to any non-owned
auto, including its equipment, minus any applicable deductible
shown on the declarations page.
Two coverage options are
available: a covered auto can be insured for (1) Collision Loss and
(2) loss caused by Other-Than-Collision.
Collision Loss
Collision is defined as the upset of a covered auto or a NonOwned Auto or the impact with another vehicle or object.
Collision losses are paid regardless of fault.
Other-Than-Collision
The Personal Auto Policy makes a distinction between a
Collision Loss and any Other-Than-Collision loss.
Under Part D, loss caused by any of the following is considered
Other-Than-Collision:










missiles or falling objects
fire
theft or larceny
explosion or earthquake
windstorm
hail, water or flood
malicious mischief or vandalism
riot or civil commotion
contact with a bird or animal
breakage of glass
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Non-Owned Auto
As noted, the Part D coverage also applys to a Non-Owned
Auto. A Non-Owned Auto is any private passenger auto, pickup,
van or trailer that is not owned by, or furnished or made available
for the regular use of the named insured or any family member
while such a vehicle is in the custody of, or being operated by, the
named insured or any family member.
Deductible
A deductible is used for Part D in order to reduce small claims,
hold down premiums and encourage the insured to be more careful
in protecting his/her property from damage or theft by requiring the
insured to share all losses.
Transportation Expenses
If a covered auto is stolen, the insurance company will pay up
to $15 per day to a maximum of $450 for transportation expenses
the insured may incur.
Exclusions
Twelve exclusions apply to the Part D coverage.
Public or Livery Conveyance
Wear and Tear, Freezing, and Mechanical and Electrical
Breakdown
Radioactive Contamination or War
Electronic Equipment
Government Destruction or Confiscation
Camper Body or Trailer not Shown in the Declarations
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Non-Owned Auto Used Without a Reasonable Belief of
Permission
Awnings and Cabanas
Radar Detection Equipment
Customized Equipment
Non-Owned Auto Used in the Automobile Business
Non-Owned Pickups and Vans Used in Any Other Business
Limit of Liability
The insurer's Limit of Liability for a Physical Damage Loss to a
covered automobile is the lower of (1) the actual cash value of the
damaged or stolen property or (2) the amount necessary to repair or
replace the property.
Payment of Loss
The insurer has the option of paying for the loss in money or
repairing or replacing the damaged or stolen property.
Appraisal
In some cases, the named insured and the insurer cannot
agree on the amount of the loss. In the event of a disagreement on
the amount of loss, either party may demand an appraisal of the
loss.
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CHAPTER 6
PART E – DUTIES AFTER AN ACCIDENT OR LOSS
and
PART F – GENERAL PROVISIONS
Part E of the Personal Auto Policy outlines a number of duties
the insured must perform after an accident or loss.
The following general duties must be met after an accident or
loss in order to have protection under the policy.
1. The insurer must be promptly notified of how, when and where
the accident or loss occurred.
2. The insured must cooperate with the insurer in the investigation,
settlement or defense of any claim or suit.
3. The insured must promptly submit to the insurer copies of any
notices or legal papers received in connection with the accident
or loss.
4. The insured must agree to submit to a physical examination at
the insurer's expense.
5. The insured must authorize the insurer to obtain medical reports
and other pertinent records.
6. The insured must submit a proof of loss when required by the
insurer.
Additional Duties for Uninsured Motorists Coverage
In addition to the general duties, a person seeking benefits
under Part C - Uninsured Motorists Coverage must perform the
following two additional duties:
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 Notify the Police
 Submission of Legal Papers
Additional Duties for Physical Damage
Three additional duties are required if the insured is seeking
benefits under Part D- Coverage for Damage to Your Auto.
 Prevent Further Loss
 Notify the Police of a Stolen Auto
 Inspection and Appraisal
PART F – GENERAL PROVISIONS
Bankruptcy of the Insured
The insurer is not relieved of any obligations under the policy
even if the insured declares bankruptcy or becomes insolvent.
Change in the Policy
The terms of the policy cannot be changed except by an
endorsement issued by the insurer.
The Liberalization Clause states that if the insurance
company makes a change in its policy form which provides broader
coverage without a premium change, that change will automatically
apply to the insured's policy on the date the change goes into effect
in the insured's state.
