CHAPTER OBJECTIVES

When you have finished this chapter, you should be able to

• Determine if an automobile is eligible for coverage under the Personal Auto Policy (PAP)
• Identify and explain the four coverage sections of the PAP
• Describe the coverage features of the PAP liability coverage, including the persons and automobiles for which coverage is provided
• Describe the scope of coverage under the medical payments coverage of the PAP, including the persons to whom the coverage is applicable
• Describe the scope of coverage under the uninsured motorists coverage of the PAP, including the persons to whom the coverage is applicable
• Describe the scope of coverage under the Damage to Your Auto coverage of the PAP
• Identify and explain the Duties after Loss and general provisions of the PAP

In this chapter, we continue our study of automobile insurance, turning now to an examination of one of the contracts under which auto insurance is provided, the Insurance Services Office (ISO) Personal Auto Policy (PAP). The PAP is only one of several auto forms in use. Some insurers have developed their own contracts, which differ in detail from the ISO form. Still, the PAP is the most widely sold of the various auto insurance forms and serves as a standard against which other policy forms may be compared.

GENERAL NATURE OF THE PERSONAL AUTO POLICY

The Personal Automobile Policy (PAP) was introduced in 1977. It is written in the simplified terminology that has become common in the insurance field, but when it was introduction, it was considered a remarkable departure from the existing contracts. The policy has been revised several times, and the following discussion is based on the 2005 edition.¹

The automobile insurance policy is one of the most complicated of all insurance contracts. The contract's complicated nature results from the need to provide coverage against different types of losses under diverse circumstances. The ownership or operation of an auto involves three types of loss:

1. Legal liability
2. Injury to the insured or members of the insured's family
3. Damage to or loss of the auto itself

The PAP is a package policy, providing protection against all three of these types of loss. It may be used to provide liability coverage, medical payments coverage, uninsured motorist coverage, and physical damage insurance. It may be endorsed to provide no-fault benefits in those states where such laws exist.

Besides covering various types of loss, the policy must provide protection in various situations. Most people in our society operate autos, and often the vehicle being driven is not owned by the operator. Jones may borrow Brown's car, and as we have seen, Brown may be held liable with Jones if the latter is negligent. It is, therefore, necessary to devise a contract that will protect the owner when someone else is operating his or her auto. In addition, the contract should protect the insured when he or she is driving someone else's car. Both requirements add to the contract's complexity. In addition, the broadness of coverage in a policy designed to meet these various situations makes insurers limit its availability to specific classes. Before turning to an analysis of the policy, we will briefly examine the eligibility rules of the PAP.

Eligibility

The PAP is available only to certain eligible classes of persons and covers specified types of vehicles. First, the auto must be owned by an individual or by a husband and wife, who are residents of the same household.² Autos owned by partnerships, corporations, or by two or more individuals who are not resident relatives of the household are ineligible.³ For the purposes of eligibility and coverage, a vehicle leased under a written agreement for at least six months is treated as if it were owned.

Furthermore, the auto must be of a specific type. The first class of eligible vehicles consists of private passenger automobiles, defined as “a four-wheel motor vehicle, other than a truck type, owned or leased under contract for a continuous period of at least six months.” The vehicle may not be used as a public or livery conveyance, and it may not be rented to others.

A pickup or van may also be eligible for coverage, depending on its size and use. The pickup or van must have a gross vehicle weight of fewer than 10,000 pounds and may not be used for the delivery or transportation of goods and materials. An exception to this “use” limitation permits delivery or transportation of goods or materials that are incidental to the business of installing, maintaining, or repairing furnishings or equipment, or use that is for farming or ranching.

Finally, the PAP may be used to provide coverage on motorcycles, motor homes, golf carts and similar vehicles, and snowmobiles. The vehicle must be owned by an individual, husband and wife, or two relatives who are residents of the same household. A special endorsement is used to modify the coverage of the policy when it is used for these types of vehicles.⁴

Policy Format

The PAP follows the modern insurance contract style and is written in simplified terms. “You” and “your” are used throughout the policy to refer to the named insured and spouse, and “we,” “us,” and “our” are used to refer to the insurer. Wherever possible, awkward terminology has been removed and the legalistic phrases that once characterized insurance contracts have been removed. The policy is divided into six parts, designated as follows:

1. Part A, Liability Coverage
2. Part B, Medical Payments Coverage
3. Part C, Uninsured Motorists Coverage
4. Part D, Coverage for Damage to Your Auto
5. Part E, Duties After an Accident or Loss
6. Part F, General Provisions

Parts A through D are the four separate coverages that may be included in the policy. Each part has its own insuring agreement and exclusions. The parts are made effective by an indication in the declarations that the appropriate premium has been paid and that the coverage applies. Parts E and F apply to all policy sections. A specimen of the PAP should be referred to in the following discussion.

