AIG

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEthrough negotiations with the underwriter and payment of an additional premium, it falls moreinto the category of an underwriting exclusion than a premium exclusion.3) Except with respect to operations performed by independent contractors and except with respect to liability assumed by the insured under a contract of the type covered by the policy, to the ownership, maintenance, operation, use, loading or unloading of watercraft or automobiles away from the insured’s premises, or of aircraft. The exact wording of the watercraft exclusion is handled in such fashion that it may beovercome merely by framing the policy premium schedule, indicating that coverage isintended, describing the boating hazard, and entering the appropriate premium charge.Hence, it is purely a rating exclusion. Automobiles constitute a separate and major subjectof insurance for which specific policies have been designed. Only their use around theinsured’s premises is covered, except, of course, as far as liability is assumed under a coveredcontract or in connection with work sublet. This portion, then, is essentially an underwritingexclusion. Similarly, insurance for the ownership and operation of aircraft is considered a fieldunto itself and one which is best covered under separate specialized policies. Only contingentliability and contractual liability arising out of the use of aircraft by independent contractorsis contemplated herein. Auto liability is discussed further in Section II.4) To injury, sickness, disease, death or destruction due to war, whether or not declared, civil war, insurrection, rebellion or revolution, or to any act or condition incident to any of the foregoing, with respect to (a) liability assumed by the insured under any covered contract or agreement or (b) expenses for medical and surgical relief to others incurred by the insured.The logic of this underwriting exclusion seems self-evident.5) To liability imposed upon the insured or any indemnitee, as a person or organization engaged in the business of manufacturing, selling or distributing alcoholic beverages, or as an owner or lessor of premises used for such purpose by reason of any statute or ordinance pertaining to the sale, gift, distribution or use of any alcoholic beverage. This exclusion, like that of third-party beneficiary, was introduced into the basic policy in1955. A number of states impose by statutes varying degrees of responsibility upon personsengaged in the liquor business who might have influenced or contributed toward theintoxication of an individual, who in turn causes injury to another. It should be noted that thisexclusion has application only to those people or firms engaged in the liquor business orowning premises in which such a business is carried on. It does not apply to an individual whoor a firm which gives or serves alcohol only coincidentally to his or her business of anothernature. If the manufacture, sale or distribution of alcoholic beverages is not the regularcommercial activity of such individual or firm, he or she or it would still be covered by the policyin the event of being enjoined in a claim growing out of someone becoming intoxicated asthe result of having partaken of their hospitality and, while so affected, causing injury toanother. This exclusion has comparatively limited application and can be eliminated bypayment of proper additional premium. However, broader coverage may be available undera special Dram Shop Liability Policy.51

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEExclusions Applying Only to the Bodily Injury Insuring AgreementUnder the Comprehensive General Liability Policy, further exclusions apply as follows:6) Under bodily injury liability to any obligation for which the insured or any carrier as his or her insurer may be held liable under any workers’ compensation, unemployment compensation or disability benefits law or under any similar law. Coverage for such liabilities may be readily obtained under other policies and the exclusionmay not be eliminated.7) Under bodily injury except with respect to liability assumed by the insured under a contract of a type covered by the policy, to bodily injury to, or sickness, disease or death of any employee of the insured arising out of and in the course of his or her employment by the insured. This language joins with Coverage B of the standard Workers’ Compensation andEmployers’ Liability Policy which is specifically drafted to fill this particular coverage need. Here again, a separate type of insurance is involved and the exclusion may not beeliminated. Notice, however, that this employee exclusion does not remove coverage forliability that the insured may have assumed under a written contract as insured in the policy.Exclusions Applicable Only to Property Damage Insuring Agreement The remaining four exclusions will not be set forth verbatim because they are lengthy andextremely difficult to follow without reference to other terms, conditions and definitions withinthe policy contract. A brief explanation of their general intent will probably suffice, and in analyzing them(exclusions 8 through 11), it is important to bear in mind that the CGL is a legal liability contractand that some of the excluded exposures may be more logically and more adequately coveredunder a direct damage type of insurance.8) This exclusion is concerned with the elimination of coverage from damage to property owned, occupied by, rented to, or in the care, custody or control of the insured or over which the insured for any purpose is exercising physical control.9) This involves the exclusion of damage to property of others caused by the discharge, leakage or overflow of water; the blockage or backing up of sewers; flooding or seepage of water occurring on or from premises owned by or rented to the named insured and which damages or destroys buildings or property therein. It is purely a rating exclusion and was not contained in the first version of the Comprehensive General Liability Policy. There are two distinct schools of thought on the proposition as to whether this particularlimitation has any rightful place in the basic policy. Some underwriters reason that the degreeof exposure is so varied or inconsistent as not to lend itself to any semblance of standardizedrating. Others take the view that virtually every risk has an exposure to legal liability lossarising from damage caused by water, and therefore, in keeping with the concept of broadnessof scope of coverage, the preferred mechanics of handling would seem to be that of includingthe coverage in the basic policy and making appropriate premium charge therefore.52

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE In those situations where the protection held no interest to a particular insured, the policycould be specifically endorsed eliminating the coverage. This endorsement would also serveas a visual and continuing reminder that he or she had chosen not to carry protection againstthis important exposure to loss.10 - 11) The final two exclusions have limited application. They are significant only to those insureds performing blasting (certain explosions are also excluded) or who may cause the collapse of or structural damage to a building or may damage or destroy underground property in connection with their excavating, drilling or similar operations. The policy drafters contemplated that these two exclusions, at the option of an individualcompany, might be incorporated in the basic policy or omitted and handled by an exclusionendorsement unless, of course, it is the intent to afford the coverage.Minimum Policy Premiums and Comprehensive Coverage Charge As initially conceived and introduced, the Comprehensive Liability Insurance Policyprogram contemplated minimum policy premiums of $100 for bodily injury and $50 forproperty damage. These amounts applied to standard limits in the CGL and also to the ComprehensiveAutomobile Liability Policy (CAL). The rules governing the Comprehensive Liability Policy (CL — the combination contract)logically stipulated the sum of the two separate policy minimums, namely, $200 for bodilyinjury and $100 for property damage at standard limits. The reasoning seems to have been that the writing of comprehensive liability insuranceshould be confined to those insureds whose exposures produced a sufficiently large policypremium to justify the expense both of a thorough initial risk survey and policy terminal audit.As might be expected, these minimums, however logical the reason, quickly underwent“surgery.” Competitive practices of insurers and the popular demand for these most appealing coverson the parts of proprietors of small businesses were responsible for the more lenientqualifications. Currently, an annual policy minimum of $25 is stipulated for ComprehensiveGeneral Liability insurance, which minimum is not subject to adjustment for (1) increased limitsof liability, (2) any term discount for policies written for a term in excess of one year or (3)modification under any rating plan. No minimum premium is applicable to the ComprehensiveAutomobile Liability Policy, or the Automobile section of the combined (CL) contract. Also, in the beginning, much sales fanfare was accorded to the so-called “unknownhazards” feature of this policy. Many people in the business presumed that the comprehensivecoverage special premium charge was assessed for this feature. In actuality, it was generally felt that in order to avoid allegations of unfair discrimination,it was necessary to charge more for this broadened comprehensive coverage than an insurerwould obtain for the sum of the various single covers. This premium surcharge was fixed at1 percent of the aggregate premium of the policy, as otherwise developed, subject to a bodilyinjury minimum of $10 and $5 for property damage standard limits.53

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE A second reason for the added premium was the realization among underwriters thatirrespective of the conscientiousness with which surveys of exposures and audits of insureds’records were conducted, certain exposures would, from time to time, be overlooked. The additional premium of 1 percent was viewed as necessary additional income to enablean insurer to meet this type of loss. Here again, these minimums gradually gave ground before competitive trade practicesand were entirely discarded at the time of the latest manual revisions issued by the NationalBureau of Casualty Underwriters and Mutual Insurance Rating Bureau. Alluding further to the“unknown hazard,” this term has largely proven to be a misnomer. Experience with the program has developed very few situations that can truly becategorized as stemming from an “unknown hazard.” The more practical label would seemto be the unrecognized, undetected, overlooked or forgotten hazard. The automatic coveragegiven by the policy is, of course, a very important and appealing feature, but even so, currentrating rules do not require the assessment of any special premium for it.COMPREHENSIVE AUTOMOBILE LIABILITY POLICY All automotive insurable hazards of a particular risk can be insured under a ComprehensiveAutomobile Liability Policy — properly extended by endorsement to also include variousphysical damage perils. It is a fine and attractive contract worked out with the same meticulouscare accorded the Comprehensive General Liability Policy.Comprehensive Liability Policy This insurance contract provides the broadest scope of protection against liability claimsthus far devised. The full range of coverage features contemplated by the separateComprehensive General Liability Policy (CGL) and by the Comprehensive Automobile LiabilityPolicy (CAL) are combined under this (CL) coverage. A single insuring clause for all bodily injury liability, and another for all property damageliability are feasible, although most policy drafters prefer to retain the coverage formatfollowed in the two separate Comprehensive Automobile and General Liability Policies. It isnot unusual, however, to find only one bodily injury insuring agreement employed.Understandably, the policy language can be considerably simplified where two rather thanthree or four coverage agreements are involved. Many insurers think this advantage isoutweighed by the greater flexibility possible with separate insuring agreements applicableto automotive hazards and to miscellaneous liability hazards — although separate agree-ments do complicate the phrasing of the several tracking exclusions. It is not unusual to find an insured purchasing the full complement of coverages, eventhough at time of policy issue he or she does not own any automobiles or, conversely, hasno miscellaneous liability exposures. For example, a church body or the owner of real estatemight choose to pay a nominal premium for nonowned automobile exposures plus thecomprehensive feature charges. This choice is made against the possibility that some day it(or he or she) might be enjoined in a claim growing out of the use of an automobile in its (orhis or her) behalf, although not specifically authorized by a caretaker, refuse hauler or54

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEsomeone else. Selection of the Comprehensive Liability Policy is, accordingly, highlyrecommended as always being in the best interest of the insuring public.ADDITIONAL POINTS ABOUT THE POLICIES DISCUSSEDSeveral observations can be made about the three policies already described.Personal Injury Versus Bodily Injury The standard terminology of each of the three policies reviewed limits the coverage tobodily injury as distinguished from personal injury. The latter term is, of course, far broaderin that it would encompass such additional torts as libel, slander, invasion of privacy, unduefamiliarity, mental anguish, alienation of affections, discrimination, false arrest, falseimprisonment or wrongful eviction. Understandably, underwriters have been hesitant to offercoverage widely on a full personal injury basis (and in some situations, it might even contradictpublic policy to do so), preferring to determine what the potential exposure might be on a risk-to-risk basis and negotiating an appropriate additional premium for the broadened coverage.Caused by Accident Versus Occurrence Both the bodily injury and property damage liability insuring clauses of comprehensiveliability policies (except in the Comprehensive Personal Liability and Farmer’s ComprehensivePersonal Liability Policies) are framed on a caused by accident basis. As used for liabilityinsurance purposes, accident is generally interpreted to mean a sudden, unexpected andundesigned event identifiable both as to time and place. It has become rather commonplacefor underwriters to expand the bodily injury insuring clause to an occurrence basis. In fact,some insurers have adopted it as their standard policy language for bodily injury. Claimsgrowing out of sickness, disease, inhalation of noxious fumes, noise, radiation damage, orexposure to contagious disease or harmful dusts are clearly considered as being covered underan occurrence basis, whereas considerable uncertainty might prevail under the caused-by-accident wording.Occurrence Basis Property Damage Substitution of “occurrence” for “caused by accident” seems quite another matter,however, in respect to property damage liability. It may bring within the scope of the coveragea host of situations which have heretofore been viewed purely as business risks. Thus, noxiousfumes emitted from a manufacturing plant which gradually damage or deteriorate surround-ing real or personal property would seem to be covered. Contamination, mistaken identitysuch as remodeling the wrong house or cutting down the wrong tree, and acts of omissionsuch as failure to connect an alarm or sprinkler system or to provide sufficient heat areadditional examples. Likewise, if machinery or equipment which an insured installs does notmeasure up to prescribed specifications and other costly work is involved incident to makingthe required modifications, it is likely that the property damage cover would be called upon.The standard property damage liability insuring clause does not limit coverage to tangibleproperty. Therefore, the granting of undefined or unmodified occurrence basis propertydamage coverage might involve a carrier in such far-reaching things as patent or copyrightinfringements, erroneous or inaccurate investment advice, faulty structural design, ormiscellaneous property loss due to error or omission. While such hazards are proper subjectsfor insurance protection, they lend themselves to specialized handling and a full understanding 55

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEbetween the contracting parties as to precisely what is to be covered, rather than being sweptin unwittingly under a legal liability instrument and quite likely without adequate premiumrestitution.Worldwide Territorial Provision Present policies (except Personal or Farmer’s Comprehensive Policies) customarily extendcoverage only to accidents occurring in the United States, its territories, its possessions orCanada. While this limitation was originally inserted in deference to the difficulty whichcompanies might encounter in defending an insured in some remote corner of the world, itis highly unrealistic in the face of current business intercourse. Whether or not a businessconcern sells or distributes its products abroad, more than likely some items will find their waybeyond the territorial scope contemplated under the policy. They may be components installedin another manufacturer’s product which in turn is sold abroad, they may be transportedabroad as supplies or equipment for our armed forces, or they may be carried along by worldtravelers. With the existing speed and efficiency of worldwide communications, it would seemthat American insurance companies could readily arrange for proper investigation andadequate defense of claims growing out of an accident, no matter where it happened.American underwriters have sometimes voiced fear of prejudice on the part of a foreigntribunal in assessing damages against their insureds, and therefore when consideringextension of coverage beyond the United States and Canada, have stipulated that they willonly be obligated to defend cases brought in a court of U.S. jurisdiction. No such proof ofexcessive awards exists. In fact, those few United States insurers which do transact aworldwide business confirm what English and European companies have often reported,namely, that the potential value of a liability claim is generally higher in this country thanelsewhere in the free world.Company’s Exclusive Right to Settle Claims An auxiliary insuring agreement contained in all three comprehensive liability policiesobligates the insurer to defend any suit brought against the insured and also grants to it theright to “make such investigation, negotiation and settlement of any claim or suit as it deemsexpedient.” This time-honored exclusive right reserved to the company to settle claims isviewed as being of the utmost importance to it. It is founded on the premise that since it isthe carrier’s funds which are at stake in the lawsuit, its opinions as to defense or settlementshould govern. However, this concept is being subjected to some challenge, particularly by large corporatebuyers of insurance. Their dissatisfaction is twofold, centering first on the product’s liabilityarea, and second, in concern over the impact that too liberal claims settlements will ultimatelyhave on their insurance costs. Firms which spend large sums in creating a favorable corporateimage and in establishing a reputation for the quality of their products might be entirelyjustified in objecting to disposal of a claim under circumstances which could impair their hard-won prestige. As already suggested, this situation is most likely to arise in connection withthe manufacture and sale of products. Since a favorable reputation for a firm’s wares is asimportant to it as is a fine professional standing to a doctor or lawyer, it is argued that aninsured’s consent to settlement should be solicited. The premise perhaps becomes morecontroversial or strained when it revolves only around future premium costs, because anobstinate or unrealistic policyholder could severely prejudice an adjuster’s handling of a claim 56

