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Physical Loss or Damage Coverage Provisions

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The physical loss or damage provision of personal auto policies are the principal first-party coverages afforded other than the uninsured motorist and underinsured motorist coverages. There are two main categories of covered physical damage losses:

collision damage losses and

losses other than collision.

Many people are probably at least a little bit familiar with these two categories, which are often referred to as collisionand comprehensive.(The current ISO personal auto policy no longer uses the term comprehensiveas the label for the category of covered physical damage losses that are not collision losses.)

The auto physical damage coverages of personal auto policies have relatively broadly worded insuring agreements and the boundaries of coverage are set largely by the exclusions. The insuring agreement of the ISO personal auto policy provides that the insurer will pay for direct and accidental loss to your covered auto or any nonowned auto, but only for loss caused by collision if the policy’s declarations show that collision coverage is provided for that auto. For loss other than collision, the insurer will pay only if the declarations show that coverage for noncolli-sion loss applies to that auto.

The insuring agreement then defines collision as, the upset of your coveredauto or a nonowned auto or their impact with another vehicle or object.

The insuring agreement further proceeds to list ten categories of named perils that constitute covered physical damage losses other than collision. These ten categories of covered perils are:

  1. missiles or falling objects;
  2. fire;
  3. theft or larceny;
  4. explosion or earthquake;
  5. windstorm;
  6. hail, water, or flood;
  7. malicious mischief or vandalism;
  8. riot or civil commotion;
  9. contact with bird or animal; and,
  10. breakage of glass.

The manner in which the ISO personal auto policy is drafted leaves it somewhat unclear whether these ten categories are the only noncollision covered perils, or if these ten categories of perils (plus others that may occur) will be considered as other than collision losses. Reference to other insurers’ policies suggests that ISO’s intent was to provide all-risk coverage. In other words, the list of perils covered is intended to be nonexclusive. Coverage for a noncollision physical damage loss is included unless specifically excluded.

The ISO personal automobile policy’s physical damage insuring agreement proceeds next to include a definition of nonowned auto.This includes private passenger autos, pickups, vans, or trailers not owned by, furnished, or available for the regular use of the named insured or any family member while in the custody of or being operated by, the named insured or any family member. It also includes any auto or trailer the named insured does not own while being used as a temporary substitute vehicle for the insured’s covered auto that is out of normal use because of its breakdown, repair, servicing, loss, or destruction.

ADDITIONAL COVERAGES

Most personal auto policies include some additional coverages. The policies do not actually use this term; however, the concept fits. This is also an area where there is some variation between the policies offered by different insurers. Understanding the scope of these additional or supplementary coverages might be a reason for you to choose a policy from one insurer or another.

The ISO personal auto policy labels this category of coverages as Transportation Expenses.The ISO personal auto policy provides for payment of up to $15 per day, subject to a maximum of $450, for temporary transportation expenses actually incurred by the insured in the event of a loss to your covered auto. This coverage applies only if there is coverage for the underlying loss (i.e.,the policy covers comprehensive or collision losses). Higher daily limits and higher per-loss maximum limits are available from most insurers for nominal additional premiums. You merely need to ask what limits your insurer offers, learn how much the insurer charges, and make your own decision.

This coverage is not coverage for transportation expenses incurred because of breakdown of your vehicle. It applies only in the event of a covered collision or comprehensive loss and if you have paid an additional premium for the transportation expense coverage.

Under the ISO personal automobile policy, there are some limitations of which you should be aware. If loss is due to a total theftof your covered auto or of a nonowned auto, transportation expenses are payable during the period beginning forty-eight hours after the theft and ending when your auto is returned to you or the insurer pays for the loss.

If loss is due to a cause other than theft, coverage for transportation expenses applies only after your auto has been out of service for more than twenty-four hours. It is also limited to the amount of time reasonably required to repair or replace your car.