LIABILITY COVERAGE

The liability part of the PAP, designated Part A, provides the most important coverage. It contains the liability insuring agreement, supplementary payments, liability exclusions, and special conditions applicable to the liability coverage.

Liability Insuring Agreement

The liability insuring agreement obligates the insurer to pay, up to the policy limit, damages for which any “insured” becomes legally responsible because of an auto accident. Coverage for bodily injury and property damage is provided with split limits, with separate per person and per accident bodily injury limits and a separate limit for property damage. The minimum limits available vary with the financial responsibility law of the state. In most states the minimum bodily injury limits are $25,000/50,000, and the minimum property damage limit is generally $10,000 or $20,000, but these limits can be increased. The bodily injury limits may be increased to $50,000/100,000, $100,000/200,000 or $100,000/300,000, $250,000/500,000 or higher. The property damage limit can be increased to $25,000, $50,000, $100,000, and higher. As in the case of most liability contracts, the insurer agrees to defend the insured but reserves the right to make any settlement it considers appropriate. The insuring agreement clarifies the company's obligation to defend ends when the policy limits are exhausted.

Persons Insured under Liability Coverage Since the policy agrees to pay sums an insured becomes obligated to pay, the definition of insured is a critical determinant of coverage. The PAP defines an insured as follows:

Although the provision is written in simplified terminology, it considers various situations and is, therefore, necessarily complex. A brief analysis of the definition should help clarify it.

Initially, coverage is provided for “you” or any family member for the use of any auto or trailer. Reference to the policy definitions reveals that “you” means the named insured listed in the declarations and his or her spouse if a resident of the same household. Furthermore, the policy definition of “you” includes a spouse who ceases to be a resident of the household for a limited period. This new provision is intended to eliminate short-term gaps in coverage arising from changes in relationships that existed under earlier forms. Coverage is provided for a spouse who leaves the residence for 90 days after changing residency or until he or she obtains a separate policy or until the policy period ends, whichever comes first. The definitions section indicates the term “family member” means a person related to the named insured by blood, marriage, or adoption, including a ward or foster child, who is a resident of the named insured's household.

For the named insured and resident relatives, coverage applies to any auto, which means the designated covered auto⁵ and all borrowed or rented nonowned autos. There is no restriction on the borrowed or rented auto type, and it could include, for example, a bus or truck. Although the definition of insured states that coverage applies to the named insured and resident relatives for any automobile, the contract must be interpreted as a whole, and this broad statement is subject to qualification by the policy's other provisions. Certain autos are eliminated from coverage by the exclusions that will be discussed shortly. In addition, while the definition of insured does not refer to a requirement of permission, one of the exclusions (discussed shortly) eliminates coverage for anyone operating a vehicle without a reasonable belief that he or she is entitled to do so.

Persons other than the named insured and family members are covered while using the “covered auto” subject to the requirement that the use be with the reasonable belief that the person has a right to do so.

The extension of coverage to persons or organizations held vicariously liable is divided into two parts: One applies to the owned auto, and the other applies to nonowned autos.

Part 3 of the definition extends coverage to anyone vicariously liable for the owned auto's operation. This would include, for example, the employer of any person operating a covered auto as an insured.

Part 4 of the definition extends coverage to anyone held vicariously liable for the operation of a nonowned auto by the named insured or a family member.

For nonowned autos under Part 4 of the definition, there is no coverage for the owner of the nonowned auto even if he or she is held vicariously liable for the acts of the named insured or the resident relative operating the vehicle. To illustrate the coverage for vicarious liability with respect to owned and nonowned autos, consider the following example. Smith, an insured under a PAP, uses her car in her occupation. In the event of a loss in which her employer is joined in the suit, Smith's policy will provide coverage for Smith and her employer. If Smith borrows a friend's car to use in her occupation, Part 4 of the definition provides coverage for the vicarious liability of Smith's employer. However, Smith's policy will not extend coverage to the friend if he is sued as the car's owner. The owner must look to his own policy for protection.

Because the PAP provides coverage for the named insured and family members while operating borrowed autos and provides coverage for other persons while operating the covered auto, situations will exist in which two policies will apply to the same loss. For example, if White borrows Brown's auto, Brown's policy will provide coverage for Brown and White in the event of a loss. Brown is covered as you (the named insured), and White has coverage as a permissive user. In addition, White has coverage under his own policy as a “you” (named insured) while using a borrowed auto with permission. When two or more policies apply in the same loss, the policy on the auto being driven is primary, and the policy of the permissive user is excess.