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEif he or she had it within his or her power to block a settlement. On the other side of the coin,however, rests the acknowledged fact that for those insureds who buy their coverage subjectto a retrospective rating plan, or whose premiums are sufficient to qualify them for largelyself-premium rating, every claim’s payment either pushes up their insurance cost or reducesthe amount of return premium they might otherwise receive. In recognition of the powerful considerations for and against this proposition, theenlightened approach would be to amend the insuring clause in order to make it obligatoryupon the carrier to obtain the written consent of its insured prior to compromising or settlinga product’s liability claim. If the parties cannot agree as to whether continued resistance orsettlement of the claim is preferable, then they choose a mutually acceptable arbiter who afterevaluating the facts will attempt to compose the two viewpoints. Failing that, he or she mustcast his or her vote on one side or the other. If he or she agrees with the insured, then thecompany must continue to defend. If he or she favors the insurer, then the insured must bearthat portion of any resultant court verdict or subsequent settlement outlay which is in excessof the amount for which the case could have been settled at the time that the arbiter wasengaged. No such solution appears possible in establishing the impact which claims payments haveon an insured’s ultimate premium costs. In the instance of very large risks, their premiumsare substantially and quite directly tied to the number of claims incurred and the aggregatecost of settlement thereof — loaded for company expenses, premium taxes, a small insurancecharge and a factor for contingencies and profit. Such an insured has a very real and immediateinterest in the claims adjustment philosophy and practices of his or her carrier and in urgingthem to resist to the utmost. On the other side of this particular coin is the fact that aprofessional full-time adjuster is a far better judge of what is fair and practical in claimshandling than is even the most conscientious insured.Composite Rating Despite the superiority of the blanket coverage concept employed in the severalcomprehensive liability contracts, no change is introduced into the rating bases utilized in thevarious separate liability policies. Thus, area, frontage, admissions, number of elevators,gross sales, payroll, contract price, number of and use of motor vehicles, and hired car costall play their appropriate parts in developing the total premium for the comprehensivecoverage. Utilization of these various rating bases normally produces the accurate pairing ofthe hazard insured with premium charged. Nevertheless, many persons become cranky overthe complexity of premium calculations and statistical effort which the rating entails. Also, theydeplore the absence of uniformity in classifying the various underwriting exposures. For risks which develop a worthwhile premium, the ultimate premium may be structuredto a single rating base. The label given to this technique is “Composite Rating.” It involvessimply determining the actual exposures over a given 12-month period on the conventionalunderwriting bases and applying thereto the several manual rates and minimums to producean indicated premium for the risk. All other rating considerations such as experience rating,fleet discount and graded expense discount keyed to size of risk are taken into account toproduce the final comprehensive policy premium. Once this is ascertained, the insured hasa free choice of whatever single rating basis seems most appealing and logical to him or her.57

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEGross sales, total payroll or payrolls subject to Social Security tax withholding are oftenselected. The indicated total premium as computed on the standard rating bases is dividedby sales or payroll to produce a composite rate.THE “WRAP UP” UNDERWRITING CONCEPT Recently, a concept called “wrap up” has received considerable attention. The term is usedto indicate a broad and coordinated plan of insurance coverages and premiums applicableto a single large risk project. The term usually applies to multiple insurable interests. Forexample, the insurance coverages for a group of insureds involved in a large constructionproject will be “wrapped up” in one big package. The owner, the general contractor and allsubcontractors may be so covered for workers’ compensation, combination automobile andgeneral liability, and even, in some cases, fidelity plus builder’s risk and contractors’equipment. In some respects, this concept embodies the very essence of the comprehensiveapproach. Mixed and sometimes quite strong viewpoints, both pro and con, exist within the insurancecommunity as to the propriety, or even legality, of combining under one set of policiesprotection for the diverse interests of a project owner, the general contractor and varioussubcontractors. However, the weight of logic seems clearly to rest with those supporting the“wrap-up” concept. It offers advantages of (1) centralized purchasing of the several insurancesfrom a single insurer with the concomitant size of risk premium discount, (2) elimination ofoverlaps or avoidance of gaps in coverage or limits of liability, (3) a unified and effectiveapproach to accident prevention and claims handling and (4) premium savings due to theelimination of hold-harmless and contingent liability coverage requirements.COMPREHENSIVE PERSONAL LIABILITY POLICY The Comprehensive Personal Liability Policy does for the individual what the Comprehen-sive General Liability Policy does for the proprietor of a business. Every individual is facedwith nonbusiness potential liability 24 hours a day and the Comprehensive Personal LiabilityPolicy is specifically designed to insure all such risk. It is perhaps the ultimate, or very closeto it, in legal liability covers. The bodily injury and property damage features are incorporatedinto one insuring clause and a single limit of liability applies to each occurrence. The fullcoverage of the policy extends not only to the named insured, but also to a resident of hisor her household, to his or her spouse, the relatives of either and any other person under theage of 21 in the care of an insured. With respect to animals and watercraft owned by aninsured, the policy also covers any person or organization having custody or possession thereofwith the permission of the owner. Likewise, with respect to farm tractors and equipment, eitheranimal-drawn or self-propelled, employees are included as additional insureds. For a flat premium not subject to audit, it covers what it was formerly necessary to insureunder half a dozen separate policies. An individual’s liability for personal acts, including sportsactivities; residence premises; premises in which an insured is temporarily residing; cemeterylots; vacant land; ownership of dogs or other animals on or off the premises; power lawnmowers; motorized golf carts; canoes, rowboats and power boats equipped with motors ofsmall horsepower; employer’s liability to caddies, fishing or hunting guides, and to residenceemployees — all these and more are covered at a nominal flat premium.58

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Also, an insured’s activities as a trustee member of a board or committee of a religious,charitable or civic organization is protected. Pleasure boats utilizing relatively largehorsepower and relatively large sailboats may be covered by special endorsement of thepolicy and the payment of an additional premium. Many owners of these larger boats,however, prefer to insure their risk under a special marine policy obtained from aknowledgeable marine underwriter. Such contracts normally provide the broadest possiblecoverage on the boat hull, as well as liability coverage (protection and indemnity) under themaritime laws. The operation of automobiles away from the insured’s premises; ownership or operationof the larger and more powerful boats; the insured’s ownership of “business property”; oraccidents arising out of “business pursuits” — which is to say the practice of his or heroccupation, profession or trade — constitute the principal limitations on the scope of coverageof this policy. Voluntary medical payments, up to a limit of $250 per person, are extended in connectionwith any bodily injury covered by the policy. As the expression implies, this feature operatesirrespective of the question of an insured’s legal liability. Physical damage to property is another important feature of the Comprehensive PersonalLiability Policy. It covers damage or destruction of property of others up to $250, providedit is not caused intentionally by an insured over 12 years of age. Recently, the coverage has been further broadened without additional premium chargeto include liability for fire, explosion, smoke or smudge damage to property of others whilein the insured’s care, custody or control. This has significance particularly in connection withan insured who rents his or her home from someone else, and it also includes the renting ofvacation quarters and temporary occupancy of hotel or motel rooms. Contractual liability nowapplies to liability of others assumed by the insured under written contract so that thepolicyholder has coverage if he or she signs a hold harmless agreement in connection withthe renting of power tools, power equipment, self-powered golf carts and such. The coverage is framed on an occurrence basis and is applicable to losses occurringanywhere in the world. Personal injury, as distinguished from bodily injury, is not extended. No one should be without this important, extremely broad and reasonably priced insurancecontract. Many feel that it is the biggest bargain available in insurance protection today. Theidentical coverage may be obtained as a part of the several Homeowner’s Policy forms. FARMER’S COMPREHENSIVE PERSONAL LIABILITY POLICY The Farmer’s Comprehensive Personal Liability Policy follows closely the coverage grantedunder the Comprehensive Personal Liability Policy with a few changes especially designedto meet the exposure of a farmer — including his or her business liability in connection withhis or her occupation of farming. Like the CPL Policy, it covers the named insured, his or her spouse, relatives of either, otherresidents of his or her household and any other person under the age of 21 in the care ofthe insured. With respect to animals and watercraft owned by the insured, it covers the liabilityof any person or organization legally responsible for it. With respect to farm tractors andtrailers and self-propelled or animal-drawn farm implements, any employee is considered59

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEan additional insured while operating such equipment. Like the CPL Policy, it is a single limitpolicy covering both bodily injury and property damage under one insuring clause. Products liability insurance is afforded on farm products, including coverage on farm standsfor the sale of the farmer’s produce, even though the stands may be away from the farmpremises. Animal collision insurance can be included for a small charge. It covers loss oflivestock caused by collision on public highways of such livestock with vehicles owned byothers. It would not, however, apply to such animals while being transported. Coverage for custom farming can be insured at an additional premium if the insuredperforms such work for others under contract and for a charge. If such activity is only incidental,such as neighborly exchange of work, it is covered without charge. Employer’s liabilityinsurance for farm labor is a very important and often substantial hazard for farmers and isnot covered unless it is declared and the proper premium is paid thereon. However, the basicpolicy covers the employer’s liability to casual employees such as fishing or hunting guidesand residence or domestic type employees. The same is done in the CPL Policy. The Farmer’s Comprehensive Personal Liability Policy, like the CPL Policy, may be issuedfor periods of one, three or five years. PART 2SECTION I — AUTOMOBILE INSURANCE During the 1990s, the most prominent public policy issues involving personal insuranceseem to have centered on health insurance. However, for several prior decades the insurancetopic of primary consumer and legislative importance was arguably automobile insurance.The discussion of automobile insurance begins with a look at some of the problems associatedwith automobile accidents and automobile insurance and continues with a history of themethods of compensating automobile accident victims. A description of the personal auto’policy (PAP) and insurance for high-risk drivers follows.Problems Associated with Automobile Accidents and Automobile Insurance Given the severe financial consequences that can arise from automobile accidents,automobile insurance is viewed as a necessity by most Americans both for themselves andfor the other drivers who might injure them. Yet there are many problems in providingautomobile insurance to everyone at an affordable price.These problems center around the· large number of automobile accidents· high cost of automobile accidents· uninsured and underinsured drivers· difficulty that some individuals have in obtaining automobile insurance Large Number of Automobile Accidents Automobile accidents occur frequently (over 35 million occurred in 2005). Young drivershave a disproportionate number of accidents, and regardless of the driver’s age, speedingand/or substance abuse are often involved. 60

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEHigh Cost of Automobile Accidents The costs associated with automobile accidents each year in the United States arestaggering. The annual economic loss from automobile accidents is estimated to be over $125billion for property damage, medical expenses, lost income, and defense costs. This loss farexceeds losses from fires and natural disasters. Automobile accidents kill over 40,000 personseach year and account for approximately half of the country’s accidental deaths. Statisticsindicate that close to 40 percent of these automobile deaths are alcohol related.Uninsured and Underinsured Drivers While there are variations from state to state, the number of persons without automobileinsurance is estimated at between 5 and 10 percent. Even in states with compulsory insurancelaws, there is no perfect mechanism to prevent an uninsured, or even unlicensed, driver fromgetting behind the wheel. When uninsured drivers are involved in accidents, they can rarely pay for the propertydamage and bodily injury they have caused themselves or others. Another problem is theunderinsured driver. The minimum amount of automobile liability insurance needed in moststates (usually no more than $25,000 for any injured person) is often below the amountnecessary to adequately compensate an innocent victim for his or her injuries. Because of uninsured and underinsured drivers, innocent victims of automobile accidentsmay be inadequately compensated for their injuries, and society must often bear some of theburden. As a result, states have undertaken various actions to minimize these problems.Difficulty of Some Persons in Obtaining Automobile Insurance Automobile insurance can be difficult to obtain. High-risk drivers (for example, youngerpersons or drivers with serious or multiple traffic violations) are often unable to find coveragein the standard insurance market. An increasing number of insurers are willing to write thesesubstandard applicants, and many states have passed legislation that makes coverageavailable through a residual market plan. There is also the problem of affordability. Automobile insurance is expensive and accountsfor about half of the premiums collected by property and liability insurers. This is a result ofboth the high frequency and high severity of claims. For example, the average claim paid forbodily injury in an automobile accident exceeds $10,000. Even with high premiums,automobile insurance has not generated large profits for insurers. Some of the automobileinsurance legislation mentioned later in this chapter attempts to control automobile insurancecosts and therefore make it more affordable.Methods of Compensating Automobile Accident Victims Since the early days of automobiles, there has been significant societal concern over thenumber and severity of automobile accidents and the methods of compensating automobileaccident victims. Numerous laws and regulations have been passed—often with strong support from theinsurance industry—to control the number of automobile accidents and to lessen the numberof injuries and deaths. Among these are 61

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· federal design and safety standards for automobiles· highway design standards· seat belt laws· drunk-driving laws· tightening of licensing standards for young drivers· license retesting for older drivers It is interesting to note that since the late 1980s, the annual number of deaths inautomobile accidents has declined by about 12 percent from 49,000 to 43,000. This decreasehas been attributable largely to the tougher enforcement of drunk-driving laws by most states.During this period, the percent of automobile accident deaths attributable to alcohol hasdeclined from 50 percent to under 40 percent. Over time there has also been concern over the compensation of automobile accidentvictims, particularly those who were not at fault. Historically, their compensation was underthe traditional tort liability system, which was discussed in an earlier chapter. Becausecontributory negligence laws made it difficult for many mostly innocent victims to collect fordamages, most states enacted one of the variations of comparative negligence that werepreviously discussed. In addition, various other methods of ensuring compensation have beendeveloped over the years. These include· compulsory insurance· financial responsibility laws· unsatisfied judgment funds· uninsured motorists coverage· underinsured motorists coverage· no-fault automobile insurance Not every method exists in every state, and none of these methods is exactly the samein all states where it is used. It should also be noted that most of these methods do not alterthe concept of tort liability but are aimed at increasing the likelihood that a source of monetaryrecovery exists for innocent victims.Compulsory Insurance Forty-two states3 and the District of Columbia have some type of compulsory insurancelaw that requires the owners of automobiles to carry liability insurance before a vehicle canbe registered. While this is almost always in the form of a policy from an insurance company,the law can usually be satisfied on a self-insured basis by the posting of a cash deposit, bond,or other form of security. Unfortunately, such laws are far from perfect for several reasons:· The compensation must come through traditional legal channels and can be delayed by an overburdened legal system.· There is no guarantee that an innocent victim will be compensated. Some drivers may not license their vehicles; others may drop insurance after a vehicle is licensed. In addition, a person may be injured by a hit-and-run driver, an out-of-state driver without insurance, a driver of a stolen car, or a driver of a fraudulently registered automobile. 62