While the basic ISO personal auto policy does not include coverage for towing expenses, many auto insurers include coverage for towing your vehicle to a repair shop if it is disabled as the result of one of the comprehensive perils. There are commonly two preconditions for such towing coverage to apply: first, the insured must have purchased comprehensive coverage, and second, the work or labor must be performed on your vehicle at the place of its disablement.

Some insurers offer towing coverage subject to a specific dollar limit. Others reimburse for reasonable expense, recognizing that vehicles can become disabled as a result of covered causes of loss in inconvenient locations.

EXCLUSIONS

The first auto physical damage exclusion of the ISO personal auto policy is for loss that occurs while a covered vehicle is being used as a public or livery conveyance. As with the liability coverages of auto policies, this exclusion does not apply to loss occurring while the vehicle is being used in a shared-expense car pool.

The second auto physical damage exclusion applies to damage due and limited to wear and tear, freezing, mechanical or electrical breakdown or failure, or road damage to tires. This exclusion contains an exception if the damage results from a total theft of an insured vehicle.

This exclusion has parallels to the wear and tear, deterioration, and other property exclusions of homeowners policies. It is intended to reinforce the notion that insurance policies cover fortuitous losses, not losses that are inevitable (wear and tear) or the product of a failure to maintain (mechanical or electrical breakdown). However, if a mechanical breakdown occurs that results in collision, this exclusion would not apply to the resulting collision damage.

The third exclusion is actually six exclusions that combine the nuclear, war risk, and civil commotion exclusions.

The fourth auto physical damage exclusion is that applicable to electronic equipment such as stereo systems, CB radios, telephones, scanners, televisions, VCRs, personal computers, and accessories for such equipment.

This exclusion contains an exception for permanently installed equipment designed to be operated solely by the car’s electrical system and equipment designed to be removed from its permanently installed housing in your auto (i.e.,removable face-plate car stereos).

The fifth auto physical damage exclusion precludes coverage for a total loss to a covered vehicle due to destruction or confiscation by governmental or civil authorities. This exclusion has an exception. It does not preclude coverage for the interests of a loss payee (i.e.,auto lender or lease company) in the covered auto. The purpose of this exception is to avoid inflicting the consequences of an insured’s misconduct that results in governmental confiscation of a covered auto on the lender or lessor (which did not commit any misconduct).

The sixth exclusion precludes coverage for loss to a camper body or a trailer that you own that is not shown in the policy’s declarations. There is an exemption for newly acquired campers or trailers if the insured reports the acquisition to the insurer and requests coverage within thirty days after acquiring ownership.

The seventh exclusion precludes coverage for loss for any nonowned auto when used by the named insured or a family member without a reasonable belief that the person in question is entitled to do so. In other words, you cannot use someone else’s vehicle without permission and expect to be covered for damage to it.

The eighth exclusion precludes coverage for loss to awnings or cabanas, or equipment designed to create additional living facilities.

The ninth auto physical damage exclusion precludes coverage for loss to equipment designed to detect radar or laser. The intent of this exclusion is to deter use of radar and laser speed detection equipment. The underlying rationale for this exclusion is that people who use such equipment do so for the purpose of violating speed limits.

The tenth auto physical damage exclusion precludes coverage for loss to custom furnishings in pickups or vans. Custom furnishingsor equipment are defined as including, but not limited to:

special carpeting, insulation, furniture, or bars;

facilities for cooking or sleeping;

height extended roofs; or,

custom murals, paintings, or other decals or graphics.

This exclusion has an intent similar to that of homeowners policy provisions that limit the amount of coverage for certain categories of property. Most insurers will allow the insured to buy backthis exclusion, subject to full disclosure of the custom features included in a particular vehicle and payment of an appropriate additional premium.

The eleventh auto physical damage exclusion precludes coverage for nonowned autos used by any person while employed or engaged in the business of selling, repairing, servicing, storing, or parking vehicles. In other words, persons engaged in such businesses need to purchase the form of commercial auto policy appropriate to the particular type of auto-related business to cover such loss exposures.