The “Covered Auto” As is true of the definition of insured, the definition of insured autos is an important coverage determinant. Because of its importance, the definition of covered auto is reproduced here in its entirety:

A vehicle listed in the declarations is, of course, a covered auto. Certain newly acquired autos are covered autos as explained in greater detail in the paragraphs that follow. A trailer owned by the insured is covered. There is no requirement that the trailer be listed, as long as it meets the policy definition of “trailer.” Finally, any nonowned auto is covered while used as a temporary substitute for a covered auto while the covered auto is withdrawn from use because of breakdown, repair, servicing, loss, or destruction.

The inclusion of a “newly acquired auto” in the definition of “your covered auto” provides coverage for autos acquired during the policy period but on a qualified basis. First, the auto must be one that meets the PAP's eligibility requirements (i.e., it must be a private passenger auto or a pickup or van that does not exceed the gross vehicle weight limitation and is not used for delivery or transportation of goods except as allowed by the eligibility requirements). Separate provisions apply for coverages other than physical damage and for the physical damage coverages. For liability, medical payments, and uninsured motorists coverages, replacement autos are automatically covered for the remainder of the policy period without notice to the insurer. For additional vehicles, the insurer must be notified and coverage must be requested within 14 days of the acquisition date for these coverages. If a loss were to occur during the 14-day grace period and before notice is given to the company, coverage will apply. This means the liability, medical payments, and uninsured motorists coverages will apply to replacement autos for the remainder of the policy period even without notice to the company.

For physical damage coverages, newly acquired autos (i.e., replacement vehicles and additional vehicles) are automatically covered for 14 days for whatever physical damage coverage (Collision Coverage and/or Other Than Collision Coverage) is provided by the policy for at least one insured auto. During this 14-day period, the newly acquired auto has the broadest physical damage coverage that is provided by the policy. For example, if the policy covers two automobiles, one with physical damage coverage and one without, any newly acquired vehicle is automatically covered for the physical damage coverage for 14 days.⁶ The same feature will apply when one vehicle has Collision Coverage and the other does not or when two vehicles are insured with different deductibles. If the policy does not include physical damage coverage on any of the covered autos, newly acquired autos are automatically covered for only 4 days. This automatic coverage is subject to a $500 deductible that is applicable to Collision Coverage or Other Than Collision Coverage. If the insured does not request coverage within the grace period provided, coverage for a newly acquired auto begins at the time coverage is requested.

Liability Exclusions

There are 13 exclusions applicable to the liability coverage. Nine of these exclusions (designated A.) eliminate coverage for certain persons. The other 4 (B.) exclude specified vehicles.

Exclusion A.l. excludes coverage for any insured who intentionally causes bodily injury or property damage. It would be contrary to public policy to provide protection against the financial consequences of injuries or damage caused intentionally.

Exclusion A.2. excludes coverage for damage to property owned or being transported by an insured. Damage to owned property or property being transported should be covered under a property insurance form, such as the Homeowners Policy, or a floater policy.

Exclusion A.3. is the PAP version of the care, custody, and control exclusion found in most liability contracts. It excludes coverage for any insured for damage to property rented to, used by, or in the care of that insured, thus excluding damage to borrowed or rented property.

Whereas Exclusion A.2. eliminates coverage on owned property and property being transported by the insured, A.3. goes further and excludes coverage on rented property and property in a bailment status even when it is not being transported. If the insured negligently backs over a borrowed bicycle, he or she might be held liable, but the auto policy will not respond. However, an exception to the exclusion states that it does not apply to damage to a residence or private garage.

Exclusion A.4. eliminates coverage for injuries to employees in the course of their employment except domestic employees in those states where workers compensation laws do not apply to domestic employees. This provision eliminates coverage for the driver's employer (who is otherwise covered for vicarious liability) if the liability involves injury to an employee of that employer.

Exclusion A.5. excludes coverage for liability while the auto “is being used as a public or livery conveyance.” An exception to the exclusion clarifies that it does not apply to shared-expense car pools.⁷

Exclusion A.6. eliminates coverage for any insured employed in the automobile business. However, the exclusion does not apply to the owned auto while being operated by the named insured or a family member (or by a partner, agent, or employee of the named insured or family member). Thus, if the named insured or a family member is operating the owned auto in the auto business, coverage will apply. However, there is no coverage for persons in the auto business (other than the named insured and family members) while operating the owned auto. Also, if the named insured or family member operates a nonowned auto while employed in the auto business, there is no coverage. If Abner takes his auto to a garage for a tune-up, there is no coverage under Abner's policy for Baker, the mechanic, while test driving the car. If Baker has a PAP, his policy will not cover him while operating Abner's car. The excluded exposures may be covered under a special business automobile policy called the Garage Policy. Exclusion A.7. is a “business pursuits” exclusion.

