Many insureds face a greater risk of incurring an insurable loss arising out of their use of cars and trucks than out of their ownership and use of their home. Cars and trucks travel at high speeds on roads in close proximity to other vehicles. When collisions occur, there is naturally a great risk of serious property damage or bodily injury.
Like homeowners policies, auto policies include both first-party cov-erages (i.e.,coverage for physical damage to yourcar or truck) and third-party coverages (i.e.,coverage for your liability for damages to others). In addition, depending on the jurisdiction, uninsured or underinsured motorist coverage or both may be required as part of the personal auto policy. These coverages provide protection for you if you are involved in an accident that is the fault of another driver and he or she either does not have liability insurance or has liability insurance with limits that are not sufficient to cover your damages.
Finally, in a limited number of jurisdictions, drivers must carry no-faultpolicies. No-fault auto insurance was intended to speed up the resolution of smaller claims and to lessen the number of personal injury lawsuits arising from less serious collisions.
At present, there are twelve no-fault states. They are:
District of Columbia
In addition, there are several other states where no-fault (formally known as personal injury protection) coverage is an optional coverage.
If you live in one of the twelve mandatory no-fault states, you will need to learn about your state’s specific requirements. Even in these twelve mandatory no-fault states, the coverages and required minimum coverage limits vary. In addition, whether an insurer can opt outof no-fault coverage and the limits of injury or damage at which the no-fault benefits no longer apply vary from state to state. When an accident results in damages in excess of a given state’s mandatory no fault limits, the injured person retains the right to sue for damages.
To complicate matters further, there are a few states where personal injury protection coverage can be purchased as an optional coverage. As a practical matter, the laws in many of these states overlap significantly with several of the states where no-fault coverage is nominally mandatory.
Because the no-fault laws vary so much from state to state, it is beyond the scope of this book to do other than to highlight the need to understand your state’s no-fault laws and to govern your purchase of coverage limits accordingly.
In addition, there is overlap between uninsured motorist and underinsured motorist coverage, and personal injury coverage. Thus, in an optional personal injury protection jurisdiction, a person needs to carefully consider the pros and cons of increased uninsured motorist and underinsured motorist coverage as opposed to purchasing increased limits of personal injury protection coverage.All states have some form of financial responsibility laws under which a person is not allowed to register a car or a truck without having provided proof of statutorily-mandated minimum levels of bodily injury and property damage liability insurance. Correspondingly, insurers in each of the states sell statutory limitliability policies that permit a person to satisfy his or her state’s financial responsibility laws to be able to register his or her car or truck. These minimum financial responsibility law requirements are usually very low—too low, in fact. They are not remotely sufficient given current auto prices, costs of repair, and medical and health care costs.
STRUCTURE OF PERSONAL AUTO POLICIES
As with homeowners policies, there is a standard personal auto policy published by the Insurance Services Office. As is the case with homeowners policies, many insurers, particularly direct writers such as State Farm, Allstate, and Farmers, use proprietary policy forms for their personal auto policies. Furthermore, jurisdictions, like Massachusetts, have established a statutorily-mandated personal auto policy. The provisions of the standard ISO personal auto policy and of the proprietary policies sold by other insurers tend to be more alike in their basic coverage provisions than they differ.
Coverage provisions in the ISO personal auto policy are grouped as follows:
medical payments coverage;
uninsured motorist coverage;
first-party physical damage coverages;
insured’s duties after accident or loss; and,
Proprietary personal auto policy forms used by insurers that do not employ the ISO personal auto policy forms may differ in the order in which these categories of provisions appear. Personal auto policies issued in no-fault states also differ from the ISO personal auto policy. For example, the Massachusetts Automobile Insurance Policy first lists the policy’s definition and the four compulsory coverages, which include the no-fault coverages. Following the basic coverage provisions are the optional coverage provisions.
These are then followed by the general provisions and exclusions, with provisions relating to cancellation and renewal, the insured’s duties in case of accident or loss, and the safe driver insurance plan provisions.
Before discussing the actual provisions of auto policies, the concepts of insurable interest and insured capacity, as they relate to the coverages afforded by auto policies, should be discussed. As with homeowners policies, the concept of insurable interestrelates to the coverages for physical damage to your auto. A person must have an insurable interest in the auto in question to be entitled to payment of a loss. The easy insurable interest concepts are those of the registered owner and a lien holder, such as your auto loan lender or leasing company of a covered vehicle. However, coverage also extends to nonowned autos. The common definitions of nonowned autosincludes rental vehicles and borrowed vehicles as long as they are not regularly available for use by a named insured or a family member.
Spouses will generally be considered to have an insurable interest even if not a registered owner of the vehicle.