Fraud
There is no coverage for any insured that makes fraudulent
statements or engages in fraudulent conduct in connection with
any accident or loss for which a claim is made.
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Legal Action against the Insurer
No legal action can be brought against the insurer until the insured has fully complied with all of the policy terms.
Insurer's Right to Recover Payment
This provision is essentially a Subrogation Clause.
Policy Period and Territory
The Personal Auto Policy applies only to accidents and losses
that occur within the policy period and within the policy territory.
The policy period is stated in the declarations.
The policy territory includes the United States, its territories
or possessions, Puerto Rico and Canada.
Termination
The Personal Automobile Policy also contains a provision that
applies to termination of the policy by either the insured or insurer.
Non-Renewal
Rather than cancel, the insurer may decide not to renew the
policy. If the insurer does not renew, the named insured must be
given at least 20 days notice before expiration of the policy period.
Automatic Termination
Under this Provision, if the named insured does not accept the
insurer's offer to renew, the policy automatically terminates at the
end of the current policy period.
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Transfer of Insured's Interest in the Policy
This provision is essentially an Assignment Clause. The
named insured's rights and duties under the policy cannot be
assigned to another party without the insurer's written consent.
Two or More Auto Policies
If two or more auto policies issued by the same insurer apply
to the same accident, the insurer's maximum Limit of Liability is
the highest applicable Limit of Liability under any one policy.
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CHAPTER 7
Endorsements to the Personal Auto Policy
Additional coverages are available by an appropriate
Endorsement to the Personal Auto Policy. They may be used to
change information in the declarations, to add, delete or modify
coverages, exclusions or policy provisions.
Although all
Endorsements change the policy, not all Endorsements require a
premium adjustment.
General Endorsement
This form is known as a "Blank" or "Manuscript" Endorsement
because it includes blank space for typing in whatever changes is
being made to the policy.
Change Endorsement
When it is necessary to add an Endorsement after a policy is
in effect, in most cases the Change Endorsement must also be issued.
Suspension of Insurance Endorsement
This Endorsement states, that premiums will be refunded if
the suspension exceeds a specific period of time but it does not
have a place to indicate how long the insurance will be suspended.
Split Liability Limits Endorsement
This Endorsement modifies the Limit of Liability Provision by
specifying that Separate Limits apply to each person and to each
accident, as well as, to Bodily Injury Losses and Property Damage
Losses.
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Split Uninsured Motorists Limits Endorsement
It changes the uninsured motorist limit from a single limit to
Split Limit that is used when state law requires Split Limits or when
Split Limits are preferred by the insured.
Under-Insured Motorists Coverage Endorsement
Under-Insured Motorists Coverage is important in those
situations where a negligent driver has liability limits that are
insufficient to pay the insured's damages.
Miscellaneous Type Vehicle Endorsement
Many people own motor homes, motorcycles, recreational and
other vehicles that are ineligible for coverage under an Endorsement
Personal Auto Policy. To meet the special needs of vehicle owners,
the Miscellaneous Type Vehicle Endorsement can be added. The
Miscellaneous Type Vehicle Endorsement can be used to provide
the same coverage found in the Personal Auto Policy including
Liability, Medical Payments, Uninsured Motorists, Collision and
Other-Than-Collision Loss.
A Passenger Hazard Exclusion
Can also be activated as part of the Miscellaneous Type
Vehicle Endorsement.
Extended Non-Owned Coverage Endorsement
The Personal Auto Policy excludes Liability and Medical
Payments Coverage for vehicles furnished or made available for the
regular use of the named insurance and the family members.
These exclusions can be eliminated by adding the Extended NonOwned Coverage Endorsement to the Personal Auto Policy.
Mexico Coverage Endorsement
The Personal Auto Policy does not cover driving in Mexico.
However, the Mexico Coverage Endorsement can be added to the
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Personal Auto Policy to extend Personal Auto Policy benefits to a
covered person who is involved in an accident within 25 miles of the
United States border or on a trip of 10 days or less.
Snowmobile Endorsement
Snowmobiles can be insured by adding the Snowmobile
Endorsement to the Personal Auto Policy.