Its purpose is to eliminate coverage for business use of commercial vehicles, but it does so through a curious combination of exclusions, exceptions, and cross-references. Initially, the exclusion eliminates coverage for any insured using an auto in any business except farming or ranching (or in the auto business, which as noted, is subject to a separate Exclusion A.6.). The provision then excepts private passenger autos, pickups and vans, and trailers used with these types of autos from the exclusion. This grants coverage for owned and nonowned autos of these types used in business. What remains excluded are trucks (other than pickups and vans) while used in business.

The exception for farming or ranching applies to the entire exclusion. This means pickups and vans are covered if used in farming, and other types of trucks are covered.

Exclusion A.8. eliminates coverage for any insured using a vehicle without a reasonable belief that he or she is entitled to do so. Although the provision requires only that the individual have a “reasonable belief” that he or she is entitled to use the auto, the exclusion can create dangerous gaps in coverage. As an example, assume that Brown Jr. has his parents' car at school. White, another dorm resident, takes the car without permission and is involved in a spectacular accident. Many people are injured and the lawsuits promise to be astronomical. White appears to be in serious trouble. Although the policy covering Brown's car protects anyone operating it with “a reasonable belief” he or she is entitled to do so, there is no basis for such belief and, therefore, no coverage. If White's parents have a PAP, the same exclusion will eliminate coverage under that policy.⁸ In the 1998 revision, a provision was added to exclusion A.8. stipulating the exclusion does not apply (and coverage is provided) to a family member while using a covered auto belonging to the insured.

Exclusion A.9. eliminates coverage for any insured who is also insured under a nuclear energy liability policy or who would be an insured under such a policy except for the exhaustion of its limits.

Exclusion B.1. eliminates coverage for liability arising out of motorcycles or other vehicles with fewer than four wheels or vehicles designed mainly for use off public roads (such as an all-terrain vehicle). The exclusion is subject to three exceptions. First, it does not apply if the vehicle is being used by an insured in a medical emergency. Second, it does not apply to trailers. Finally, the exclusion does not apply to any nonowned golf cart. This means that the individual's PAP will provide liability coverage for borrowed or rented golf carts but not for use of the insured's owned golf cart.

Exclusion B.2. eliminates coverage on vehicles owned by or furnished for the regular use of the named insured other than the Covered Auto. Automobiles owned by the insured at the policy's inception and not declared are excluded. Less obvious to some insureds is the exclusion of autos furnished for regular use. For example, a person may be furnished a company car by his or her employer. In the event of an accident, the employee must look to the employer's policy for coverage since this exclusion eliminates coverage under the employee's policy.⁹ Normally, the employer will have coverage to protect the employee. However, an individual who wants to arrange coverage on an auto that is furnished for his or her regular use may do so under the Extended Nonowned Endorsement to the PAP, which provides coverage for autos furnished for regular use.

Exclusion B.3. is related to Exclusion B.2. but differs in one important respect. This exclusion eliminates coverage for liability arising out of autos owned by or furnished for the regular use of family members. An exception to the exclusion states that it does not apply to the named insured or spouse. The intent is to exclude resident relatives for autos they own or are furnished for their regular use. However, if the named insured or spouse should use an auto owned by or furnished for the regular use of a family member, coverage applies for the named insured or spouse. In the absence of this important exception to the exclusion, the policy's coverage would never apply to an auto owned by another family member. This would be a serious gap in coverage for the parent with high limits of coverage who occasionally operated a son's or daughter's auto with low limits.

Exclusion B.4. excludes coverage for any vehicle located inside a facility designed for racing for the purpose of competing in or practicing or preparing for any prearranged or organized racing or speed contest. (Although the insured's souped-up stock car is covered while being used on streets and highways, it is not covered while being raced at the fair grounds.)

Other Liability Coverage Provisions

In addition to the liability insuring agreement and exclusions, Part A contains the following additional provisions applicable to the liability coverage.