The twelfth auto physical damage exclusion precludes coverage for loss to nonowned autos used by a person while employed or otherwise engaged in any business not listed in the prior exclusion. This exclusion has an exception for the maintenance or use by the named insured or family members of nonowned autos that are private passenger autos or trailers.

EXAMPLE1:You are employed as a plumber and your employer gives you use of a company truck equipped with tools, equipment, and parts for use in the business and you are involved in a collision while in the course of your employment. The auto physical damage coverage of your policy would not apply to the damage to the truck.

EXAMPLE2:You are an outside sales representative and you get use of a company private passenger auto. You are involved in a collision while in the course of your employment. This exclusion would not apply in this case.

The thirteenth exclusion of the auto physical damage coverages precludes coverage for loss to covered vehicles while located within any facility designed for racing for the purpose of competing, practicing, or preparing for any prearranged or organized race or speed contest. Coverage terminates once your vehicle enters such a facility. This is simply a risk outside the intended scope of personal auto policies.

The fourteenth and final exclusion of the auto physical damage coverages precludes coverage for loss to, or loss of use of, nonowned autos rented by the named insured or a family member. This exclusion applies if the rental vehicle company is precluded from recovering such loss from the named insured or family member by the terms of the rental agreement.

CONDITIONS

The auto physical damage coverage of the ISO personal auto policy includes a conditionssection, although it is not so labeled. Most of the concepts are substantially similar to the conditions applicable to the property coverages of homeowners policies.

Limit of Liability

The first of the three subparagraphs of this condition states that the insurer’s limit of liability will be the lesser of the actual cash value of the stolen or damaged property, or the amount necessary to repair or replace the property with other property of like kind and quality.

The second subparagraph of the limit of liability provision states that an adjustment of depreciation and physical condition will be made in determining actual cash value in the event of a total loss.

The third subparagraph of the limit of liability provision states that if repair or replacement results in better than like kind and quality, the insurer will not pay for the amount of the betterment.

This provision seemingly prevents a conundrum in light of the prevailing concept of actual cash value as the amount a willing buyer is inclined to pay a willing seller for an item of property. Depending on your local climate, modern day cars and vehicles can have a substantial utility, even though—given all our societal fascination for new cars—their actual cash value may be very, very low. It is this fact that forms the basis for the conventional wisdom that at some point in a vehicle’s life, it no longer makes economic sense to continue to pay premiums for comprehensive and collision coverage.

There is no one-size-fits-all answer to the question of when to stop paying premiums, but the means to figure it out for yourself are readily available. There are three pieces of information you need to determine when it no longer makes economic sense to carry comprehensive and collision coverage on a particular vehicle.

First, you need to get a reasonable estimate of the remaining useful life of the vehicle. A mechanic should be able to suggest the likely repair and maintenance costs you should expect to incur in that remaining useful life.

Second, you need to determine the reasonable actual cash value of the vehicle. There are a variety of sources for this information, including the KellyBlue Book, the Edmonds.com website, and Consumer Reports. These services provide regionally-adjusted wholesale and retail values for used vehicles depending on both mileage and condition.

Third, look at the declarations page of your policy and see what the premium charge for comprehensive and collision coverage on the vehicle in question is. If your comprehensive and collision premiums are still low compared to the actual cash value of your vehicle, it probably makes sense for most people to continue to maintain comprehensive and collision coverage. If the actual cash value of your car is still large enough that in the case of a total loss, you would still need or want a claim settlement to use toward a down payment for a replacement vehicle, then it is not yet time to drop collision damage and comprehensive coverage.

Loss Payment

This condition gives the insurer the option to pay the loss in money or to repair or replace the damaged or stolen property. If stolen property is recovered, the insurer has the option to return the property at its expense to the named insured, or to the address shown on the policy. If the insurer chooses to return recovered stolen property, it will pay for any damage to the property resulting from the theft. Your insurer also has the option of keeping all or part of the property in exchange for the payment. Finally, this condition provides that if the insurer settles the claim by means of a monetary payment, the payment will include applicable sales tax for the damaged or stolen property.