The concept of insured capacityis mostly a question of the definitions of insured, covered person, family member, or eligible injured person, as well as those arising under the vehicle codes and other state laws. For example, the laws of a particular state may require that a person using a vehicle with the named insured’s express or implied permission be covered as an insured under the named insured’s policy. Such requirements are related to the insured’s statutory liability as the vehicle owner for bodily injury or property damage arising out of its use.
PERSONAL AUTO POLICY DEFINITIONS
Common definitions used in the ISO personal auto policy form include the following.
The ISO personal auto policy uses the terms auto accident, accident, and accidental, without specifically defining any of those terms. Many of the policy forms used by insurers that do not employ the ISO personal auto policy do define accident. Most such definitions incorporate some form of unexpectedor unintendedlanguage. This is to make clear the fundamental concept that insurance applies only to fortuitous losses, not to expected or intended losses.
Bodily Injurymeans bodily harm, sickness, or disease, including death that results. This is essentially the same as the bodily injury definition of the ISO HO 3 homeowners policy’s liability coverage. Occasional variations are seen in other policies, but this is a standard and workable definition. (However, the Massachusetts Auto Insurance Policy does not contain a definition of bodily injury at all.)
Businessincludes trade, profession or occupation. Not all personal auto policies contain a definition of business.
Family membermeans a person related to you by blood, marriage, or adoption who is a resident of your household. This includes a ward or foster child. Other insurers’ definitions can add qualifications that eliminate coverage for wards or foster children or for children who have manifested an intent to reside elsewhere permanently. Where you need to be careful is if you have children who reside temporarily elsewhere because they are attending school or are in the military, but whose legal address is still your residence. You need to assure that your policy’s definition of family member extends to your chil- dren in such a situation in order to assure that they continue to qualify as insureds under your policy. If the definition of family member does not extend to such circumstances, then it may be necessary to obtain a separate policy to cover your child’s use of vehicles while temporarily away at school or in the military. (The Massachusetts Auto Insurance Policy contains a definition of household memberthat is substantially the same as the definition of family member in the ISO personal auto policy.)
Occupyingmeans in, upon, or getting in, on, out, or off. This definition relates to a very important concept applicable to auto liability insurance. Historically, the insuring agreements of many auto policies stated in substance and effect that coverage applied to liability arising out of the ownership, maintenance, or use of covered autos. Over the decades, there has been an enormous amount of litigation over what constitutes ownership, maintenance,or useof covered autos. Occupying will be discussed in greater detail in the discussion on liability coverages of auto policies. (see Chapter 14.) Suffice it to say for now that the concept of occupying a covered auto is one that relates to what constitutes ownership, maintenance, or useof covered autos.
Property damagemeans physical injury to tangible property, including its loss of use. This is essentially the same definition as appears in homeowner’s liability coverage. The discussion of the property damage definitions of homeowners policies also applies to the concept of property damage under auto liability coverages. (The Massachusetts Auto Insurance Policy does not contain a definition of property damage.)
There are two concepts that are important to understand with respect to this definition. First, trailersare vehicles that are designed to be towed by private passenger autos, pickup trucks, vans, or other similar vehicles designed for use on public roads. This also includes farm wagons and implements when towed by one of the above categories of vehicles.
Second, trailersare deemed to be covered vehicles for purposes of the policies’ liability coverages. In the policies of insurers that do not use the ISO form, these concepts are likely to be included, but they may appear within the policies in other locations or under other headings.
Your Covered Auto
The concepts embraced by this definition contained in the ISO personal auto policy are relatively complex. Most of these concepts appear in one form or another in the policies of insurers that do not use the ISO form. Again, check your own policy to confirm whether these provisions are included. The complexity of the definition reflects the increasing complexity of modern life and reflects insurers’ attempts to make clear for their customers what loss exposures are and are not covered. Some of the complexities in this definition also correspond to statutory requirements under states’ vehicle and insurance codes.
The first subcategory under this definition is any vehicles shown in the policy’sdeclarations. However, when more than one policy may apply to a particular loss, confusion can occur. Since it is common in the case of auto accidents that more than one policy may apply to the same loss, there are rules for determining which policy applies. Often these rules are statutory, and thus can vary from state to state. An almost universal rule, however, is the rule that states that the policy in which an insured vehicle is specifically rated or described always applies to the loss first.
The next category of covered autos includes private passenger autos, pickup trucks, or vans that have gross vehicle weights of less than 10,000 pounds. This provision has many qualifications. First, the insured must acquire the vehicle during the policy period. Second, the insured must report the acquisition of the vehicle to the insurer within thirty days after the insured acquires it. Third, pickup trucks or vans do not qualify if any other policies afford coverage for those vehicles.
These latter qualifications mean that small installation or repair contractors and farmers who purchase pickups or vans that are comparable to those that people purchase for ordinary personal use can cover their business- or work-related use of such vehicles under their personal auto policy. This is available for those people whose business use is not so extensive as to require a commercial auto policy.