Supplementary Payments In addition to the promise to pay sums that the insured is legally obligated to pay and the cost of defending suits, the insurer promises to pay certain other costs under the Supplementary Payments section:

1. The policy promises to pay the cost of bail bonds required of the insured because of an accident provided the accident results in bodily injury or property damage covered under the policy. The limit of payment for such bonds is $250.
2. Premiums on appeal bonds and bonds to release attachments in suits covered under the policy are covered in full.
3. Interest on a judgment after the judgment has been entered is covered.
4. Loss of earnings up to $200 a day while attending hearings or trials at the company's request is covered.
5. Other reasonable expenses incurred at the request of the insurer are covered.

Amounts payable under the supplementary payments provision are payable in addition to the liability limit.

Out of State Coverage One of the conditions of Part A, designated Out of State coverage, provides two important qualifications to the liability insuring agreement when the insured auto is involved in an accident in another state. First, if the state in which the accident takes place requires higher limits under its financial responsibility law than those of the policy, the policy automatically adjusts to provide the higher required limits. In addition, if the state has a compulsory insurance law that applies to nonresidents (such as a no-fault law), the policy changes automatically to include the minimum amounts of coverage required.

Limits of Liability The Limit of Liability provision stipulates that the per person and per accident bodily injury limits apply, and the per accident property damage limit is the most the insurer will pay regardless of the number of insureds, claims made, vehicles insured under the policy, or vehicles involved in an accident. This section also states that no one will be entitled to receive duplicate payments for the same elements of loss under liability coverage and medical payments coverage, uninsured motorists coverage, or underinsured motorists coverage provided by the policy.

MEDICAL PAYMENTS COVERAGE

Medical payments coverage is a special form of accident insurance, providing coverage for medical expenses incurred by insured persons in automobile-related injuries. The basic limit of liability for medical payments coverage is $1000 per person, with no maximum per accident. For a small additional premium (a few dollars a year), this limit can be increased to $5000 or $10,000 per person, again with no aggregate per accident.

Medical Payments Insurance Agreement

The Medical Payments Coverage insuring agreement is simple and straightforward:

The definition of bodily injury means “bodily harm, sickness or disease, including death that results.” In the case of fatalities, funeral expenses are paid, again up to the limit for the coverage.

As in the liability insuring agreement, the definition of insured is an important determinant of coverage. Coverage applies to two classes of persons.

First, coverage applies to the named insured and to any family member who suffers bodily injury caused by accident while occupying a covered auto. The term occupying is defined to include “in, upon, or getting in, on, out, or off.” This broad definition of occupying means the fairly common injuries caused by slamming car doors on hands and fingers are covered under the medical payments coverage.

Coverage also applies to the named insured and family members if while a pedestrian they are struck by any motor vehicle designed for use on public roads or by a trailer of any type. A child of the insured might be struck by an auto while crossing the street; in such a case, the medical payments coverage would pay for medical expenses incurred up to the limit for the coverage. Under this “struck by” facet of the coverage, the injured party might be injured while a pedestrian. Although the insuring agreement makes specific reference to “pedestrian,” an Insurance Services Office clarification (ISO) states there was no intent, by use of the term “pedestrian,” to limit coverage to insureds when struck by a vehicle while walking. In other words, for example, an insured struck by a motor vehicle while riding a bicycle is entitled to Medical Payments coverage under the “pedestrian” provision.

Persons other than the named insured and family members are covered for medical payments but only while occupying the insured's covered auto. Persons injured while occupying a nonowned auto may have coverage for medical payments under the coverage on the nonowned auto or under their own policies.

Medical Payments Exclusions

Like the liability coverage, the medical payments coverage is subject to its own set of exclusions. Several exclusions are almost identical with those in the liability section; therefore, it is unnecessary to repeat their discussion here. The exclusions under the liability section that also apply to the medical payments coverage are those that relate to the following:

• Vehicles with fewer than four wheels (1)
• Autos used as a public or livery conveyance (2)
• Autos (other than a covered auto) owned by or furnished for the regular use of the named insured (5)
• Autos (other than a covered auto) owned by or furnished for the regular use of family members (6)
• Autos operated without a reasonable belief that the user is entitled to do so (7)
• Trucks being used in business (8)
• Occupying a vehicle in a facility for racing or competing (11)

Exclusion 3 excludes coverage for injuries sustained while occupying a vehicle that is located for use as a residence or premises. Since the definition of covered auto includes a trailer owned by the insured, this exclusion is required to prevent the policy from becoming a general accident policy in those instances in which the insured owns and occupies a house trailer.

Exclusion 4 applies to individuals injured in the course of their employment and eliminates coverage if benefits are available or required under a workers compensation law.

The next two exclusions under the medical payments coverage (Exclusions 9 and 10) eliminate coverage for injuries caused by the discharge of nuclear weapons, war, civil war, insurrection, rebellion or revolution, and injuries caused by nuclear reaction, radiation, or radioactive contamination.