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· The required liability limits are relatively low and rarely exceed $20,000 or $25,000 for bodily injury to any one person, $40,000 or $50,000 in the aggregate for all bodily injury claims in an accident, and $10,000 or $15,000 for property damage claims. Financial Responsibility Laws All states without compulsory insurance laws, and many states with them, have some typeof financial responsibility law.These laws require proof of future financial responsibility by thecarrying of insurance (or the posting of a cash deposit, bond, or other security) under thefollowing circumstances:· after an automobile accident involving bodily injury or property damage that exceeds a specified limit· after conviction of a serious offense, such as drunk driving or reckless driving· after loss of a driver’s license because of repeated motor vehicle violations· failure to pay a legal judgment that arose from an automobile accident Failure to comply with financial responsibility laws results in the revocation or suspensionof a person’s driving privileges. The major criticism of financial responsibility laws is that they only become effective afteran accident or serious offense and do not provide any compensation to the innocent victimsof that accident. In addition, the same limitations that apply to compulsory automobileinsurance also apply to financial responsibility laws.Unsatisfied Judgment Funds A few states (all of which also have compulsory insurance requirements) have unsatisfiedjudgment funds, which are established by the state to compensate persons who are unableto collect a legal judgment that results from an automobile accident. The injured person—in addition to obtaining a legal judgment against the negligent party—must show that thejudgment cannot be collected. The maximum amount that can be collected from the fund isusually limited to the state’s minimum compulsory insurance requirement and is reduced bycollateral sources of recovery, such as workers’ compensation benefits or insurance. The negligent driver must repay the fund for payments made to the injured person or losehis or her driver’s license until repayment is made. The process of collecting from unsatisfied judgment funds is slow and cumbersome. Inaddition, some funds have had financial problems as a result of inadequate funding, whichusually comes from fees levied on insured drivers or insurance companies that writeautomobile insurance in the state.Uninsured Motorists Coverage In most states, insurers that write automobile insurance are required to offer uninsuredmotorists coverage. However, the policyowner can voluntarily waive the coverage in writing.In a few states, uninsured motorists coverage must be included in any automobile insurancepolicy. Under uninsured motorists coverage, the insured is able to collect the amount he or shewould have collected from the insurer of an insured driver if that driver had been carrying 63

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEinsurance. In effect, the insured’s own company acts as the insurer of the uninsured driver.The term uninsured is broadly defined to include not only uninsured drivers, but also the driversof hit-and-run vehicles and persons whose insurer cannot pay because the insurer has becomeinsolvent. Uninsured motorists coverage, however, does not apply if the negligent partycarries insurance that has inadequate limits to fully indemnify the innocent party. Uninsuredmotorists coverage is analyzed in more detail when the personal auto policy is discussed.Limitations to uninsured motorists coverage include the following:· The limits of coverage are equal only to a state’s compulsory insurance or financial responsibility limits unless the policyowner has purchased higher limits.· The insured must establish that the other party was legally liable.· The coverage usually applies to bodily injury only. States vary as to whether the coverage applies to property damage.· The cost of the coverage is borne by the innocent victim, not the uninsured driver. Underinsured Motorists Coverage Underinsured motorists coverageprovides protection to automobile accident victims whena negligent driver has insufficient insurance limits to pay for the damages for which he or sheis responsible. For example, assume a negligent driver causes bodily injury of $30,000 toanother person but only carries $25,000 of insurance, which is the minimum staterequirement. If the innocent victim has $100,000 of underinsured motorists coverage, theadditional $5,000 can be collected from his or her own company. Underinsured motorists coverage is a policy endorsement in about half the states and canonly be purchased if the policyowner also carries uninsured motorists coverage with the samelimit. However, in most other states, underinsured motorists coverage must be included alongwith uninsured motorists coverage and for the same limits.No-fault Automobile Insurance The traditional insurance and tort systems for compensating automobile accident victimshave been subject to criticism for many years. These criticisms center around the followingissues:· Many innocent persons are unable to collect anything for their injuries under the traditional tort system because injuries are caused by uninsured and hit-and-run drivers.· Injuries from automobile accidents are a societal problem for all insured parties whether they are negligent or not.· It is often difficult or impossible to determine who is at fault in an accident.· The traditional tort system has resulted in many serious claims being underpaid because of inadequate insurance limits. However, there is evidence that many small claims are overpaid for the sake of a quick settlement.· Under the traditional insurance and tort systems, a large portion of premium dollars are used to pay claims costs and attorneys’ fees.· The traditional tort system is slow. In some states, delays of 3 to 5 years between an accident and a resulting trial are common. 64

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE The result of these shortcomings to the traditional systems of compensating automobileaccident victims has lead to the passage of some type of no-fault law in over half the states,the District of Columbia, and Puerto Rico. The concept of no-fault insurance is not new, havingbeen originally proposed in the 1930s. However, the first such law was enacted inMassachusetts in 1971, and most existing laws date to the 1970s. A few additional statespassed laws in the 1980s and early 1990s, but a few others also terminated these existinglaws. Today 24 states, in addition to the District of Columbia and Puerto Rico, have no-faultlaws. The slow growth of no-fault in additional states results from many arguments against no-fault laws, such as the following:· They have not resulted in lower premiums, probably because the right to sue is only modified for relatively minor injuries.· The traditional systems of compensating automobile accident victims work well with most cases being settled relatively quickly and out of court.· The inability in some states to sue for pain and suffering has not been popular with attorneys and many drivers, who feel such suits are their right.· There are ways to modify the current tort systems, such as limiting attorneys’ fees and increasing the use of arbitration rather than trials.· Some of the costs of automobile accidents tend to be shifted from negligent parties to innocent victims. Types of No-fault Laws The original proposals for no-fault automobile insurance were based on the principle thatthe tort liability system would be abolished for automobile accidents. Under such a pure no-fault system, each owner of an automobile would be required to carry first part insurance thatcompensated all persons injured in automobile accidents involving that vehicle. The right tosue a negligent party, even for pain and suffering, would not exist. No state has gone as faras adopting a pure no-fault law. The types of laws that do exist fall into three broad categories—modified no-fault laws, add-on plans, and choice no-fault laws. Modified No-fault Laws. The most common form of no-fault legislation limits the rightof an injured party to recover damages from a negligent party but does not eliminate it. Stateswith modified no-fault laws have taken two approaches in allowing suits. Some states havea dollar threshold, which may vary from $400 to $5,000 dollars. If a person’s injuries arebelow this amount, he or she must collect from first-party no-fault benefits and cannot sue.However, suits are allowed once the threshold is reached. The injured party can still receiveno-fault benefits, but his or her insurer is reimbursed to the extent any amount from a legaljudgment duplicates any no-fault benefits received. Other states have averbal threshold andallow suits when there is a fatal injury, serious injury, or serious disfigurement. Whatconstitutes a serious injury or disfigurement varies among these states. Nine states5 have compulsory liability insurance laws that also require the purchase of no-fault benefits. Two other jurisdictions6 require vehicle owners to purchase no-fault benefits,but they make the purchase of liability coverage optional.Types of No-Fault Laws 65

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· Pure no-fault: right to sue negligent party is eliminated.· Modified no-fault: right to sue negligent party exists only if injuries exceed a dollar or verbal threshold.· Add-on no-fault: right to sue negligent party exists in addition to right to collect first-party no-fault benefits.· Choice no-fault: right to sue negligent party is an alternative to collecting under a modified no-fault plan, at option of the injured person. Add-on Plans.Under an add-on plan,there is no restriction on the right to sue a negligentparty, but first party no-fault type benefits are available. The insurer that pays these benefitshas subrogation rights against the negligent party. (Note that there are some persons whoargue that add-on plans should not be referred to as a type of no-fault since the traditionaltort system has not been altered.) In some states, both liability insurance and no-fault benefits are compulsory; in otherstates, liability insurance is compulsory, but the no-fault benefits are optional. In still otherstates, both liability insurance and no-fault benefits are optional. Choice No-fault Laws. A choice no-fault law, used in a few jurisdictions, gives the injuredperson two choices: coverage under the traditional tort liability system or coverage under amodified no-fault law at a reduced premium. Depending on the jurisdiction, a person whoelects to retain the right to seek damages under the traditional liability system may or maynot be able to purchase no-fault type benefits in a manner similar to an add-on plan.Types of No-fault Benefits No fault benefits are provided by adding an endorsement to an automobile insurancepolicy. This endorsement varies from state to state to conform to each state’s no-fault law.Usually, it is referred to as the personal injury protection (PIP) endorsement. Benefits are normally subject to dollar or time limits, and some states require insurers tomake larger-than-required benefits available. Some states also require insurers to offeroptional deductibles to reduce or eliminate certain no-fault benefits. The use of thesedeductibles can make sense to the extent the no-fault benefits duplicate other medical expenseor disability income insurance. No-fault benefits in most states include· medical expenses· rehabilitation expenses· loss of earnings (or some proportion thereof)· expenses for essential services, such as house or yard work that an injured person can no longer perform· funeral expenses· survivors’ benefits arising from death in an automobile accident In only one state—Michigan—do no-fault benefits apply to property damage. No-fault benefits are typically available to the policyowner and relative members of hisor her household riding in any vehicle, as well as to other persons riding in the policyowner’svehicle. State law varies as to which policy pays when a person is eligible for benefits as an 66

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEinjured passenger in someone else’s automobile and also under his or her own automobileinsurance policy. THE PERSONAL AUTO POLICY The discussion of automobile insurance focuses on the most common automobile policy—ISO’ s personal auto policy, often referred to as the PAP. Like the homeowners policy, it isa package policy that provides both property and liability insurance for family members. Asis the case with the ISO homeowners policy, some insurers use their own policy forms.However, these forms tend to be similar to the PAP. The following discussion looks at the basic format of the PAP, eligibility, some definitionsthat apply throughout the policy, and the policy territory. This is followed by an analysis ofthe various coverages in the policy. Finally, some of the more common endorsements arebriefly described. Like the homeowners policy, the basic PAP does not meet everyone’s needsand often must be modified.Format of the PAP Following a declarations and definitions section, the PAP provides four types of insurancecoverage:· Part A—Liability Coverage· Part B—Medical Payments Coverage· Part C—Uninsured Motorists Coverage· Part D—Coverage for Damage to Your Auto In states with no-fault laws, Part B is replaced with an endorsement that provides therequired no-fault benefits. The policy also contains two other sections—Part E and Part F—that spell out the dutiesof an insured following a loss and other policy provisions. These provisions have largely beendiscussed in prior chapters. A copy of the current Personal Auto Policy is contained in appendix B. This policy isperiodically revised and the current form dates from 1998.Eligibility A PAP can be written on eligible vehicles owned or leased by an individual or by a husbandor wife residing in the same household. Vehicles with other forms of ownership (such as afather and a son) can also be insured with an endorsement. A vehicle rented to others or usedas a public or livery conveyance is not eligible and must be insured under a commercial policy. Eligible vehicles include private passenger automobiles, such as cars, vans, and sportsutility vehicles, owned by the policyowner or leased under a written contract of six continuousmonths or longer. Pickups are also eligible vehicles if their gross weight is less than 10,000pounds. However, vans and pickups are ineligible for coverage if they are used for thetransportation or delivery of goods and materials except when (1) they are used for farmingor ranching or (2) their use is incidental to the named insured’s business of installing, 67

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEmaintaining, or repairing furnishings or equipment. An example of the latter would be a vanof an electrician or appliance repair person. Other vehicles, such as motor homes, motorcycles, golf carts, and snowmobiles can alsobe insured by endorsement in most states. Finally, the policy can be endorsed to provide automobile insurance to a person who drivesautomobiles but does not own any vehicles eligible for coverage under a PAP. This might bea person who frequently rents a car or has use of a company car on a regular basis.Definitions Like the homeowners policy, the PAP contains numerous definitions. One importantdefinition—insured—is different for different parts of the policy and is discussed later.However, some definitions are used throughout the policy. These definitions includecoveredauto, you, family members, and occupying.Covered Auto A covered auto (referred to in the PAP as “your covered auto”) is any vehicle listed in thepolicy declarations. In addition, it includes three other categories of vehicles: newly acquiredautos, trailers, and temporary substitute vehicles. Newly Acquired Autos. A newly acquired auto is one that meets the eligibilityrequirements previously described but which is acquired after the effective date of the policy. If the new automobile replaces an existing vehicle, it is automatically insured for thebroadest Parts A, B, and C coverages that apply to any vehicle listed in the declarations. Thereis no need to notify the insurance company, though it is a good idea to do so. If the newautomobile is an additional vehicle, the same automatic coverage applies only if thepolicyowner asks the insurance company to insure the vehicle within 14 days of purchase. The situation is different for damage to the automobile (Part D). There is automaticinsurance for the broadest Part D benefits provided to any vehicle in the declarations onlyif the insurance company is notified within 14 days of purchase. There is also coverage fornewly acquired automobiles even if Part D is not in effect on any vehicles listed in thedeclarations, but only if the insurance company is notified within four days of purchase thatsuch coverage is wanted. If the four-day notification is satisfied, any loss prior to insurancecompany notification is subject to a $500 deductible.Tom Howard’s car is insured under a PAP for Coverages A, B, C, and D. Tom tradeshis car in for a new one. Tom’s Coverages A, B, and C apply to the new car automatically,with no necessity to notify the insurer. Tom’s Coverage D also applies to the new carautomatically, but only if Tom notifies the insurer within 14 days. Trailers. A trailer is a vehicle designed to be pulled by a private passenger automobileor van. It also includes a farm wagon or farm implement while it is being towed. Temporary Substitute Vehicles. A temporary substitute vehicle is one not owned by theinsured while it is used temporarily in place of a vehicle listed in the declarations if that vehicleis out of normal use because of breakdown, repair, servicing, loss, or destruction. 68

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDENote that this definition of a covered auto only applies to Parts A, B, and C of the PAP.YouThe terms you and yours are used throughout the PAP. They refer to the named insuredshown in the policy declaration and the spouse of the named insured if a resident ofthe same household.If the spouse ceases to be a resident of the same household, the spouse is still a “you”or “your” until the earliest of the following:· the end of 90 days following the spouse’s change of residency· the effective date of another policy that lists the spouse as a named insured· the end of the policy period Family MemberA family member is any person related to “you” by blood, marriage, or adoption whois a resident of the same household. This includes a ward or foster child.OccupyingOccupying means in, upon, and getting in, on, out of, or off a vehicle.Policy TerritoryThe PAP applies only to accidents and losses that occur in the United States, its territoriesor possessions, Puerto Rico, or Canada. Coverage also applies if a covered auto is beingtransported between these locations.Coverage can be endorsed or other policies purchased when a covered auto is in anothercountry such as Mexico. PART A—LIABILITY COVERAGEThe discussion of Parts A, B, and C of the PAP focuses on answering four questions:· What is covered?· Who are the insureds?· What exclusions apply?· What happens when there is other insurance covering a claim?What Is Covered? Part A of the PAP provides bodily injury and property damage liability protection to anyinsured who is legally responsible for an automobile accident. As with other liability policies,the insurer agrees to pay defense costs until the limit of liability has been exhausted bypayment of judgments or settlements. The liability limits are selected by the applicant and apply to each covered accident. Thelatest version of the PAP is written with split limits, but it can be endorsed to provide singlelimit coverage. With split limits, there are three separate dollar amounts, such as $25,000/$50,000/$10,000, that apply to each accident. The first limit is the maximum amount that 69