Physical Damage Endorsements
Part D - Coverage for Damage to Your Auto can also be
broadened by adding certain endorsements to the Personal Auto
Policy.
Some of the more widely used Physical Damage
Endorsements are:
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Extended Transportation Expense Coverage
Towing and Labor Costs Coverage
Electronic Equipment and Tapes
Stated Amount
Covered Property Coverage
Customized Equipment
Loss Payable Clause Endorsement
Additional Insured-Lessor
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CHAPTER 8
Automobile Insurance and the Law: Compensation of
Accident Victims
Under the United States legal system, persons who are injured
or incur Property Damage are entitled to compensation and
damages.
Here we will discuss the laws and methods of
compensating accident victims.
Tort Liability System Based On Fault
A “tort” is a legal wrong for which the law allows a remedy in
the form of money damages.
Negligence
Negligence is a failure to exercise the standard of care required
by law to protect others from harm.
Before an injured automobile accident victim can collect
damages, he or she must prove Negligence and establish fault on
the part of the other driver.
The dollar amount of damages awarded to an accident victim
depends on several factors. There are 3 types of damages that may
be awarded:
Special Damages
General Damages
Punitive Damages
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Types of Laws
With respect to accidents, there are 2 basic types of Financial
Responsibility Laws: (1) Security Type Laws and (2) Security and
Proof Laws.
Financial Responsibility Laws
Financial Responsibility Laws that require motorists to provide
proof of financial responsibility equal to certain minimum amounts.
If the proof of financial responsibility is not provided, both the
driver's license and vehicle registration are suspended.
Security Type Laws
Under a Security Type Law, a motorist involved in an accident
involving Bodily Injury or Property Damage over a certain amount
must provide proof of financial responsibility at least equal to
certain minimum amounts. Proof of financial responsibility is
normally provided by having Automobile Liability Insurance at least
equal to certain minimum limits.
Unsatisfied Judgment Funds
Five states (New Jersey, Maryland, Michigan, North Dakota
and New York) have unsatisfied judgment funds that compensate
accident victims who have exhausted all other means of payment.
Under-Insured Motorists Coverage
The Under-Insured Motorists Coverage applies when the
negligent driver has Liability Insurance at the time of the accident
but the limits carried are less than the limits provided under the
Under-Insured Motorists Coverage.
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No-Fault Automobile Insurance
As of 1993, there were 27 states that had some form of NoFault Automobile Insurance Law in operation.
The Meaning of No-Fault
No-Fault Insurance means that in the event of an automobile
accident, each party collects from his or her own insurer regardless
of fault. It is not necessary to establish fault and prove negligence
in order to collect.
In addition, a pure No-Fault Law places some restrictions on
the Right-to-Sue the negligent driver who caused the accident.
Automobile Insurance for High-Risk Drivers: The Shared
Market
High-Risk Drivers frequently have difficulty obtaining
automobile insurance in the standard markets. These drivers can
obtain Automobile Insurance in the Shared Market. The Shared
Market refers to plans in which automobile insurers participate to
make coverage available to drivers who cannot obtain coverage in
the standard market. Several plans are specifically designed for
High-Risk Drivers:
Automobile Insurance Plan
Joint Underwriting Association
Reinsurance Facility
Specialty Insurers
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CHAPTER 9
Underwriting and Rating Personal Auto Insurance
Automobile insurers are in business to make a profit.
Accomplishing this objective requires effective underwriting and
appropriate rating.
Underwriting refers to the selection and
classification of profitable insureds. Class rating commonly used
in private passenger Automobile Insurance means the same
underwriting class and charging each person the same rate.
Rating Terms
A rate is the cost for a unit of insurance. Automobile rating is
the process of determining base rates and applicable rating factors
and then calculating individual coverage premiums and the total
premium for the policy. Separate premiums are determined for
each of the four major Personal Auto Coverages. These separate
premiums must then be added to obtain the total premium.
Rate Regulation
Automobile insurers, however, do not have unlimited freedom
to charge any price they desire for the coverage they provide.
The rating laws can generally be classified into the following
categories:
Prior Approval Laws
Under a Prior Approval Law, the rates must be approved by
the State Insurance Departments before they can be used.