This provision of your auto policy makes clear that you get automatic coverage for newly acquired vehicles. However, such automatic coverage only applies for thirty days and only if you actually report the acquisition to your insurer within the thirty-day period. If you take the responsibility for reporting your acquisition of a new vehicle to your agent, you will minimize the risk of a gap in coverage that could result if the dealership’s finance department fails to timely notify your insurer.
There are a couple of other qualifications to this newly acquiredauto coverage provision. If the newly acquired vehicle is a replacement for a covered vehicle described in the policy’s declarations andyou report the new vehicle within thirty days of its acquisition, the coverages that applied to the former vehicle will apply to the newly acquired vehicle. Further, if the new vehicle is a new vehiclein the absolute sense, that is, the vehicle is not replacing an existing vehicle, this new vehicle is automatically covered and it will be covered to the broadest extent of any existing covered vehicle under the policy.
Your covered vehiclealso includes any car, truck, or trailer that you rent or use as a temporary substitute vehicle if you are out of your normal vehicle because of:
In practical terms, this means that if you borrow or rent a vehicle while your car is unavailable to you because of any of these circumstances, you are covered for use of that substitute vehicle. In other words, if your car breaks down or even is in the shop or dealership for normal maintenance work, you are covered for use of:
a friend’s or neighbor’s vehicle;
a rented vehicle; or,
a loaner vehicle while yours is in the shop.
The definitions of the concepts of your covered auto in proprietary policy forms used by insurers that do not use the ISO personal auto policy form can be more restrictive or more liberal than these definitions. Some insurers place lower gross vehicle weight limits on this coverage, effectively limiting coverage to private passenger cars and effectively excluding most SUVs, vans, and many full-size pick-up trucks. Other companies do not include any sort of gross vehicle weight limitation in the definition of your covered auto. (The Massachusetts Automobile Insurance Policy incorporates the same 10,000 pound gross vehicle weight limit as does the ISO policy.)
LIABILITY COVERAGE PROVISIONS
The insuring agreement of the liability coverage of the ISO personal auto liability provides that the insurer will pay for damages for bodily injury or property damage for which any insuredbecomes responsible because of an auto accident. The insuring agreement provides that the insurer will settle or defend as it deems appropriate any claim or suit seeking such damages. The insuring agreement provides that the insurer’s duty to defend terminates when the policy limit has been exhausted.
As with the liability coverage of the homeowners policies, the auto liability coverage of the ISO personal auto policy includes several coverages under the heading Supplementary Payments. These are substantially similar to the supplementary payments coverages of homeowners policies, but are not identical to them.
These supplementary payments coverages include:
up to $250 for the cost of bail bonds required because of an accident, including related traffic law violations, provided the action results in covered bodily injury or property damage;
premiums for appeal bonds and bonds to release attachments in suits that the insurer defends;
postjudgment interest on that portion of a judgment against an insured that is within the policy limits of the policy (postjudg-ment interest is covered from the time of entry of judgment until the time the insurer offers to pay that portion of the judgment that is within the policy limits);
up to $50 per day for loss of earnings—but not other forms of income—because of attendance at hearings or trials at the request of the insurer (often, insurers will pay greater per diem amounts for attendance at hearings or trials, when the insured can show that his or her lost wages exceed that amount and the insured has an actual loss of income (i.e.,his or her employer does not pay the insured for the time off work));
other reasonable expenses incurred by the insured at the insurer’s request; and,
expenses for emergency first aid to others at an accident involving an auto covered by the policy.
The supplementary payments provisions of insurers that do not use the ISO personal auto policy and the Massachusetts Automobile Insurance Policy usually are substantially similar, differing principally in the daily amount payable for lost earnings and premiums payable for bail bonds.
Choosing Liability Limits
In the auto liability context, the need to purchase increased liability limits is even more important than it is in the homeowner’s liability context. Average vehicle costs and costs to repair vehicles are much higher than they were in the past. It is not uncommon for persons to drive vehicles whose new pur- chase prices exceed $30,000, $40,000, or even $50,000. Generally, the more expensive a vehicle is to purchase, the more expensive it is to repair. Plus, not every collision involves just two vehicles. Take a moment and consider your potential liability if youare determined to have been at fault, or primarily at fault, for a multi-vehicle pile up.
Similar comments apply to your potential liability for injury to persons.
That liability can include not only the costs of their medical treatment, but also the costs of their loss of income during the period they are unable to work.
For these reasons and those discussed in connection with homeowners policies, the absolute minimum limits that the average person should carry in terms of liability limits on his or her auto liability coverage are:
$50,000 property damage per accident;
$100,000 per person/$300,000 per accident bodily injury; and,
at least a $1,000,000 personal umbrella policy.
Persons with greater income or assets should seriously consider purchasing significantly higher limits