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEwill be paid to any one person for bodily injury; the second limit is the aggregate that will bepaid for all bodily injury claims; and the third limit applies to aggregate property damageclaims. With a single limit, there is one amount that applies in the aggregate to all bodily injuryand liability claims arising from an accident. The limits available often range from $50,000to $500,000 or more.Gary Rock’s PAP provides split limits under Part A of $500,000/$1,000,000/$50,000.In an auto accident, Gary injures two people in another car. One is awarded damagesof $750,000 and the other is awarded damages of $300,000. Their car, worth $60,000,is totally demolished.The insurer will pay only $500,000 of the $750,000 award because that is the per personpolicy limit for bodily injury. The policy will pay the full $300,000 to the other person.In addition, the policy will only pay $50,000 for the damage to the car because that isthe policy’s property damage limit. In most cases, policyowners will carry the amount needed to satisfy the required underlyinglimits of an umbrella liability policy (usually in the range of $250,000/$500,000/$50,000).The umbrella liability policy is discussed later in this chapter. The PAP specifies that the insurer’s limit of liability shown in the declarations is the mostthe company will pay regardless of the number of insureds, claims made, vehicles or premiumsshown in the declarations, or vehicles involved in any accident. For example, if a son has anaccident while driving a family car, the son and both parents might be sued. The policy limitsonly apply once, not three times. An identical provision applies to Part B and Part C of thePAP. In addition, the policy specifies that no one is entitled to receive duplicate payments forthe same elements of loss under more than one of Part A, Part B, and Part C of the policy.For example, an injured passenger who sued an insured could not receive a liability paymentunder Part A for specific medical expenses and medical payments under Part B for the samemedical expenses. The PAP also contains a provision that adjusts the limits of liability to those required in astate where an accident occurs if it is a state other than the one where the insured vehicleis principally garaged. Any other required coverage, such as no-fault benefits, are alsoprovided for out-of-state accidents. The PAP also provides certain supplementary payments for expenses arising from anaccident covered by the policy. These payments, like defense costs, are in addition to the statedliability limits. They are· up to $250 for bail bonds· premiums on appeal bonds and bonds to release attachments· interest occurring after a judgment· up to $200 per day for loss of earnings because of attendance at hearings or trials· other reasonable expenses incurred at the insurer’s requestWho Are the Insureds? The insureds under Part A include several categories of persons. From the policyowner’sstandpoint, the most important category is probably the named insured, spouse, and family70

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEmembers for legal liability arising out of the ownership, maintenance, or use of any automobileor trailer. There is also coverage for any other person using a covered auto. In addition, other persons or organizations may have coverage because of their legalliability arising from the actions of any of the parties previously mentioned. For example, ifthe named insured is driving a vehicle as part of his or her job or while doing work for a charity,it is possible that the employer or charity could also become a party to a legal action. Theyare insured under the policy as long as they do not own or hire the vehicle.What Exclusions Apply? There are several situations in which the PAP does not provide liability coverage. Oneexclusion denies coverage for anyone who intentionally causes an accident. However, otherinsureds still have coverage if they are sued because of that person’s actions. Anotherexclusion denies coverage to any insured, other than a family member using the covered auto,who uses a vehicle without a reasonable belief that he or she is entitled to do so. Several exclusions pertain to business situations. The primary purpose for these exclusionsis that certain expenses should be covered under a commercial auto policy rather than the PAP. One of these denies coverage for theownership or operation of a vehicle if it is used as a public or livery conveyance, which is avehicle hired out to carry persons or property. Note, however, that this exclusion does notapply to situations where expenses of carpooling or a vacation are shared. Another exclusion pertains to persons engaged in the business of selling, repairing,servicing, storing, or parking vehicles designed for use mainly on public highways. Forexample, a named insured while engaged in this type of business would not have coveragewhen driving other people’s vehicles nor would another person engaged in this type ofbusiness (such as an auto repair person) have coverage driving the named insured’sautomobile. However, the exclusion does not apply to the use of the covered auto by thenamed insured, spouse, or a family member, or any partner, agent, or employee of theinsured, spouse, or a family member. Another somewhat similar exclusion denies liabilitycoverage when the named insured is using certain other vehicles in the course of any business(other than farming or ranching). However, this exclusion does not apply to a privatepassenger automobile, pickup, or van, or to a trailer used with any of the three types ofvehicles. A final business-situation exclusion applies to bodily injury to employees of any insured.However, this exclusion applies to domestic employees only if they either are or should becovered under a workers’ compensation policy. There are also some exclusions that apply to property damage, to property beingtransported by an insured, or property (other than a residence or private garage) rented to,used by, or in the care of any insured. There may be some coverage for these loss exposuresunder a homeowners policy. There is no liability coverage for vehicles with fewer than four wheels or vehicles designedmainly for off-road use except trailers, nonowned golf carts, or vehicles used in an emergency.If a policyowner needs to insure such vehicles as motorcycles or mopeds, coverage can beadded by an endorsement. 71

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE A significant exclusion for many insureds is one that applies to any vehicle, other than thecovered auto, that is either owned by the named insured or spouse or furnished for his or herregular use. If the vehicle is owned, it should be listed and insured along with other ownedvehicles. If a vehicle is furnished for regular use, such as an employer-provided car, it shouldeither be insured by the employer or this exclusion should be modified by endorsement. Asimilar exclusion applies to vehicles owned by or furnished for the regular use of familymembers. However, this exclusion does not apply to the named insured or spouse. Forexample, assume a 22year-old son living at home owns an uninsured car. He would be insuredunder his parents’ policy for driving other cars, but as a family member, he would not have“free” coverage for driving his own vehicle. However, his parents would have coverage if theydrove his car on an occasional basis, as long as it was not available to them for regular use. Finally, there is no liability coverage for vehicles located inside a facility for racing whenthey are competing in or practicing or preparing for any type of organized racing or speedcontest.Other Insurance In some cases, more than one PAP might provide coverage. The most common exampleoccurs when a person drives a friend’s car. The first person is a named insured under his orher own PAP while driving another automobile. He or she is also an insured under the friend’sPAP as a person using the covered auto. The other insurance provision in the PAP states that the policy will pay its pro rata shareof any loss, based on its policy limit as a percentage of the total of all policy limits applicableto the loss. However, the PAP also says that coverage provided for a vehicle that an insureddoes not own is excess insurance. Therefore, in the previous situation, the friend’s policy isprimary because it covers an “owned vehicle,” and the driver’s insurance is secondary orexcess because he or she is driving a “nonowned vehicle.” The driver’s policy will only payon an excess basis after the limits of the owner’s policy are exhausted. PART B—MEDICAL PAYMENTS COVERAGEWhat Is Covered? Part B of the PAP provides payment for the reasonable and necessary medical expensesof an insured as a result of an automobile accident. Only those expenses that result frommedical services that are rendered within 3 years of the date of an accident are covered.Benefits are paid regardless of fault. The benefit limit, typically in the range of $1,000 to $10,000, is selected by the applicantand applies separately to each person injured in an accident. As previously mentioned, noone can collect for the same expenses more than once under Part A, Part B, and Part C. Ifan insured incurred $10,000 of medical expenses when struck by a hit-and-run driver,duplicate payments for the same expenses would not be paid under medical paymentscoverage and uninsured motorists coverage. For example, if the medical payments coveragepaid its limit of $5,000, only $5,000 more could be collected under Part C for the actualmedical expenses. However, additional amounts might be collected because of pain andsuffering from the injuries received in the accident. 72

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Note that in most states with no-fault laws, Part B is replaced by an endorsement thatprovides the no-fault benefits.Who Are the Insureds? The insureds under Part B include the named insured, spouse, and any family members(1) while occupying either a motor vehicle designed for use on public roads or a trailer or (2)when struck as a pedestrian by such a vehicle or trailer.Any other person who is injured while occupying a covered auto is also an insured.What Exclusions Apply? With a few minor exceptions, the exclusions that apply to Part B are the same as thosefor Part A. That is, if liability coverage would not apply to an accident, medical paymentscoverage would likewise not be available.Other Insurance The other insurance provision that applies to medical payments coverage is similar to theone for liability coverage. The policy pays on a pro rata basis except when the other insuranceis on a nonowned vehicle. That coverage is excess over other collectible automobile insurancethat provides payments for medical or funeral expenses. PART C—UNINSURED MOTORISTS COVERAGEWhat Is Covered? Part C of the PAP provides uninsured motorists coverage (and underinsured motoristscoverage in many states). Under Part C, the insurer agrees to pay compensatory damagesthat an insured is legally entitled to recover from the owner or operator of an uninsured motorvehicle because of bodily injury (and property damage in a few states) sustained by an insuredand caused by an accident. The coverage applies to claims for medical expenses, lost wages,and pain and suffering but does not include punitive or exemplary damages. There typically is a minimum amount of coverage that must be purchased in accordancewith a state’s financial responsibility law. Above that, the applicant can purchase an amountof coverage as high as the liability limits that apply under Part A. The insurance company has no legal obligation to pay an uninsured motorists claim unlessthe owner or operator of the uninsured vehicle is legally responsible for the insured’sdamages. The insured must file a claim against his or her own insurer and, in the ideal situation,the insured and the insurer will reach a satisfactory settlement. If not, the matter is subjectto the appraisal provision as described in an earlier chapter. Note that the results of a suitagainst the uninsured party are not binding on the insurer if it is brought without the insurer’swritten consent. For purposes of Part C, an uninsured vehicle is more than one without insurance. It alsoincludes· a vehicle that is insured for less than the limits of the financial responsibility laws of the state where the covered auto is principally garaged 73

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· a hit-and-run vehicle whose operator cannot be identified and that hits the(1) named insured, spouse, or family member,(2) a vehicle that any of these insureds are occupying, or(3) a covered auto· a vehicle to which insurance applies at the time of the accident, but the insurance company either denies coverage, is insolvent, or becomes insolvent. Coverage might be denied, for example, because an insured intentionally caused an accident.Uninsured Vehicle· One with no insurance· One with liability limits lower than the applicable state law· One driven by a hit-and-run driver· One whose insurer denies coverage or becomes insolvent Part C, however, specifically excludes certain vehicles from the definition of an uninsuredvehicle. These are vehicles that are· owned by or furnished for the regular use of any family member· owned or operated by a self-insurer under an applicable motor vehicle law unless the self- insurer is or becomes insolvent· owned by any government agency unit· operated on rails or crawler treads· designed mainly for use off public roads· located for use as a residence or premisesWho Are the Insureds? auto. In addition, anyone else who is entitled to recover damages because of bodily injuryto any of the previously mentioned persons is an insured. This would include, for example,the spouse of a passenger injured while riding in the covered auto if a claim was brought forloss of consortium.What Exclusions Apply? The PAP excludes uninsured motorists coverage if an insured is injured while occupyingor struck by an automobile that is owned by the insured but which is not insured under thepolicy. However, a few state courts have said this exclusion is not enforceable because theintent of the law was to protect injured persons, and a claim must be paid as long as oneautomobile is insured under the policy. There are also exclusions similar to those previously discussed for use of the covered autowithout permission or as a public or livery conveyance.Other Insurance As with Part A and Part B, losses are settled on a pro rata basis except that coverage onan owned vehicle is primary to coverage on a vehicle that an insured does not own. UnderPart A and Part B, the insured in effect has insurance equal to the combined limit of all policies 74

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEcovering a loss. This is not true under Part C. If more than one policy provides coverage, therecovery for damages under all policies may not exceed the highest limit for any one vehicleunder any of the policies. For example, assume one policy provides $25,000 of uninsured motorists coverage anda second policy provides $50,000 of coverage. The maximum amount of coverage is then$50,000 and the entire claim would be paid under that policy if it was the primary policy.If the first policy was primary, it would pay the first $25,000 of a claim, and the second policywould pay the next $25,000. PART D—COVERAGE FOR DAMAGE TO YOUR AUTO The questions to be answered for Part D are somewhat different because the focus is ondamage to automobiles rather than on injuries to people.What Is Covered? Part D is the portion of the PAP that provides coverage for physical damage to the coveredauto and to certain other nonowned automobiles. There are actually two coverages: (1)collision and (2) other than collision. Other than collision was formerly called comprehensiveand this terminology is still frequently used colloquially and in commercial policies, although it is not a term inthe PAP. The policyowner can elect both coverages or only other-than-collision coverage;collision coverage cannot be purchased alone. Deductibles that can be selected by thepolicyowner apply to each coverage. Frequently, a lower deductible is purchased for other-than-collision coverage than is purchased for collision coverage because of the significant costsavings by selecting a larger deductible for the latter.Part D also provides certain additional coverages, referred to astransportation expenses.Collision Collision is defined as the upset of the covered auto or any nonowned auto or their impactwith another vehicle or object.Other than Collision The PAP never specifically defines the term other than collision. Technically, if a loss is notcaused by a collision, it must be a result of other than collision. Together these two coveragesgive an insured “all-risks” coverage on an insured automobile, subject to the various policyexclusions. In some cases, it is difficult to determine when a loss results from collision or other thancollision. The PAP has a specific list of sources of loss that are considered other than collision.These are· missiles and falling objects· fire· theft or larceny· explosion or earthquake 75

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· windstorm· hail, water, or flood· malicious mischief or vandalism· riot or civil commotion· contact with a bird or animal· breakage of glass. However, the policyowner of the collision loss if it is caused by collision. For example, a car damaged in a collision by a thief who stole it would be a theft loss andcovered under other than collision. In many cases, this is the most advantageous place forcoverage because other-than-collision coverage is sometimes purchased without collisioncoverage, and the deductible is often lower. Similarly, if a car is swept into a tree by flood,the damage is covered as a flood loss under the other-than-collision coverage.What Exclusions Apply? Numerous exclusions apply to Part D. Some of these are similar to the exclusions previouslydiscussed in connection with other parts of the PAP. For example, losses to any vehicle areexcluded if it was used as a public or livery conveyance or in competition or for practice insidea racing facility. Losses to nonowned autos are excluded when used without a reasonablebelief that an insured is entitled to use them or when the vehicle is used by anyone in thebusiness of selling, repairing, servicing, storing, or parking vehicles designed for use on publichighways. Several exclusions apply to various types of property under certain circumstances. Forexample, there is no coverage for· electronic equipment (including accessories) designed for the reproduction of sound. However, this exclusion does not apply if the equipment is permanently installed in an automobile. It also does not apply if the equipment is removable from a housing unit that is permanently installed as long as the equipment is (1) solely operated by power from the automobile’s electrical system, and (2) in an automobile at the time of loss.· electronic equipment that receives and transmits audio, visual, or data signals (including accessories). Examples of such equipment include citizens band radios, telephones, two- way mobile radios, scanning monitor receivers, television monitor receivers, video- cassette recorders, audiocassette recorders, or personal computers. However, this exclusion does not apply to equipment that is necessary for the normal operation of an automobile or the monitoring of an automobile operating system. It also does not apply to permanently installed telephones (or their accessories) designed to be operated by use of power from the automobile’s electrical system.· loss to tapes, records, discs, or other media used with equipment described in the two previous exclusions· loss to equipment designed or used for the detection or location of radar or laser· loss to a trailer, camper body, or motor home (including facilities or accessories used with them) not shown in the policy declarations. However, this exclusion does not apply to nonowned trailers or trailers acquired duringthe policy period as long as the insurer is asked to insure them within 14 days of acquisition. 76