This latter provision is eminently fair. The insurer is, in effect, buying a totaled vehicle from you. As a result, you are going to have to make a significant financial outlay for the purchase of a replacement vehicle and will have to pay sales tax (in most states) on the purchase price. If the actual cash value of your totaled vehicle is $8,000, at a rate of 8%, the sales tax is $640—not an insignificant sum. Inclusion of sales tax in the loss payment by your insurer serves to make you whole.

No Benefit to Bailee

This condition is similar to that of homeowners property coverages. It provides that the auto physical damage insurance will not directly or indirectly benefit any carrier or other bailee for hire.

This condition is intended to make sure that if a bailee is responsible for damage to your car, it (or its insurer) should pay for the loss. It is not very common for the average person to put his or her vehicle in the custody of a carrier. When most people move these days, even cross-country, they often drive to their new location.

However, custody of our vehicles is given to others (bailees) on a regular basis. If you turn over your keys to parking attendants who park or move your car, you have created a bailment. Similarly, when you turn over your keys at an automobile dealership or repair shop, you have created a bailment.

Other Source of Recovery

This condition is a variation on an other insurance clause. It is generally worded the same, except it uses the phrase other source of recoveryrather than just other insurance.The general statement of the condition is that the insurer will pay its share of loss in the proportion to its total applicable limits. The exception is that nonowned autos will apply only for excess coverage over any other insurance company, as well as any other source of recovery for the loss.

Appraisal

Auto physical damage coverages contain a contractual appraisal condition that is essentially identical to that of the property coverages of homeowners policies. In essence, this is a contractual arbitration provision that either the insurer or the insured can invoke when there is a dispute over the amount of loss. As is the case with the appraisal provisions of homeowners policies, the appraisal process cannot decide coverage questions.

In the auto physical damage coverage context, valuation issues most often arise when the vehicle is a total loss. Insurers frequently consult with appraisal services and data banks that maintain vehicle valuation information. The consumer has a greater ability to determine whether the insurer’s valuation is accurate by virtue of these various services.

Because the insured and insurer must split the costs of appraisal on a 50-50 basis, do two things before demanding appraisal. First, ask your insurer to give you a copy of the appraisal report on which it is relying for its offer to settle your claim. Look it over to make sure that the report is using sales prices for the exact make, model, and model year of your vehicle, and that the features, conditions, and mileage are the same or similar to those of your vehicle. Also check for the geographic area from which the appraisal report got its information. Vehicle values vary widely from region to region.

Second, use one of the online vehicle valuation services to learn the regionally adjusted wholesale and retail prices for your vehicle. Be honest when inputting data relative to mileage and the condition of your vehicle. If the figures you come up with are close to what your insurer is offering and there are no obvious errors in the insurer’s appraisal report, consider accepting the insurer’s offer, or seek a compromise. Also, find out what paying your own appraiser will cost you. With that information, you should be able to figure out whether the costs, risks, and inconveniences of appraisal are likely to be worthwhile.

Duties after an Accident or Loss

This is a group of four conditions that are substantially similar to the insured’s duties after loss on the property damage coverage of homeowners policies. This group of conditions applies to all the auto coverages, not just the physical damage coverage.

The first subparagraph requires the insured to give the insurer prompt notice of loss, including details as to how, when, and where the accident or loss occurred. This includes providing the names and addresses of any injured persons and witnesses.

The second subparagraph provides that the insured must:

cooperate in the investigation, settlement, or defense of any claim or suit;

promptly send the insurer copies of any notices or legal papers with respect to the accident or loss;

submit as often as the insurer reasonably requires to:

physical examinations by doctors selected by the insurer and at the insurer’s expense and

examinations under oath;

authorize the insurer to obtain medical reports and other pertinent records; and,

submit a proof of loss if required by the insurer.

The third subparagraph of the insured’s duties after accident or loss relates solely to the uninsured motorist and underinsured motorist cover-ages. If the accident involves a hit-and-run driver, the insured must promptly notify the police. The insured must also promptly send the insurer copies of legal papers if a suit is brought.