Limitations Applicable to Medical Payment Recoveries

The PAP's Medical Payments section is subject to several provisions that limit the insured's recovery. First, the Limit of Liability provision stipulates that duplicate payments will not be made for the same loss under the medical payments coverage and the uninsured or underinsured motorists coverage (discussed shortly).

Recovery under medical payments is further limited by the Other Insurance clause. This clause provides that Medical Payments coverage of the policy is excess with respect to any nonowned auto; when other auto medical payments coverage exists, payment is made on a pro rata basis, based on the medical payment limits.

Finally, the medical payments coverage is subject to a subrogation clause. The general provisions require the insured to assign to the insurer any right of recovery against a third party to the extent that he or she receives payment from the insurer.

UNINSURED MOTORIST COVERAGE

In spite of the financial responsibility laws and the dictates of common sense, some people drive without auto liability insurance. Uninsured motorist coverage, designated Part C in the PAP, is designed to protect the insured and his or her family for injuries sustained as a result of being struck by an uninsured or hit-and-run driver or a driver whose insurance company has become insolvent.¹⁰

Uninsured Motorist Insuring Agreement

In its simplest terms, the uninsured motorist coverage insuring agreement promises to pay the amount that an injured insured could have collected from the insurer of an uninsured driver if such driver had carried auto liability insurance. As in the case of the liability coverage, uninsured motorist coverage is written with split limits of liability applicable per person and per accident. The standard limit for the coverage is the minimum limit required under the state's financial responsibility law, but higher limits are available. Increased limits may be purchased up to the limit carried under the policy's liability section (Part A).

Coverage applies when an insured is injured by an “uninsured motor vehicle.” Uninsured motor vehicle is defined to include (1) a motor vehicle that is not covered for bodily injury liability insurance or for which the bodily injury limits are less than the limits required by the state law, (2) a hit-and-run vehicle, and (3) a vehicle that was insured at the time of the accident, but the insurer becomes insolvent. The policy excludes from the definition of “uninsured motor vehicle” vehicles owned by or furnished for the regular use of the named insured or family members and vehicles owned or operated by qualified self-insurers or government bodies. In addition, farm-type tractors or equipment designed for use off public roads while not on public roads and vehicles operated on rails or crawler treads are excluded.

Persons Insured The definition of Insured under uninsured motorist coverage includes three classes of persons: (1) the named insured and any family member, (2) any other person occupying the insured's covered auto, and (3) any person for damages that person is entitled to recover because of injury to a person described in (1) or (2). The named insured and family members are covered even when they are not occupying an auto and could recover if injured by an uninsured motorist as a pedestrian or, say, on a bicycle. Other persons are covered only if injured while occupying the insured's covered auto.

Uninsured Motorist Exclusions In addition to the previously noted exclusions of certain types of vehicles from the definition of “uninsured motor vehicle,” the policy contains eight additional exclusions. Two of these are grouped as Exclusion A, three are grouped as Exclusion B, and the remaining two are designated Exclusions C and D.

Exclusion A.1. excludes injuries sustained while occupying an owned vehicle not insured for uninsured motorist coverage under the policy. Exclusion A.2. excludes bodily injury sustained by any family member while occupying or if struck by a vehicle owned by the insured and covered on a primary basis under another policy. This provision is designed to eliminate pyramiding of uninsured motorist coverage limits.

Exclusion B.1. excludes coverage under uninsured motorist coverage if the injured person settles with the negligent party, and the settlement prejudices the insurer's right to recover payment. This is to preserve the insurer's right to recovery against the negligent uninsured motorist, which would be impaired by such settlement.

Exclusion B.2. is the standard exclusion of an auto being used as a public or livery conveyance, and B.3. is the exclusion of vehicles used without a reasonable belief the person is entitled to do so. The exclusion requiring reasonable belief that the person is entitled to use a vehicle, like the same exclusions under liability coverage and medical payments coverage, does not apply to a family member using a covered auto.

Exclusion C stipulates the coverage shall not apply directly or indirectly to benefit any insurer or self-insurer under any workers compensation, disability benefits, or similar law. This means that such an insurer or self-insurer would not be subrogated to the injured party's right of recovery under the uninsured motorist coverage if the injury was sustained during employment and the insurer paid workers compensation benefits to the injured insured.

Exclusion D excludes coverage for punitive or exemplary damages under the uninsured motorist coverage. It was added to the policy in response to court decisions in some states that ruled that punitive damages were covered because they were not specifically excluded.