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· loss to any custom furnishings or equipment in or upon a pickup or van. However, this exclusion does not apply to a cap, cover, or bedliner in or upon a covered auto that is a pickup.How Are Losses Settled? The insurer’s limit of liability is generally the lesser of (1) the actual cash value of stolenor damaged property or (2) the amount necessary to repair or replace the property with otherproperty of like kind and quality. However, $500 is the maximum payment for loss to anonowned trailer, and $1,000 is the maximum payment for equipment designed solely forthe reproduction of sound that is installed in locations not used by the automobilemanufacturer for the installation of such equipment. The insurance company has the right to pay losses in money or to repair or replacedamaged or stolen property. They also have the option of returning stolen property to thenamed insured and paying any damage that results from the theft, or of keeping all or partof the property and paying the insured an agreed or appraised value. Loss payments in theform of money include applicable sales tax. The policy contains an appraisal provision that applies to situations when the insurer andinsured cannot agree on the amount of a loss. If there is other insurance, losses are settled on a pro rata basis except that coverage ona nonowned auto is excess over other collectible insurance. PAP ENDORSEMENTS As with the homeowners policies, there are several ISO endorsements that can be addedto the homeowners policies to better meet the needs of certain individuals. Someendorsements apply to more than one of the four coverages previously discussed; others applyto one specific coverage only. Several of these endorsements are briefly described. Some of these endorsements are automatically included in PAPs by some insurancecompanies.Extended Nonowned Coverage One significant exclusion in the PAP for many policyowners applies to liability and medicalpayments coverage for vehicles furnished or made available for the regular use of the namedinsured and family members. This exclusion, for example, eliminates coverage if an insuredregularly drives a company car. Extended Nonowned Coverage can be used to delete this exclusion in the PAP. However,any person who needs this coverage must be specifically listed in the endorsement. Forexample, if only the named insured is listed, there is no coverage for a spouse or other familymember who might drive the vehicle. The endorsement also deletes the exclusions that apply to (1) a nonowned vehicle usedin business as long as the business is not the automobile business, and (2) a nonowned vehicleused as a public or livery conveyance. The addition of this endorsement also results in coverage if the insured is sued by a fellowemployee as a result of an accident while driving a vehicle covered by the endorsement. This 77

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEcoverage is often excluded under business policies of the employer of the driver and fellowemployee.Named Nonowner Coverage This endorsement is for use by persons who do not own an automobile but want to haveprotection when they drive nonowned vehicles. Parts A, B, and C of the PAP are available. If the named insured acquires an automobile, there is coverage for 30 days to give theinsured time to specifically insure the vehicle.Miscellaneous Type Vehicle Endorsement This endorsement is used to cover miscellaneous types of owned vehicles, such as motorhomes, motorcycles and similar type vehicles, all-terrain vehicles, dune buggies, and golfcarts. Each vehicle is listed in a schedule, and the same coverages that apply to automobilesin the PAP can be purchased. Liability for bodily injury to anyone who occupies an insured vehicle can be excluded. Thisresults in a reduced premium, but it is appropriate only if passengers are never carried.Snowmobile Endorsement An endorsement similar to the Miscellaneous Type Vehicle Endorsement can be used toinsure snowmobiles.Limited Mexico Coverage Without an endorsement, the PAP does not provide coverage when an insured is drivingin Mexico. It is necessary that acceptable coverage be obtained through a licensed Mexicaninsurance company before a trip is taken to Mexico. To drive in Mexico without such coverageis a criminal offense. Coverage can be purchased at the border. Alternatively, it may bepossible to add this protection to an existing PAP if an insurance company is a member of aforeign insurance association. However, this is not the purpose of Limited Mexico Coverage. The endorsement is primarilyused by people who live near the border and occasionally take brief trips to Mexico. All policycoverages can be purchased for losses that occur in Mexico within 25 miles of the UnitedStates’ border and the coverage applies only while the insured is in Mexico for 10 days orless. The insurer will only defend the insured under the liability coverage if the original suitis brought in the United States and if the suit does not involve a Mexican citizen or resident.Repairs to a covered auto are not covered if they are made in Mexico unless the vehicle cannotbe driven in its damaged condition. It is important to point out that the endorsement is effective only if the insured has alsopurchased liability insurance through a Mexican insurer, and coverage is excess over thatpolicy. The main advantage of the endorsement is the ability to have higher liability limits thanthe Mexican insurance as well as other policy coverages.Coverage for Damage to Your Auto (Maximum Limit of Liability) Insurers are often reluctant to write Part D coverage on antique or restored vehiclesbecause of the difficulty in determining value when a loss occurs. This endorsement lists a 78

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEstated amount, which becomes the maximum that the insurer will pay for a loss. However,this does not mean that the stated amount is automatically paid if a total loss occurs. Theinsurer’s maximum limit of liability is the smallest of three amounts (less the applicabledeductible):· the stated amount selected· the actual cash value of the stolen or damaged property· the amount necessary to repair or replace the property with property of like kind and qualityJoint Ownership Coverage This endorsement is used to modify the definition of insured when individuals are notmarried, reside together, and jointly own one or more vehicles. It can also be used whenrelated persons jointly own a vehicle but do not live together.Auto Loan/Lease Coverage In some cases, the total loss to a leased vehicle or a financed automobile results in theinsured’s being required to pay the lessor or lending company an amount that exceeds theactual cash value of an insured vehicle. The purpose of this endorsement is to fill that gap. The endorsement provides indemnification for any unpaid lease or finance amounts otherthan the following: overdue payments at the time of loss, financial penalties under a leasefor excessive use or abnormal wear and tear, security deposits not refunded by a lessor, costsfor extended warranties or life and health insurance purchased, and carryover balances fromprevious leases or loans.Towing and Labor Costs Coverage This endorsement pays for towing and labor if a covered auto or nonowned auto is disabledfor any reason. The limit of coverage is a stated amount, such as $25, $50, or $100 perdisablement. The labor costs of repair work (such as changing a flat tire) are covered only atthe place of disablement. This endorsement can be used only for automobiles that are already covered under PartD of the PAP. It is not unusual for the towing and labor coverage to be a standard part of aninsurance company’s PAPs if collision coverage is purchased.Other Endorsements There are several other endorsements that provide coverage either for property that isexcluded under the PAP or where the amount of coverage is limited. These endorsementsare very briefly described below:· Optional Limits Transportation Expense Coverage. The $20 per day and $600 maximums that apply to transportation expenses are increased to $30 and $900, respectively, under this endorsement.· Customizing Equipment Coverage. This endorsement can be used to insure custom furnishings and/or equipment in a pickup or van.· Audio, Visual and Data Equipment and Media. This endorsement provides coverage for electronic equipment other than that designed solely for reproduction of sound. The 79

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE equipment must be (1) permanently installed or (2) removable from a permanently installed housing unit and designed to operate solely from the vehicle’s electrical system. There is a limited amount of coverage ($200) for tapes, records, discs, and other media.· Covered Property Coverage. This endorsement provides coverage for awnings, cabanas, and other similar equipment designed for use with insured vehicles, such as vans, camping trailers, or motor homes. HARD-TO-INSURE DRIVERS records and often include those who are youthful or who have little driving experience.Statistics clearly show that these groups have a high probability of being involved in futureaccidents. Another category of hard-to-insure drivers consists of persons with very high-poweredand/or expensive automobiles. However, there are insurers that specialize in this market,particularly for individuals who have good driving records. The number of hard-to-insure drivers varies significantly from state to state with thenumber being much higher in those states where insurance companies have made less-than-desired profits or contributions to surplus on their automobile insurance business. This usuallyresults from the state insurance department’s unwillingness to grant desired rate increases.Insuring Hard-to-Insure Drivers· Specialty high-risk auto insurers· State automobile insurance (assigned risk) plans· Joint underwriting associations· Reinsurance facilities Hard-to-insure drivers can usually find some coverage in what is referred to as theresidualmarket (sometimes referred to as the shared market or substandard market). This marketconsists of specialty insurers and state programs to make insurance available, though notnecessarily affordable. However, a small number of drivers with very poor driving records(for example, several drunk driving convictions) may still be unable to obtain insurance fromeither of these sources in some states.Specialty Insurers There are insurers who specialize in writing coverage for high-risk drivers. They chargesubstantially higher premiums than in the standard marketplace and often provide morelimited coverage. For example, the limits for liability coverage are sometimes only thosespecified in a state’s financial responsibility or compulsory insurance law. However, it is notunusual to have optional higher limits available. Medical payments coverage can also be limited, and collision coverage, if written, is oftensubject to a high deductible. 80

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEState Programs State programs for hard-to-insure drivers also tend to have higher-thannormal premiums(often much higher) and more limited coverage than the standard marketplace, but significantvariations exist among the states. The state programs usually follow one of three models:· automobile insurance plans· joint underwriting associations· reinsurance facilities Automobile Insurance Plans An automobile insurance plan is the type of program that exists in most states. To beeligible, an applicant must show that he or she has been unable to obtain coverage withina recent specified period of time. Each automobile insurer in the state is then assigned its proportionate share of the driversin the plan based on the total volume of automobile insurance written in the state. Becauseof this procedure, these plans were once known as assigned risk plans, but this terminologyis no longer in vogue because of its perceived negative connotation. The company to which the policy is assigned issues and services it. It also receives anyprofits or absorbs any losses from the policies it writes.Joint Underwriting Associations Under this arrangement, there is an association of automobile insurers, and all businessof the association is placed in a pool. Any underwriting losses are shared by the insurancecompanies in proportion to the automobile insurance premiums written in the state. A limited number of companies are designated to issue and service policies on behalf ofthe association.Reinsurance Facilities Under this approach, insurers must accept all applicants who have a valid driver’s license,and they issue and service policies for these applicants. However, if an applicant is consideredhigh-risk, the insurer has the option of assigning the premiums for the applicant to thereinsurance facility. All underwriting losses from this type of business are shared by allautomobile insurance companies in the state in proportion to automobile insurance premiumswritten. SHOPPING FOR AUTOMOBILE INSURANCE The cost of automobile insurance varies significantly in a highly competitive market. Infact, studies by some state insurance departments show that the premium for a hypotheticalinsured can be two to four times higher if purchased from certain insurance companies ratherthan others. Therefore, it pays to shop around. Of course, as previously stated, factors suchas the financial strength of the insurer and the service from the company and its agents alsoneed to be evaluated. 81

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Many factors affect automobile insurance rates, and some of them are not readily withinthe control of the insured at the time automobile insurance is purchased. These factors ‘includethe age, sex, and marital status of drivers, the use of the insured vehicles (that is, driving towork, pleasure, or business), and the geographic territory where vehicles are normally usedand garaged. Other factors are subject to some control by the insured but not necessarily at the momenta policy is purchased. These include driving record and the type and age of vehicles owned.The latter is particularly significant for physical damage coverage where the Part D premiumcan be several times higher for a new luxury automobile than a van that is several years old. Even though these previously mentioned factors are commonly used by most companiesto determine premiums, they can be applied differently among companies. For example,premiums are higher if a family has a teenager who drives. If the teenager primarily or solelydrives the old family van, many companies will rate this vehicle for the teenager. However,other companies will assign the teenage driver to the highest-rated vehicle even if he or shedoes not use it. Other factors can also affect automobile insurance premiums for one or more policycoverages. Many companies give discounts for at least some of the following:· a driver education course for young drivers· a student with good grades· a defensive driving course· senior citizens, but the discount may require the periodic attendance of a classroom program on driver education· nonsmoking· anti-theft devices in a vehicle· airbags or automatic seat belts in a vehicle· reduced use of a vehicle by a student who is away at school over a specified distance from home, provided the student does not have an insured vehicle at school· no accidents for some period of time, such as 3 years· other policies with the same company. For example, some insurers give a discount if they write both automobile insurance and homeowners insurance for a policyowner. Another important factor in the cost of automobile insurance is the coverages selected,their limits, and deductibles. For policyowners with an umbrella liability policy, the limits forliability insurance only need to be those required by the umbrella policy. If a policyowner andfamily have an adequate medical expense insurance plan, it is probably unnecessary to carryany more Part B coverage for medical payments than might be required in a state. However,it should be pointed out that this coverage applies to more than just family members and alsocovers funeral expenses. Similarly, if a policyowner and family members have adequatemedical expense and disability income insurance, the need to carry other than minimallyrequired no-fault benefits should be evaluated. Financial planners often disagree over the appropriate limit of uninsured/underinsuredmotorists coverage. Some argue that it should be the same as a policy’s liability limits. Others82

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEargue that this is unnecessary if other insurance exists that will pay for a family’s medicalexpenses and lost wages. However, higher limits do give an insured the right to collectdamages for pain and suffering. Finally, there are ways to lower Part D premiums. Higher deductibles, particularly oncollision coverage, can result in significant savings over a period of years. In addition, apolicyowner must evaluate the need for coverage on an older vehicle. For example, there arethose who argue that it is probably not cost-effective to carry physical damage coverage ona vehicle that is worth as little as $3,000 or $4,000. Obviously this threshold amount variesby factors such as the net worth and risk tolerance of an individual. PERSONAL UMBRELLA LIABILITY INSURANCE In today’s litigious society, it is important to carry broad liability insurance of sufficientlyhigh limits. Without this coverage, many individuals face the possibility of having assets and/or income seized to pay a legal judgment. The personal umbrella liability policy substantiallyaccomplishes this task for individuals. However, it still contains limitations and exclusions anddoes not provide liability protection for every situation that might confront an individual. While once thought of as a policy only for the wealthy with large asset accumulations and/or high incomes, the magnitude of today’s legal awards makes this policy appropriate for manymiddle-income individuals as well. Unlike homeowners insurance and automobile insurance, there was historically nostandard personal umbrella liability policy, and each insurer that offered this type of insurancedeveloped its own policy. The situation has changed somewhat with the recent developmentof an ISO policy. While insurers can now adopt the ISO policy, most continue to use their ownpolicies. Unfortunately, this results in significant variations among policy forms. As a result,the following discussion is general in nature. However, it is important to remember that theappropriate policy for a particular individual is the one that best covers his or her specific lossexposures, and a thorough evaluation of policies is often appropriate. The following discussion looks at the general nature of personal umbrella liability policies,the underlying coverage requirements, the persons insured, and the exclusions that oftenexist.General Nature The personal umbrella policy is designed primarily to provide liability coverage forcatastrophic legal claims or judgments. The smallest limit of coverage available from mostinsurers is $1 million, and limits up to $5 or $10 million are often available. The policy coversnot only bodily injury and property damage liability but also personal injury liability. The personal umbrella policy requires the policyowner to carry certain underlying liabilitycoverages of specified minimum amounts. These normally include automobile liabilityinsurance, watercraft liability insurance for large owned watercraft, and personal liabilityinsurance under a homeowners or other policy. If a claim is made under an underlying policy,the umbrella policy will pay only after the limits of the underlying policy are exhausted. Theumbrella policy is excess and will pay up to its limits so that the insured effectively has anamount of coverage equal to the sum of the limits of the umbrella policy and the underlyingcoverage. 83