File and Use
File and use simply means the company files the policy and
rates with the State and immediately begins marketing the product
without prior approval from the State.
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Open Competition Laws
Under an Open Competition Law (also called a No-Filing Law),
rates do not have to be filed with the State Insurance Department
and insurers can charge rates based on their own experience and
market conditions.
Mandatory Rates
Under this type of law, rates are set by some state agency or
rating bureau and all licensed insurers are required to use these
rates.
Selection of Insureds
As noted earlier, the basic objective
underwriting is to select profitable insureds.
of
automobile
Primary Rating Factors
The major or primary factors for determining the cost of
Automobile Insurance are:
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territory
age, sex and marital status
use of the automobile
good student discount
driver education
Secondary Rating Factors
 type of automobile
 number of vehicles
 driving record
Other Factors
 deductibles
 liability limits
 other available discounts and credits
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CHAPTER 10
Personal Auto Policy Case –
Insurance
A Guide to Auto
Two things make it difficult to shop for Auto Insurance:
companies can charge widely different prices for similar coverage
and the quality of service is impossible to judge until one is
unfortunate enough to be in an accident.
The reasons Automobile Insurance tends to be expensive are:
1. today's cars are getting complex and quite expensive to repair.
2. streets are getting more congested, so people tend to bump into
each other more often.
3. in some cities theft is rampant.
4. medical costs are out of sight.
5. there's more litigation and higher settlements in injury cases.
6. badly designed No-Fault Laws encouraged litigation rather than
discourage it.
7. more buyers have been choosing small or sports cars, which
generate more collision and injury claims than big cars.
8. By law, insurance companies are allowed to exchange price
information thus lessening competition, and,
9. In some states, inept regulation has forced even good drivers
into Assigned-Risk Pools, where they are charged extra for their
coverage.
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CHAPTER 11
Insuring Other Vehicles
The Personal Auto Policy provides adequate coverage for
private passenger cars and pickups that are not used for business
purposes. There are other types of vehicles that require discussion.
Motorcycles
Coverage for motorcycles is usually found in the Specialty
Insurance Company market. Due to the added risks associated
with motorcycle operation, most insurers would rather not offer
coverage on motorcycles.
Recreational and Customized Vehicles
The term "recreational vehicles" is a very broad area. Although
standard policies, such as Homeowners and the Personal Auto
Policy do make some provisions for covering some recreational
vehicles, many of these vehicles are often covered under NonStandard Policies that are issued by Specialty Insurers.
Snowmobile
A Snowmobile Endorsement can be used to provide offpremise Liability Coverage under Homeowners Policies for specified
snowmobiles provided they are not subject to motor vehicle registration.
Other Snowmobile Coverages
Some Specialty Insurers offer policies specifically designed to
provide Liability and Physical Damage coverage for snowmobiles
and other recreational vehicles.
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Miscellaneous Type Vehicle Endorsement
The Miscellaneous Type Vehicle Endorsement can be used to
provide both Liability and Physical Damage Coverage for
motorcycles, motor homes, golf carts and other miscellaneous
vehicles.
Coverage on Pickup Camper Bodies, Campers, Trailers,
Travel Trailers, Motor Homes
Many insurance companies modify Automobile Policies to meet
the needs of owners of the above vehicles. Such policies provide
Physical Damage Coverage on the following:
 the vehicle
 permanent equipment
 furniture and equipment used with the vehicle
Classic and Antique Autos
Antique automobiles are usually over 25 years old while
classic cars may be less than 25 year olds but possess special value
because of unique styling or mechanical features.
Liability Coverage for Antique and Classic Cars does not
present any special problem. There could be problems when the
insured attempts to have Physical Damage Coverage on the Antique
and Classic Auto. These problems stem from the fact that these
cars generally are appreciating in value rather than depreciating.
A solution to this problem would be to use the Personal Auto
Policy Stated Amount Endorsement to establish the vehicle value.
Mini Bikes and Mopeds
Mini bikes are small editions of the motorcycle, they are
designed for off-road use.
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There is no coverage for either mini bikes or mopeds under the
unendorsed Personal Auto Policy.
If it is not endorsed to the Personal Auto Policy, the best
method of insuring mini bikes and mopeds is to obtain Motorcycle
Coverage.
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