Limitations on Payment The Uninsured Motorist Coverage's Limit of Liability provision establishes certain limitations on the amount payable under the coverage. It provides that amounts otherwise payable under the coverage will be reduced by all sums paid by or on behalf of the party who is legally responsible (i.e., the uninsured motorist). Payment under uninsured motorist coverage is reduced by amounts payable under a workers compensation law, disability benefits law, or any similar law. Finally, payments under uninsured motorist coverage are reduced by amounts the recipient is entitled to receive under the Liability section of the policy.

The Other Insurance Provision of the uninsured motorist coverage makes coverage excess over the coverage on any nonowned automobile. In addition, recovery under all policies is limited to the highest applicable limit for any one vehicle under any insurance providing primary or excess coverage.

Basis for Settlement Although the insuring agreement stipulates the company will pay damages a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle, the policy also states that the question of whether the injured person is entitled to collect from the uninsured motorist and, if so, the amount to which he or she is entitled, is to be decided by agreement between the covered person and the company. If the covered person and the company cannot agree on either point, either party may request arbitration. If both parties agree to arbitration, each party selects an arbitrator, and the two arbitrators select a third. The three arbitrators settle the matter. If the arbitrators cannot agree on an umpire within 30 days, the court of jurisdiction appoints one. Each party pays the cost of his or her arbitrator, and they share the umpire's cost.

Underinsured Motorist Coverage

Those insureds who purchase uninsured motorist coverage are eligible for an additional coverage: underinsured motorist coverage. Underinsured motorist coverage, which is added to the PAP by endorsement, covers bodily injuries sustained by an insured when the negligent driver has insurance, but the limits are less than the limits of the underinsured motorist coverage. As is true in uninsured motorist coverage, the injured party's insurer agrees to pay the amount that the insurer of the other driver would have paid if he or she had been adequately insured. The underinsured motorist coverage does not duplicate or overlap with uninsured motorist coverage. Uninsured motorist coverage applies only when the other driver does not carry insurance, is a hit-and-run driver, or is insured by an insurer that becomes insolvent. In the case of underinsured motorist coverage, the other driver has insurance, but the limits of coverage are less than the amount to which the injured party would be entitled based on his or her injuries. As in the case of uninsured motorist coverage, determination of the amount to which the injured party is entitled is decided by agreement between the insurer and the injured party or by arbitration.¹¹

Underinsured motorist coverage may be written only when the insured has purchased increased limits for uninsured motorists coverage. The underinsured motorists coverage must be written for the same limit as the uninsured motorists coverage.

PHYSICAL DAMAGE COVERAGE

The physical damage coverage of the PAP, Part D, is designated Coverage for Damage to Your Auto. Like the liability, medical payments, and uninsured motorist parts, the physical damage coverage includes its own insuring agreement, exclusions, and special conditions.

Physical Damage Insuring Agreement

The single physical damage insuring agreement, which provides coverage on an open-peril basis, states that loss by collision is covered only if the declarations section so indicates:

Earlier forms of auto physical damage coverage, such as the Family Auto Policy, divided physical damage coverage into two separate insuring agreements: comprehensive and collision. Although the PAP refers to loss by collision, the term comprehensive is not used. The open-perils coverage excluding collision will undoubtedly continue to be referred to as comprehensive as well as by its newer designation, other than collision.

Loss Other Than by Collision The coverage for loss other than by collision is essentially an openperils type of property coverage. Coverage applies to all losses except those specifically excluded. The policy specifically designates several perils as “not considered collision”:

Because these losses are not considered collision losses, they are covered as comprehensive losses. Because the collision deductible is normally higher than for other losses, this is beneficial to the insured. The policy provides the insured may, at his or her option, consider breakage of glass to be loss due to collision. This will be advantageous in two situations. First, if the insured carries collision but does not carry comprehensive insurance, coverage would exist for glass broken in a collision. In addition, if glass is broken in a collision, the insured benefits by having the glass breakage subject to a single deductible with other damage to the vehicle rather than subject to a separate comprehensive deductible.

Collision Coverage Collision is defined as “the upset of your covered auto or a ‘non-owned auto’ or its impact with another vehicle or object.” Coverage for loss by collision applies to the covered auto regardless of fault and will respond when the insured cannot recover from another party because his or her personal negligence was the cause of the damage. But collision coverage can be valuable in those cases in which the insured is not at fault.

In those cases in which the driver of the other auto is to blame, we would expect his or her Liability coverage to respond for damages to the owned auto. However, the other party may not have insurance. The innocent driver with Collision coverage can collect the amount of the loss (less any deductible) and then leave the job of collecting from the negligent driver to the insurance company. The PAP includes a subrogation provision under which the insured is required to assign to the insurer the right of claim against a negligent third party to the extent that he or she collects under the policy. Also, when the insured is at fault, the Collision coverage will pay for damage to his or her auto.