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDECharlene Smith has a $1 million umbrella policy and an automobile liability policy ofthe required underlying limit of $250,000 per person. If a legal judgment of $700,000is obtained against her by an injured party, the underlying auto policy will pay $250,000and the umbrella policy will pay the remaining $450,000. If an underlying policy does not cover a loss that is not excluded from a personal umbrellapolicy, the umbrella policy is the primary insurer and will cover the loss subject to aself-insuredretention (SIR). The SIR is like a deductible and requires the policyowner to pay the first portionof the loss—typically $250. However, SIR amounts vary by company and can be $500 or$1,000 or even higher. The SIR is not applicable to losses covered by underlying policies. Notethat the term drop-down coverage is often used to describe the situation when an umbrellapolicy covers a loss not covered by underlying insurance. In effect, it drops down to cover theentire loss, other than the SIR, rather than act as excess coverage. In addition to paying liability claims, most personal umbrella policies pay defense coststhat are not payable by underlying policies and provide various other supplementarycoverages similar to those in the homeowners and PAP policies (premiums on appeal bonds,expenses incurred at the company’s request, and so on). Finally, some states require that the policyowner be given the right to extend coverageunder a personal umbrella policy to uninsured and underinsured motorists coverage.Underlying Coverage Requirements A requirement of the personal umbrella policy is that the policyowner maintain certainunderlying coverages of specified minimum amounts. Some insurers also require that theseunderlying coverages be purchased for them. At a minimum, the following underlying coverages are required, and the amounts shown,while they vary from company to company, are not unusual.· automobile liability insurance: $250,000/$500,000/$50,000 or $300,000 to $500,000 single limit· homeowners liability insurance: $100,000 or $300,000· watercraft liability insurance if the policyowner owns a boat: $300,000 or $500,000 Other underlying coverages for recreational vehicles, aircraft, and employer liability mayalso be required, particularly if liability from these vehicles or situations is covered under thepersonal umbrella liability policy. If the policyowner fails to maintain the required underlying coverages, the insurer will payonly the amount it would have been required to pay if the underlying policies had been inforce. In the previous example, if the insured’s liability limits had been $50,000, rather thanthe required $250,000 limit, the umbrella policy would still only pay $450,000. The autopolicy would pay $50,000 and the insured would have an uninsured loss of $200,000. A premium reduction may apply if the underlying limits are greater than those requiredby the personal umbrella policy. 84

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEWho Are the Insureds? Personal umbrella policies provide coverage for the named insured, spouse, and familymembers living in the household. Other residents of the household who are under the ageof 21 and in the care of an insured are usually covered. Other persons or organizations who are driving a named insured’s or spouse’s automobileor who are liable because of actions of an insured with respect to an automobile are also usuallycovered in a manner similar to coverage under the PAP. Coverage for these persons ororganizations may or may not exist with respect to watercraft and recreational vehicles. Most policies also extend coverage to persons or organizations who have custody of aninsured’s animals other than businesses such as kennels, veterinary hospitals, and stables.What Exclusions Apply? At one time, personal umbrella policies were relatively inexpensive and contained few ofthe exclusions found in homeowners and automobile policies. However, claims experienceover the years has lead to increased premiums and more numerous exclusions. In fact, someumbrella liability policies now have almost the same exclusions that are in homeowners andautomobile policies. However, the number and nature of the exclusions vary significantlyamong companies, and exclusions should be evaluated carefully when selecting a personalumbrella policy. For example, an individual who is actively involved in recreational boating might frequentlyoperate watercraft owned by other persons. Some policies cover damage to such watercraftwhen an insured is liable; other policies exclude coverage for nonowned watercraft that arein the insured’s care, custody, or control. Some of the exclusions often found in personal umbrella policies include liability that arisesfrom the following:· intentional injury unless it results from actions to prevent or eliminate danger or to protect persons or property· government programs such as workers’ compensation· damage to property owned by an insured· damage to certain types of nonowned property in an insured’s care, custody, or control. There is seldom a blanket exclusion for all property of this type, but damage to certain classes of property (for example, automobiles, watercraft, and aircraft) is often excluded. In addition, damage to property for which an insured has assumed contractual liability is also often excluded. The insured should have some type of property insurance in such situations.· the use of watercraft, and possibly other recreational vehicles, unless underlying coverage applies· the use of aircraft· business pursuits, other than those arising out of a personal automobile or when underlying coverage exists 85

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE· the rendering or failure to render professional services. A few insurance companies will cover this loss exposure for an additional premium.· directors’ and officers’ activities, other than those performed for a not-for-profit organization but only if the insured receives no compensation other than reimbursement of expenses· transmission of communicable diseases· sexual molestation, corporal punishment, and physical or mental abuse NO-FAULT AUTO INSURANCE The term “no-fault” auto insurance is often used loosely to denote any auto insuranceprogram that allows policyholders to recover financial losses from their own insurancecompany, regardless of fault. But, in its strictest form, no-fault applies only to state laws thatboth provide for the payment of no-fault first-party benefits and restrict the right to sue, theso called “limited tort” option. The first party benefit coverage is known as personal injuryprotection (PIP). Under current no-fault laws, motorists may sue for severe injuries and for pain andsuffering only if the case meets certain conditions. These conditions, known as a threshold,relate to the severity of injury. They may be expressed in verbal terms (a descriptive or verbalthreshold) or in dollar amounts of medical bills, a monetary threshold. Some laws also includeminimum requirements for the days of disability incurred as a result of the accident. Becausehigh threshold no-fault systems restrict litigation, they tend to reduce costs and delays inpaying claims. Verbal thresholds eliminate the incentive to inflate claims that may exist whenthere is a dollar “target” for medical expenses. However, in some states the verbal thresholdhas been eroded over time by broad judicial interpretation of the verbal threshold language,driving up costs. Currently 12 states and Puerto Rico have no-fault auto insurance laws. Florida, Michigan,New Jersey, New York and Pennsylvania have verbal thresholds. The other seven states —Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota and Utah — use amonetary threshold. Three states have a “choice” no-fault law. In New Jersey, Pennsylvaniaand Kentucky, motorists may reject the lawsuit threshold and retain the right to sue for anyauto-related injury. Colorado’s law reverted back to the tort liability system in July 2003.RECENT DEVELOPMENTSMassachusetts: In August 2006 the Massachusetts Supreme Judicial Court overturned a lower court ruling that said the creation of an assigned risk plan is contrary to existing law. In a unanimous decision, the high court said that the insurance commissioner. Julianne Bowler, has the power to overhaul the state’s auto insurance residual market plan, paving the way for another attempt at auto insurance reform in 2007. Opponents of reform had argued that only the legislature could bring about change. The commissioner had proposed, as an entry point for reform of the entire auto insurance system, the phasing out of the current plan and its replacement with an assigned risk plan. Assigned risk plans exist in many states. Applicants for insurance who are rejected by the voluntary market are assigned to insurers on a rotating basis, according to each company’s market share. The commissioner was sued by two insurance companies that benefit most from the status quo to prevent her from implementing her plan. 86

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEA study of the Massachusetts auto insurance system conducted by Robert Shapiro, a prominent economist and a former U.S. Undersecretary of Commerce for Economic Affairs in the Clinton Administration, shows why the system needs to be revamped. Among its major findings are the following: Massachusetts drivers paid 28 percent more in 2003 for auto insurance than the national average; the state’s complex pattern of rate subsidies results in 87 percent of the state’s drivers subsidizing the rates paid by the other 13 percent; and the state’s auto insurance claims include a much higher proportion of fraud and claim build- up than the national average, in some cases more than twice as much.Florida: Governor Jeb Bush vetoed legislation extending the state’s no-fault law to January 1, 2009. Most of the reforms that he and others, including some insurers, favored had been stripped from it. The governor has promised to revisit no-fault reform in the immediate future.The only significant provision in the measure, SB 2114, was $1.2 million in additional funding for antifraud efforts including a provision that crash reports contain detailed information about the crash incident, particularly the names and addresses of all drivers and passengers in the vehicle. The change in crash report forms was designed to prevent “jump-ins,” the practice of fraudulently adding passengers, some of whom do not exist or were not present at the time of the crash. The no-fault law will end on October 1, 2007 if the legislature takes no further action to extend it.A November 2005 report by the state’s Senate Banking and Insurance Committee had included recommendations designed to reduce the cost and curb abuse of the law, among them provisions to cap attorneys’ fees; limit fees to doctors, chiropractors and other medical care providers for services paid under personal injury protection (PIP) coverage; and curb abuse of the medical care system, in particular unnecessary medical services, by crash victims. Insurers doing business in the state are divided over whether to support reform of the system or a return to a tort-based system. Proponents of reform point to what has happened in Colorado since no-fault was repealed (see Colorado, below) while opponents say that the system is broken beyond repair.A study by the Property Casualty Insurers of America (PCI) shows that auto injury claim costs have risen faster in Florida than the national average. During the first quarter of 2005, the average PIP claim cost shot up more than 17 percent, resulting in an overall increase of 44 percent since 2000. In terms of average auto insurance expenditures, Florida ranked 5th in 2003, up from 7th in 2002, according to NAIC data. Among the explanations for soaring costs are a higher-than-average number of office visits to medical practitioners, higher health care costs and more sprain and strain soft-tissue injury cases that are harder to evaluate both for the degree of injury and recovery. These higher costs make it easier to reach the tort-threshold limit of $10,000 and to sue for additional compensation, weakening the basis for the no-fault system.New York: In New York City, a bill aimed at curbing auto insurance fraud, particularly medical clinics established specifically to file fraudulent no-fault claims, was signed by Mayor Michael Bloomberg in 2006. The legislation requires medical clinics that handle a large volume of no-fault claims to file information with the City about their ownership, management and the percentage of medical bills that are no-fault claims. The legislation also prohibits the hiring of “runners” to help solicit individuals to participate in no-fault fraud. New York City is known to be at the center of much of the fraudulent activity in the state. An Insurance Research Council study found that although the city’s residents are87

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE not more seriously injured than other New York State residents, their claims cost far more and are far more likely to be seen as involving fraud or some degree of “build-up” of legitimate claims by professionals who reviewed the files. Recent legislation requiring the purchase of an index number for all court filings may also reduce the number of fraudulent cases.In New York State, following the implementation of a fee schedule for medical payments and changes in the law that shortened the period of time for filing PIP claims and enhanced anti-fraud activities, losses dropped significantly, according to the state’s insurance department. From year-end 2002 to June 30, 2004 the average personal injury claim dropped from $8,489 to $6,229. Looked at another way, New York State’s auto insurers were paying out 86 cents in claims for every premium dollar collected in 2002. By June 30, 2004 they were paying out 61 cents in claims. As a result, many auto insurers have lowered their rates. Rates for drivers in the state’s assigned risk plan, its auto insurance market of last resort, dropped 2 percent in August 2004.Colorado: Legislation recommended by the Colorado Interim Auto Insurance Committee, which was set up to consider the impact of the state’s transition from a no-fault to a tort- based auto insurance system, failed to pass. Most bills dealt in one way or another with medical care coverage and would have increased the cost of auto insurance, negating the savings derived from the switch to a tort-based system. The state switched from a no-fault system to a tort-liability based system in 2003 because soaring legal costs and over- utilization and abuse of the benefits available under PIP were making auto insurance unaffordable. The effects can be seen in the state’s ranking for average auto insurance expenditures, which rose from the 12th highest ($807.51) to the 8th highest ($914.04) between 2001 and 2002, according to data from the National Association of Insurance Commissioners (NAIC), a jump of more than $100 in just 12 months. A study of premiums shortly after the 2003 change and in January 2005 confirms that many policyholders saved a significant amount as a result of the change. Rates dropped between 19.5 and 27.1 percent between June 2003 and January 2005, depending on the coverages selected.But while policyholders benefited from the drop in premiums, many of the entities that were dependent on the no-fault system’s generous benefits, such as trauma care units, emergency medical care providers and lawyers, lost income. For example, payments for medical treatment resulting from auto accidents under the tort system generally come from a person’s health insurance, which compensates medical practitioners on a discounted basis. While first party (policyholder) medical care coverage is available in Colorado, insurers are not required to offer it and few policyholders that have adequate health insurance purchase it. The governor has said that his priority is to keep auto insurance affordable. In May 2006, legislation was passed that will allow emergency medical care and trauma care personnel to be compensated for unreimbursed costs.New Jersey: Insurers are urging lawmakers to modify a June 2005 New Jersey Supreme Court ruling in what is known as the DiProspero case that could allow many more people involved in accidents to sue for pain and suffering, effectively negating the cost advantages of choosing no-fault coverage. The DiProspero ruling weakened the verbal threshold that is designed to keep all but the most seriously injured drivers from suing for noneconomic damages. At issue is whether the New Jersey legislature, in crafting changes to the no- fault law in 1998 to attract more insurers to the state and reduce the cost of auto insurance, intended to lower the threshold for lawsuits and thus allow more cases to go to court. New88

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE Jersey’s no-fault law was introduced in 1973 with a monetary threshold which in 1988 was changed to a verbal one. In a precedent setting case in 1992, the state Supreme Court ruled that to meet the requirements of the verbal threshold the injury had to have a serious impact on the plaintiff’s life.The language defining the threshold was modified in 1998 when the state auto insurance law was completely revamped. At the time, insurers said that allowing damages for minor injuries would cost policyholders choosing the lawsuit limitation option significantly more. Since then, cases that would not have met the original threshold have been relitigated. Until now, the state Supreme Court had declined to review decisions by lower courts which accepted that the overall purpose of the law was to limit the number of lawsuits. However, in the DiProspero case, the high court reversed lower court decisions, noting that if the legislature had intended to make it more difficult for accident victims to obtain an award through the courts, then it should have written the statute accordingly.Several bills have been introduced into the New Jersey legislature since the ruling. At issue is the ruling’s long-term impact. So far there has been no significant increase in auto injury case filings, according to the state’s bar association. The bills would require lawsuits for noneconomic damages to be limited to injuries that are serious and permanent and have a serious impact on the plaintiff’s life. Insurers are also pushing for the adoption of a medical fee schedule, a list of maximum charges for certain common treatments and procedures, which would help contain soaring medical care costs. In September 2006 the insurance department made public its proposal for a medical fee schedule based on a percentage of Medicare’s fee schedule for medical care providers.Minnesota:In March 2005, the Senate Commerce Committee voted against a bill that would have reformed the state’s no-fault law. However, its sponsor, Sen. Linda Schied, is continuing to push for a change in the law although no-fault reform met with little support in the legislature again in 2006. Weaknesses in Minnesota’s no-fault system have encouraged fraudulent claims which, in turn, have pushed up premiums making auto insurance in Minnesota much more expensive than in surrounding states. Because of the low threshold for lawsuits, the state’s drivers are paying for the costs of both a traditional tort system and mandatory no-fault coverage, insurance industry observers say. The Senator’s bill would have basically adopted the state’s list of fees for medical care under workers compensation, its billing codes and its treatment standards in an effort to eliminate excessive and unnecessary care and reduce costs. In addition, the measure would have changed the threshold for lawsuits from a dollar amount to a verbal definition. The current law allows cases to proceed to court when medical care expenses exceed $4,000, an amount that can be easily reached by exploiting the system. The proposed verbal threshold would have prohibited recovery for noneconomic damages through the courts unless the injury resulted in serious permanent impairment of a bodily function or death.BACKGROUND Currently, state auto liability insurance laws fall into four broad categories: those basedsolely on the traditional tort liability system; those that require an insurance company to payfirst-party (policyholder) benefits, regardless of who was at fault in the accident, but retainthe right to sue as in tort liability states; those that provide no-fault first-party benefits butrestrict the right to sue except under certain conditions; and those that provide a choicebetween the traditional liability system and a no-fault system. These alternative systems have89