Since it is usually the insured who is suing the other driver in an uninsured motorist or underinsured motorist situation, the insured must provide his or her insurer with a copy of the complaint against the other driver as well as all other legal papers served by both parties in the suit. This is because one of the preconditions to recovery of uninsured motorist or underinsured motorist benefits by the insured is proof that the uninsured motorist or underinsured motorist is legally liable to the insured for damages.

The fourth and final paragraph of the insured’s duties after accident or loss applies to the physical damage coverage. The insured must take reasonable steps after loss to protect a covered vehicle and its equipment from further loss. Such reasonable expenses will be reimbursed by the insurer. An example of reasonable steps might include having the vehicle towed to a repair shop where it can be secured pending examination by the insurer’s adjusters.

The insured must promptly notify the police if a covered vehicle is stolen. The insured must permit the insurer to inspect and appraise damaged property before it is repaired or disposed of.

In this regard, just as is the case with property coverage of your homeowners policies, you should obtain written confirmation from your insurer that it is permissible to dispose of damaged property before you do so.

General Provisions

The final section of the ISO personal auto policy is titled, General Provisions. This is essentially another group of conditions, most of which are substantially similar to homeowners policy general conditions.

Bankruptcy

This condition states that the bankruptcy of the insured will not relieve the insurer of its obligations under the policy. This is a standard provision that appears in essentially all liability policies issued in the United States.

Changes

This condition addresses three separate issues. First, it states that the policy contains all of the agreements between the insurer and the insured, and that the terms of the policy may not be changed or waived except by way of an endorsement issued by the insurer.

The second concept included in the condition is the insurer’s right to change the premium during the middle of the policy term if there is a change in the information on which the policy is based, including but not limited to:

the number, type, or use of insured vehicles;

the number of operators;

the place where vehicles are garaged; or,

changes in coverages afforded, deductibles, or limits of liability.

The third concept included in this condition states that if the insurer makes a change that broadens coverage under this editionof the policy without an additional premium, the change will apply automatically as of the date of the insurer’s implementation of the change.

Fraud

This condition provides that coverage is negated for any insuredwho has made fraudulent statements or engaged in fraudulent conduct with respect to any accident or loss for which coverage is sought.

Legal Action Against Us

This is a standard policy provision. This condition first provides that no lawsuits can be brought against the insurer unless there has been full compliance with all the policy’s terms. This provision cannot bar a person from suing his or her insurer. Rather, it provides the insurer with a defense to such a suit when there has been a material breach of policy terms, such as a refusal to submit to an examination under oath or failure to comply with proof of loss requirements.

The second portion of this condition states that no lawsuit may be brought against the insurer by a claimant against the insured, unless the insurer agrees in writing that the insured has a legal obligation to pay damages, or judgment has been enforced. Again, this provision cannot bar a claimant from filing a lawsuit against your insurer. Rather, this provision gives the insurer a defense to the lawsuit where these preconditions are not satisfied.

Finally, this condition states that no one can bring the insurer into a lawsuit in which the liability of the insured will be determined.

NOTE:The law of a very limited number of states permits the insurer to be named thedefendant along with the insured.

Our Right to Recover Payment

This condition contains the personal auto policy’s subrogation provisions. When an insurer makes a payment for a loss for which a third party is legally responsible, the insurer becomes subrogated (i.e.,succeeds) to the insured’s rights to recover from that third party. This condition provides that the insured must cooperate with the insurer in enforcing its subrogation rights against the responsible third party and must do nothing to prejudice the insurer’s subrogation rights, such as, for example, releasing the responsible party.

This condition also provides that if the insured recovers damages from the responsible party and the insurer has paid the claim, the insured must hold the recovery in trust for the insurer and reimburse the insurer to the extent of the claim payment.

Policy Period and Territory

This condition provides that the policy’s coverage applies only to accidents and losses that occur during the policy period shown in the policy’s declarations. It further provides that the policy territory is the United States, its territories and possessions, Puerto Rico, and Canada. (Coverage applies to loss or damage involving covered vehicle while being transported between the ports of the covered policy territories.)