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEevolved over time as consumers, regulators and insurers have sought ways to lower the costand speed up the delivery of compensation for auto accidents. In the early 1990s, the concept of pure no-fault, which prohibits most lawsuits for bodilyinjury, began to garner support. Pure no-fault addresses several societal concerns: the wasteof resources and the inequities in the liability system and the need to have affordable coveragefor medical care and rehabilitation costs. The first attempt at a pure no fault system was “pay-at-the-pump,” a scheme to pay for no-fault auto insurance through a fee collected on gasolinesales. The “pay-at-the-pump” initiative campaign failed in all states in which the plan wasconsidered, including California, due to opposition to the gasoline usage-based fee but thepure no-fault idea was incorporated into a variety of legislative proposals in various statesincluding both Hawaii and California. Proposals introduced in Congress for a “choice” pureno-fault auto insurance system never reached the floor for a vote. More recently, some auto insurance reformers have been proposing the elimination ofnoneconomic damages from tort liability coverage as a way to reduce costs, with optionalcoverage provided as a first-party coverage with a pre-determined limit. The premium savingswould come not only from the elimination of coverage but also from the reduced temptationto inflate medical costs to boost noneconomic damages which are generally calculated as apercentage of economic damages. Variations on the No-Fault Concept: In the 1960s, the traditional auto liabilityinsurance system became the target of public criticism. Dissatisfaction was expressed not onlyby those purchasing auto insurance but by companies and agencies marketing it and by stateofficials regulating it. The debate focused on the often expensive and time-consuming processof determining who is at fault — legally liable — when accidents occur. To reduce the delays and inefficiencies of the system, legislation was introduced in the1970s in many states, which allows accident victims to recover such financial losses as medicaland hospital expenses and lost income from their own insurance companies. In the states thathave adopted such laws, the major variations involve: dollar limits on medical and hospitalexpenses, funeral and burial expenses, lost income and the amount to be paid a person hiredto perform essential services that an injured non-income producer is unable to perform. Twenty-four states, the District of Columbia and Puerto Rico now have laws that allowpolicyholders to obtain compensation for auto accidents from their own insurers. Of these,12 states and Puerto Rico have placed restrictions on the right to sue either through a monetarythreshold, which allows a suit to be filed for pain and suffering when medical expenses reacha certain stipulated amount, or through a descriptive or verbal threshold, which allows suitsonly when the injury incurred meets the criteria for a serious injury as defined (hence the termverbal or descriptive) by state statute. These are the only true no-fault states. The states where first-party insurance benefits have been added on to the traditionalliability system are known as “add-on” states. In add-on states there are no restrictions onlawsuits, first-party coverage may not be mandatory and first-party benefits may be lowerthan in true no-fault states. Pennsylvania, formerly an “add-on” state, began offeringconsumers the choice between a verbal threshold and no restrictions on lawsuits in July 1990.(New Jersey and Kentucky also offer such a choice, except that Kentucky’s threshold ismonetary). This is Pennsylvania’s second no-fault law. An earlier law was repealed in 1984.90

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE The District of Columbia has neither a true no-fault nor an add-on law. It offers driversthe option of no-fault benefits or fault-based coverage. In the event of an accident, a driverwho originally chose to receive no-fault benefits has 60 days to decide whether to receivethese benefits or to take the other party to court. This means that, in effect, there are norestrictions on lawsuits. In the late 1980s, Project NEW START, a national nonprofit consumer organization thatwas devoted to promoting a new auto insurance policy, developed legislation that would offermotorists a choice between a traditional liability-based policy and a strict no-fault policy.Motorists who chose the no-fault program would have had the option to purchase personalinjury protection (PIP) above the basic limits and also coverage for pain and suffering. In thefirst full year after the law took effect, drivers who chose the no-fault policy would have seentheir premiums reduced by a significant amount — at least 20 percent of the statewideaverage premium for insurance required by the state’s financial responsibility law, accordingto the plan. Another version of choice no-fault was known as the O’Connell plan, afterUniversity of Virginia Law Professor Jeffrey O’Connell, who, along with Robert E. Keeton, firstproposed a no-fault accident compensation system in 1965. This plan allowed a policyholderwho chose the tort system and was involved in an accident with a no-fault driver to file a claimunder the uninsured motorist provision of the policy. The no-fault driver could not sue andwas immune from suits. Various modifications of these basic proposals have since been introduced in many states,along with measures known as “no-frills” policies that would provide no-fault basic coveragefor economic losses to all good drivers in the state for a standard statewide premium. NewJersey’s choice no-fault law, passed in 1998, comes closest to this concept. The New Jersey law offers consumers a choice in the level of protection they buy. The basicpolicy provides $15,000 in PIP with coverage of $250,000 for catastrophic injuries, $5,000in property damage liability, an optional $10,000 in bodily injury liability and no uninsured/underinsured motorist coverage. Additional PIP coverage options, all with coverage forcatastrophic injuries, are available. Those who do not specifically choose an option receivethe standard $250,000 full coverage. New Jersey also created “dollar-a-day” car insurancethat provides low income drivers with up to $15,000 for emergency care and up to $250,000for the treatment of catastrophic injuries such as injuries to the spinal cord or brain. A critical decision in developing a choice no-fault system is how the choice law is framed.In New Jersey, applicants for insurance are presumed to have opted for the verbal thresholdon lawsuits unless they specifically reject it; in Pennsylvania, the opposite is true. Pennsylvaniapolicyholders are assumed to want unrestricted access to the courts unless they specificallyrequest the verbal threshold. As a result, more than 85 percent of policyholders in New Jerseyhave policies restricting lawsuits. By contrast, less than 50 percent have this kind of policy inPennsylvania, with the largest percentage being drivers in Philadelphia, where rates arehighest. (This is due, in part, to a high propensity among the city’s drivers to file bodily injuryclaims after an auto accident. More than 55 percent of accidents that cause some physicaldamage also result in a bodily injury claim, while in other parts of the state the ratio of suchclaims to physical damage claims is only 17 percent, insurers report.) In 1992, Professor Jeffrey O’Connell and Michael Horowitz, Senior Fellow at TheManhattan Institute, proposed another choice no-fault program estimated to lower prices91

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEnationwide by 20-30 percent. Under the O’Connell/Horowitz plan, drivers could choose no-fault or tort liability but the entire system would be converted to a first-party payment system.Thus drivers choosing compensation under the tort system would be paid by their own insurersup to the level of coverage that they had elected to purchase. (Under the current system, thelevel of coverage, in effect, is selected by the person being sued.) Drivers electing the limiton tort liability would be able to sue for actual damages in excess of their own coverage andwould be compensated for reasonable attorney’s fees. The savings would come principallyfrom the elimination of the pain and suffering component in the personal injury protectionpackage. Potential pain and suffering payments now act as an incentive to build up medicalclaims to the tort threshold. This became the basis for the federal auto choice plan, mentionedearlier. The various pure no-fault proposals considered in Hawaii and California incorporatedsome elements of these plans but went one step further in that they eliminated almost alllawsuits. Pay-At-The-Pump: Beginning in the early 1990s, a concept that melded a no-fault autoinsurance system with funding through surcharges on gasoline was considered in severalstates, including California where its supporters worked to put it before the voters as a ballotinitiative. However, overwhelmed by the fierce opposition to the concept by Californiabusinesses and suburban and rural motorists who would have shouldered the brunt of thegasoline tax increase, the coalition for Common Sense Auto Insurance withdrew theirproposal. The initiative, called the Uninsured Motorist Act, because it would force all driversto pay something towards the cost of auto crashes, was sponsored by financial columnistAndrew Tobias. The measure would have imposed a 25-cent per gallon surcharge on gasolineand a $141 auto registration surcharge to fund the state-run insurance operation. Bad driverswould have paid an additional surcharge. The pay-at-the-pump concept is based on the premise that the primary determinant ofaccident costs is miles driven, when in fact miles driven plays only a minor role in the costof accidents. Research suggests that the major determinant is traffic density. Since the concept first surfaced in California, pay-at-the-pump bills have been introducedin Colorado, Massachusetts, Nevada and Texas and the concept was considered by the Councilof the City and County of Honolulu. In Florida, the House Insurance Committee studied thefeasibility of the pay-at-the-pump concept. A pay-at-the-pump bill has been introduced inColorado periodically but it has garnered little support. And in Louisiana and Hawaii, as partof an effort in 1997 to reduce auto insurance prices, committees were formed to study theidea. Pay-at-the-pump’s greatest virtue is that is would eliminate the cost of litigation, like atraditional no-fault system. Beyond that, the proposal has serious flaws. First, instead of payingone premium every six months, drivers would be taxed to pay for insurance in hundreds oftransactions throughout the year. They would pay every time they bought gasoline and whenthey registered their car. In addition, their health insurance premiums would rise since pay-at-the-pump pays only for unreimbursed medical care costs. Second, it treats all drivers alike by making how much gasoline a person uses the primarydeterminant of how much a person will pay for insurance instead of an individual’s driving92

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEexperience and driving record, and the type of vehicle that person drives. Thus, a parent drivinga group of ten-year-olds to a neighborhood baseball game in a minivan would pay more forinsurance coverage than an eighteen-year old cruising around on a Saturday night, despitethe fact that adults as a group are safer drivers than teenagers and minivans are among thesafest types of cars. Small cars use less gasoline than minivans so drivers of small cars wouldpay less for their insurance than minivan drivers, even though small car collision claims are75 percent higher and small car occupants more likely to suffer serious injury in a collision. Third, it places a burden on those who have to drive long distances to get to work. Peoplewho drive long distances to work in outlying areas, for example, could end up paying twiceas much for insurance coverage as under the current system because pay-at-the-pumpignores distinctions between driving conditions in congested city areas where claims are highand driving conditions in the outer suburbs and rural areas. Overview of Enactment of Laws: The jurisdictions that have forms of true no-fault autoinsurance and the dates on which the laws originally became effective are shown below.Compulsory first-party/liability insurance; some restrictions on lawsuits:Hawaii, September 1, 1974Kansas, January 1, 1974Kentucky, July 1, 1975Massachusetts, January 1, 1971Michigan, October 1, 1973Minnesota, January 1, 1975New Jersey, January 1, 1973New York, February 1, 1974North Dakota, January 1, 1976Pennsylvania, July 1, 1990 (earlier law passed on July 19, 1976)Utah, January 1, 1974 Compulsory first-party, optional liability insurance; some restrictions on lawsuits:Florida, January 1, 1972 (compulsory property damage liability)Puerto Rico, 1970 States that have repealed their no-fault laws:Nevada: effective 1974; repealed 1980Pennsylvania: effective 1976; repealed 1984 (reenacted 1990)Georgia: effective 1975; repealed 1991Connecticut: effective January 1, 1973; repealed 1993Colorado: effective April 1974, repealed July 2003 Georgia repealed its no-fault law effective October 1, 1991. In states with weak no-faultlaws (Georgia’s monetary threshold was $500) costs tend to increase more rapidly than instates with a verbal threshold because weak laws provide the broad benefits of a no-faultsystem without sufficient offsetting savings — almost as many cases go to court as in a93

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEtraditional tort-based system. In addition, personal injury benefits (PIP) were low. Minimumcoverage provided only $2,500 per accident for medical costs (although policies with higherlimits could be purchased.) The combination of low mandatory PIP coverage and a lowmonetary threshold pushed many cases where injuries were minor into the courts, drivingup costs. Then in 1993, Connecticut repealed its no-fault law. The law had been comparativelyineffective because its threshold for lawsuits was only $400. Colorado’s law was repealed, or more exactly allowed to expire, in 2003 after Gov. BillOwens said that he would not sign another extension unless it significantly reduced the costsof the existing system. But lawmakers could not resolve a dispute about the extent of coveragefor medical procedures. Rates in 2002 increased by as much as 20 percent, more than twicethe national average, due to the no-fault’s law generous medical care benefits and a lowthreshold for lawsuits. Effectiveness of No-Fault Auto Insurance As noted earlier, insurers generally favorlaws that provide for verbal thresholds on suits instead of dollar thresholds. One of thedisadvantages of having a “dollar target” for medical expenses is that it may encourage thesubmission of fraudulent claims. In addition, unless the law includes a provision that enablesthe threshold to be adjusted to keep pace with inflation, (medical costs, for example, havebeen increasing at a rate of close to 10 percent a year) its effectiveness in curbing litigationis gradually eroded. The no-fault concept and strong restrictions on filing suit were given additional supportby a study on bodily injury claim costs, the findings of which were made public in March 1989.The study, “Compensation for Automobile Injuries in the United States,” conducted by theAll-Industry Research Advisory Council (now the Insurance Research Council), showed thatstates with strong no-fault laws were more successful in holding down auto injury costs duringthe 10-year period, 1977-1987, than other states. New York’s average bodily injury costsrose 73 percent, Florida’s 71 percent and Michigan’s 112 percent. (These states, all threeof which have strong no-fault laws, also had much lower overall injury costs, especiallyMichigan.) The average rise in bodily injury costs nationwide was 146 percent during theperiod. There is a wide variation in no-fault laws, with significant differences in monetarythresholds and in other benefits provided. For example, monetary thresholds range from$1,000 in Kentucky and to $4,000 in Minnesota. In Utah, the medical benefits limit is $3,000and in Michigan there is no limit on the medical benefits a claimant may receive. One problemin states with higher than average PIP benefits is that dishonest providers of professionalservices have found ways to abuse and cheat the system, pushing up the cost of auto insurance.New Jersey pioneered reforms designed to curb overuse of medical care in its overhaul ofthe auto insurance system in 1998. Other states are modeling their reforms on the New Jerseyprotocols. Fraud and PIP Benefits: In a number of no-fault states, PIP coverage is being exploitedby fraud rings that include phony pain clinics and corrupt physicians, chiropractors and lawyers,particularly in states where PIP benefits are generous.94

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE These criminal groups have created medical “mills,” phony clinics that file fraudulent autoinsurance medical claims. In an attempt to address this drain on resources, New York createdregulation 68, a reform measure adopted in 2002 that substantially shortens the time periodfor reporting auto accident injuries and submitting bills for medical treatment is expected toreduce such claims. The reduced notification time allows insurers to look at the treatment plansooner, thus providing fewer opportunities for unnecessary diagnostic tests and treatments.New Jersey dealt with the problem of unnecessary medical treatment by creating precertificationmedical guidelines, or Care Paths, for the treatment of specific injuries that result from autoaccidents, primarily soft tissue injuries. In Massachusetts, where experts estimate that $80million in personal injury claims are fraudulent, the state is seeing the same increase in fakedaccidents, the use of runners, phony medical clinics and dishonest medical providers andattorneys that other no-fault states are experiencing.TYPES OF INSURANCE What is liability insurance? It is a form of coverage where one is protected against claimsof other parties from specified causes. The issue of liability insurance is the most controversialaspect of auto insurance and the most expensive to purchase. Liability insurance is designedto protect you against the costs of being sued, should you or another insured’s negligent drivingcause injury. Many states require by law that a minimum level of liability insurance be carried by eachperson insuring a vehicle. The amounts required vary from state to state. However, if you haveproperty of any significance or you earn wages that could be subject to attachment, you shouldcarry more than the minimum to be sure you are adequately protected against liability. Negligent driving can be defined as driving outside the standard of care required of theoperators of an automobile. What constitutes driving beyond the standard of care will dependon each state’s individual laws. A good universal example of driving outside the standard ofcare would be running a red light. Negligence requires more than the mere act of driving poorly. In order for liability to arise,there must also be some form of actual harm, called damages, which directly result from thebad driving. Under the “no harm, no foul” principle, if you run a red light and get away withit without incident, you will not be subject to liability to anyone. However, if you run a red lightand hit someone, you can be held liable for all of the monetary damages allowed by law thatresult from your negligence. An auto insurance policy addresses three separate aspects of this liability: bodily injury,property damage and the cost of defending a lawsuit. Bodily injury involves driving negligence, which causes the injury or death of another, inwhich case you must pay the monetary damages that result from the accident. This includesmedical bills, lost wages and money to compensate the victim for pain and suffering (in faultstates) that result from the injury. In some cases, you can also be responsible for damagesthat the injury to one person causes to others. For example, if the injured person is killed, youcan be held responsible to the deceased’s spouse and children for loss of the support theywould have received had the person lived. When you purchase liability insurance as part of an auto insurance policy, you have thepower to choose how much protection from liability you want to buy. This liability coverage95

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEwill be expressed in terms of a single-limit amount or a split-limit amount. Split-limit liabilitypackages are the kind the majority of people purchase. The risk accepted by the insurancecompany is expressed in terms of the maximum amount that will be paid under the policy perinjured person and per accident for all injured persons; a typical example is $100,000 perperson and $300,000 per accident. A single-limit policy will not limit the amount payable toan individual, but will limit the amount payable per accident—for example, $300,000 peraccident. Under a split-limit type of coverage, the maximum amount the most severely injuredperson could be paid under one’s liability insurance would be up to the policy limits. You couldbe forced to pay the difference out of your own pocket if the injured person (or his or her lawyer)decides to pursue you in court. Under a single-limit policy, however, you would have less toworry about, because your insurance would be more productive. Most of your liabilityinsurance could be applied to the seriously injured party. At the very least, the amount youcould be forced to take out of your own wallet would be significantly less than under the split-limit format. The property damage aspect of the liability portion of an auto insurance policy pays fordamages to another’s property caused by negligent driving. Usually, the damage is to anothervehicle, but it doesn’t have to be. For example, if you lose control of your car and crash intoa fence, you would probably be responsible for the cost of repairing the fence—a legal burdenyou would transfer to your auto insurance company under the contract of insurance. Likecoverage for personal injury, the policy will provide for maximum benefits that the insurancecompany has to pay. Many states require a minimum amount of coverage, usually $10,000or so. However, with the expense of vehicle repair today, the minimum usually isn’t enough.Thus, you should probably add to the minimum coverage so that you are protected for at least$25,000. Coverage for property damage, like personal injury in a fault state, is based on negligence.The extent of risk for property damage is far less than for personal injury, so the cost of thecoverage is also far less. However, more than 50 percent of all insurance payouts are madefor property damage. The cost of defense is a very important part of your auto liability policy should you get sueddue to an accident or other incident covered by the policy. This cost of defense coverage canliterally save you thousands of dollars, since it includes high-priced items such as the cost oflawyers, specialists in accident reconstruction (if necessary), doctors who work for the defenseand other similar expenditures that are often needed to adequately defend an auto accidentcase. Losses come in two types—first person and third-party losses. A first-person loss occurswhen the policyholder is personally damaged; for example, if your car is stolen. A third-partyloss exists when the damage occurs to someone else, but in such a way that the policyholderis responsible; for example, an auto accident, where one person often must pay damages toanother (the third party) for damages caused by the collision.Personal Auto Insurance Coverages When you purchase insurance, you are, in essence, making a trade. You accept a fixedloss, which is the money you pay the insurance company. These fixed payments are called 96

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEpremiums. In return for your premiums, the insurance company agrees to accept your riskof loss within the subject matter of the policy in the event that a loss occurs. You are tradinga small, but defined, loss in your premium in order to get the insurance company to absorban unknown, but potentially larger, future loss. This agreement is formalized in a writtencontract known as an insurance policy. An auto insurance policy, whether in a fault or no-faultstate, is really a combination of several different coverages tied up in one package. Someof these coverages protect third parties and some protect the insured directly. Some of thecoverages are mandatory and some optional. The differing coverages are priced separatelyand added together to come up with the total premium cost.Protection for Auto Owners/Drivers If you buy insurance for your car, you are a named insured, as is your spouse if you aremarried. Also, any other family members who reside with you are named insureds, as well. If you allow your brother-in-law to borrow your car, he also becomes an insured, sinceinsurance coverage usually follows the car wherever it goes, as long as it goes with yourpermission. This is important, because liability also follows the vehicle wherever it goes—again, as long as it is driven with your permission or by someone who could reasonably believeyou had given permission. Many states limit the liability of the insured for damages causedto others by a permissive driver, but this limit does not protect the driver from further liability.Medical Payments Coverage Medical payments coverage in an auto insurance policy is designed to pay for some of themedical consequences that can result from an accident. Unlike the liability portion of theinsurance policy, “med pay” has no relationship to fault, but will pay benefits to eligiblebeneficiaries for the cost of medical care and funeral expenses, up to the policy limits. Twoclasses of persons are entitled to receive benefits under med pay—the insured and familymembers who live in the same household, and any passenger injured while in the “coveredvehicle.” The injured and family members who live in the same household are protected by the medpay portion of the policy, which will pay for the treatment of your injuries, up to the extentof coverage. An insured and covered family are also protected under med pay if they are hitas pedestrians by a vehicle intended to be drivenon public roads, regardless of who causedthe accident. This “no fault” aspect of med pay coverage can be important, since you do nothave to wait until the matter is resolved in court to receive benefits—which in some statescan take years. Any passenger injured while in the covered vehicle is entitled payment for medicalexpenses caused by the accident, regardless of who is at fault, up to the maximum amountprovided in the policy. However, if you are driving someone else’s car, your medical paymentscoverage would not cover the accident injuries of a passenger. That would be up to the medicalpayments coverage portion of the car owner’s policy. Most people elect not to take out large amounts of medical payments coverage, since theyare usually covered by some form of health insurance and there could be duplicate coverage.However, medical payments will cover one thing that health insurance will not—funeral 97

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDEexpenses. Since the price of the coverage is relatively small, it is a good idea to have at leasta few thousand dollars in coverage. If you don’t have health insurance, be sure to buy large amounts of medical paymentscoverage. It’s relatively inexpensive, and if you are injured in an auto accident, it may meanthe difference between adequate care and a trip to your county hospital, where treatmentmight not be as forthcoming.Collision and Comprehensive Collision and comprehensive refers to collision coverage, and its cost is about one thirdof the total cost of the policy. Collision coverage is not dependent on fault. Like medical pay,if you have a valid claim for collision damage, you are entitled to benefits, even if you causedthe accident. Collision is not a mandatory coverage. You do not have to take out collisioncoverage and many people with older vehicles don’t. It is simply not worth the money if thecompany is likely to “total” the vehicle rather than pay for its repair. Or, you can elect to takeeither collision or comprehensive, but not both. It is important to note that collision andcomprehensive are separately provided for and charged. In order for the company to consideryou to be covered by either or both, the declarations page must show that you have selectedthat protection. Collision is usually defined as the impact with another vehicle or object.” This means therehas to be a physical contact between your vehicle and another car, truck or object that causesphysical damage to your auto. Any damages to the other vehicle would be paid by the liabilityportion of your coverage (if you were at fault). Unlike some other aspects of auto insurance, the collision protection of the policy is subjectto a deductible (the amount you pay before any insurance benefits are paid). Most deductiblesare around $200, but you can elect to have a higher or lower amount. The higher thedeductible, the lower the premium. If your vehicle is damaged or stolen, the company has the right to choose one of two waysin which to pay your benefits—the amount necessary to repair the vehicle or replace propertythat was lost, or the cash value of the stolen or damaged property. Many people feel theyhave been treated unfairly with the cash value method. Under the terms of the policy, theinsurance company may elect to “cash you out” for the loss, rather than repair the vehicle,if this method will cost them less money. In addition, they can deduct for depreciation andadjust for a deteriorated physical condition of your vehicle. When the insurance companyelects not to repair your car, but to pay you its value, it is sometimes called “totaling” thevehicle. When the company totals your car, you receive what the vehicle is “worth” on theopen market, even if (as is often the case) this amount is less than it will cost you to actuallyreplace the car. If your insurance company tells you they want to total your damaged car, don’t just acceptwhat they say your car is worth. Look in the Kelly Blue Book, which should be at your locallibrary, and in your local paper in the classified ads, to see what cars like yours are sellingfor. It will often be more than the company wanted to pay. Also, if your car includes extraequipment, such as a valuable stereo system, air conditioning, special tires, etc., be sure tolet them know. 98

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDE It can add to the value of your car when the insurance company adds up its total value.Some companies will sell you an endorsement that will add a benefit requiring the companyto pay for a new car if the covered car must be totaled. If you are covered for auto theft, there is a transportation benefit. If your car is stolen, andif you are covered under the collision aspect of your policy for other than collision loss, youwill be entitled to reimbursement for some of the transportation costs you incur until benefitsare paid under the policy. Benefits are payable daily, typically $10 or so, and there will bea maximum total benefit defined in the policy. Your collision policy will pay benefits for vehicles you do not own. If you are driving a caryou do not own and are in an accident or the car is stolen while in your possession, your collisioncoverage will pay benefits for the loss. However, this protection will not apply if you drive thecar on a regular basis. There is an important exclusion to collision coverage that you shouldknow about. It is “loss to equipment for the reproduction of sound,” known as a stereo. If thestereo is permanently installed in the car, it is covered. But if you purchase the kind of stereothat you can take out of the car to thwart thieves, the stereo is no longer considered“permanently installed,” and there will be no coverage if it is ever stolen. Other exclusionsof note include CB equipment, car telephones, wear and tear, mechanical breakdown, camperbody or trailer (unless specifically paid for and shown in the declarations) and customizedequipment.Comprehensive Loss caused by flying objects, fire, theft, windstorm, hail, malicious mischief, riot, hittingan animal, etc., is considered “other than collision” coverage—more commonly calledcomprehensive coverage. There will be unusual instances where no deductible is applied. Suppose you are drivingalong the road and another vehicle kicks up a stone that damages your windshield. Thisdamage would be covered by your comprehensive coverage. You would have little successgoing after the driver that kicked up the stone, because this is considered to be a road hazard. You would be able to file a claim under the comprehensive coverage in your automobilepolicy. While you normally will have a deductible under that coverage, your insurance carriermight waive the deductible if you agree to have the windshield repaired, rather than replaced.There is a process, which costs about $50, that can repair chips in a windshield. If the damageis in the driver’s line of vision, a repair is not usually permitted. The windshield must bereplaced. The cost of replacing it runs from $200 to over $1,000, depending on the makeand model of the car. This windshield replacement is covered by the comprehensive coverageand subject to the deductible.Uninsured Motorist Coverage Uninsured motorist coverage is optional. But if you can afford it, it is very advantageousto know you will be protected if you are injured by someone who has no car insurance or isuninsured. Otherwise, the only protection you have if you are hit by an uninsured driver willbe your med pay, which is rarely enough to pay for all of the bills of a serious accident. Theadditional expenses of your injury—such as medical bills beyond that covered by med pay, 99

Noble Continuing Education All rights reserved. AUTO INSURANCE GUIDElost wages, and pain and suffering—will simply not be covered if you do not have the protectionof uninsured motorist coverage. Uninsured motorist protection has nothing to do with property damage. It is specificallydesigned to pay your losses for bodily injury. Thus, the more you have, the safer you will be.Here are some of the important points that you should know about the protection:1) It is based on fault. If you caused the accident and the other car was not insured, you will not receive benefits. Uninsured motorist protection pays you what you would have been entitled to had the other driver had insurance. In other words, the uninsured driver must have been liable to you for damages in order for you to collect.2) You can collect for pain and suffering. The measure of damages is the same in uninsured motorist proceedings as in a fault lawsuit. Such things as medical bills, lost wages, and pain and suffering are all included in determining the amount of compensation you will receive.3) Three groups are covered under the uninsured motorist provision. The insured, members of his or her household, and any other person legally entitled to recover damages are protected under the uninsured motorist provision of an auto policy. The coverage also applies to injuries sustained by the insured or householders who are injured as pedestrians by an uninsured motorist.4) You do not go to court if you have a dispute with your company. If you and the company cannot agree on a fair compensation for damages caused by an uninsured motorist, you do not go to court. Instead, you engage in an arbitration. In the arbitration, there may be one arbitrator, for whom you and the company pay mutually; or three arbitrators—one selected (and paid for) by you, one by the company and one by both of the previously selected arbitrators, for whom both parties pay equally. The arbitrator(s) must determine whether you are entitled to damages and, if so, in what amount.5) The limits of liability will be shown on the declarations page. The limit of insurance company liability for uninsured motorist coverage is shown on the declarations page just as it is in the liability portion of the policy. Thus, “$15,000/$30,000” on the declarations page means $15,000 maximum coverage per individual and a maximum of $30,000 total per covered accident.6) Some companies offer underinsured motorist protection. For the reason that many persons are underinsured, many companies recognize this problem and allow you to purchase underinsured protection, which will pay the amount not covered by the other driver’s insurance to the maximum of your own policy. This is excellent coverage to purchase, since many drivers are forced to underinsure themselves due to the high cost of premiums.Miscellaneous Coverages There are other smaller coverages you can purchase at a nominal cost when you buy autoinsurance, including: Rental Car Reimbursement If you have to rent a car while yours is being repaired after an accident, you can be partiallyprotected by indemnity-type payments (fixed amounts) per day in an amount set forth in the 100