For most persons, it is more important to recognize where coverage will not apply. First, coverage does not apply in Mexico. You need to purchase a separate policy if you wish to drive into and in Mexico. The policy must be purchased from an insurer licensed to issue policies in Mexico. There are significant differences between the laws of the United States and Mexico and in the absence of a policy with coverages that conform to Mexican law, you could face being jailed or having your vehicle impounded in the event of an accident. Under Mexican law, traffic accidents and property damage and bodily injury arising out of accidents are both criminal and civil matters.

Second, the transportcoverage only applies between ports of covered territory—while on a ferry between Seattle and Vancouver, British Columbia, for example. If you buy a car for European delivery, your United States auto policy will not cover loss or damage occurring while the car is in shipment to the United States. Again, you need to purchase separate coverage for such an exposure.

Termination

This condition contains the policy’s cancellation and nonrenewal provisions. Almost every state has statutory requirements, which are added to policies by means of endorsements that contain the state’s limitations on the insurer’s right to cancel or nonrenew a policy and the amount and kind of notice required for an effective notice of cancellation or nonrenewal.

The insured’s failure to pay premiums is a permissible ground for cancellation. Also, if your driver’s license has been suspended or revoked, or if any driver who lives with you or who customarily uses your covered auto is suspended or revoked, the insurer may cancel the policy. Finally, the insurer may terminate if it discovers that the policy was obtained through material misrepresentation.

The ISO personal auto policy also contains two automatic termination provisions. The first of these states that if the insurer has offered to renew or continue coverage and the insured fails to pay the premium, the policy will automatically terminate at the end of the current policy period.

The second provision states that if the insured obtains any other insurance on your covered auto, any similar insurance provided by the policy will terminate for that auto on the effective date of the other policy. Such provisions may conflict with your state’s laws governing cancellation of policies and may not be enforceable.

Transfer of the Insured’s Interest under the Policy

This is another standard American insurance policy condition. It provides that the named insured’s rights under the policy cannot be assigned without the insurer’s written consent. This provision reinforces the concept that insurance policies are personal contracts between the insured and the insurer. While items of property may be the subject of a policy and their physical characteristics are important, the contract is between the insured and the insurer. It is the insured’s conduct and standing that matters to the insurer. Hence, assuming acceptability of a new and different insured to the insurer after the sale of a house or a car, the insurer may be willing to issue a policy to the new owner. But it is under no obligation to do so. And, the insured cannot circumvent the insurer’s rights by assigning his or her rights under a policy.

In event of the death of the named insured, this condition does provide that the spouse of the named insured will be covered, as will be the estate’s legal representative (i.e.,executor). Such coverage applies only until the end of the policy period. Depending on the length of time needed to close the estate or on the actual persons who will be driving the vehicle while the estate is open, the executor may need to obtain additional coverage. For example, if the title to the vehicles is held solely in the name of a deceased husband, the executor of the estate probably needs to obtain an auto policy in the name of the estate, the executor, and all persons who have use of the vehicles until the estate is settled.

Two or More Auto Policies

This is a policy condition that is pretty much exclusive to personal auto policies. It provides that if:

this policy and any other auto insurance policy issued to you by usapply to the same accident, the maximum limit of our liability underall the policies shall not exceed the highest applicable limit of liabilityunder any one policy.

This is intended to be merely an antistacking provision. If several policies issued by the same insurer to the same insured apply to the same loss, there is nothing inherently unfair about a contractual provision that states that only the highest applicable policy limit applies, not the limits of all applicable policies.

However, the very existence of this provision seemingly undermines the automatic termination provision previously discussed. This provision expressly contemplates the possibility that the insured might for various reasons obtain several policies, including from the same insurer, that could result in overlapping coverages. Under the rules of policy interpretation applicable in many states, the foregoing condition is yet another reason why the automatic termination clause may well be unenforceable, particularly under the facts of a specific situation.

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