Physical Damage to Nonowned Autos We have noted that the physical damage coverage of the PAP applies to the insured's covered auto and to a nonowned auto. This means that when the individual has purchased physical damage coverage on his or her own auto, such coverage is extended to nonowned autos being used by or in the custody of the insured or a family member. If there is a loss to a nonowned auto, the insurer will provide the broadest coverage applicable to any covered auto shown in the declarations. If, for example, a policy insures one owned auto for collision and comprehensive and another owned auto for comprehensive only, a nonowned auto will be covered for comprehensive and collision if a loss occurs.

The definition of “non-owned auto” under the physical damage section is an important coverage determinant. A non-owned auto is defined as follows:

So, the term non-owned auto includes two parts. The first refers to a private passenger auto, pickup, van, or trailer not owned by, or 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. The second part includes any nonowned auto or trailer used as a temporary substitute for a covered auto that is out of normal use because of its breakdown, repair, servicing, loss, or destruction.

Coverage on nonowned autos is subject to the same insuring agreements as owned autos. Nonowned autos are subject to three specific exclusions (discussed next). One of these exclusions eliminates coverage for loss to a nonowned vehicle when used by an insured without a reasonable belief that the user is entitled to do so.

The question of permissive use arises in connection with the owned auto. The policy's subrogation clause states the insurer does not have the right to subrogate against a person who uses a covered auto with a reasonable belief he or she is entitled to do so. This means, conversely, that the insurer may subrogate against a person operating the vehicle without permission after making payment for damage arising out of such operation.

The physical damage coverage on nonowned autos is excess over other coverage applicable to the nonowned auto. If Brian borrows Joan's car and demolishes it, Joan's policy will apply if she carries collision coverage. If Joan does not carry collision on her car, Brian's collision coverage will apply. The same is true with respect to a borrowed trailer. The definition of nonowned auto includes “trailer,” so coverage applies to rented or borrowed trailers. The Limit of Liability provision imposes a $1500 limit on payment for damage to nonowned trailers.

One situation in which coverage for damage to nonowned autos can be important is the rental of an automobile. National car rental companies such as Hertz and Avis provide the renter with auto insurance covering liability, medical payments, and uninsured motorist coverage (plus no-fault benefits in those states with such laws) but do not provide the renter with physical damage coverage. Collision damage waiver (CDW) is offered at a cost of $9 or $10 per day. For those persons who carry comprehensive and collision on their own cars, the extension of physical damage coverage to nonowned autos under the PAP provides coverage on rented cars, subject to the policy deductible.¹²

Physical Damage Exclusions

Even though the physical damage coverage is on an open-perils basis, the number of exclusions in this section of the policy is small. There are 13 exclusions: 5 of these exclude loss to owned and nonowned vehicles and their equipment under specified circumstances, 3 apply only to nonowned autos, and 5 eliminate certain types of property from coverage.

Exclusions 1, 2, 3, 6, and 12 deal with specific loss situations. Exclusion 1 is the exclusion of loss while the auto is being used as a public or livery conveyance.

Exclusion 2 eliminates coverage for damage due and confined to wear and tear, freezing, mechanical or electrical breakdown or failure, and road damage to tires. Losses of this nature are inevitable or at least controllable by the insured. However, the exclusion does not apply if the damage results from total theft of the insured auto.

Exclusion 3 eliminates coverage for damage caused by radioactive contamination or by the discharge of a nuclear weapon and war in all its forms. Exclusion 6 excludes the total loss of an auto by destruction or confiscation by government or civil authorities. The exclusion was added in response to the increasingly frequent confiscation of vehicles by law enforcement agencies and decisions holding that such confiscation was a covered loss under the policy, because it was not excluded. The exclusion does not apply to the interests of a loss payee under the policy.

Exclusion 12 excludes any owned or nonowned auto while located inside a facility designed for racing, for the purpose of competing in or practicing for a prearranged or organized racing or speed contest.

Exclusions 8, 11, and 13 apply to nonowned autos. Exclusion 8 excludes coverage for damage to a nonowned vehicle being used without a reasonable belief that the user is entitled to do so. It is similar in wording and intent to the permissive use exclusion discussed in connection with the liability coverage.

Exclusion 11 is a business-related exclusion applicable to nonowned autos. It eliminates coverage for damage to nonowned autos being used by any insured while employed in the automobile business. This eliminates coverage for damage to a nonowned auto while being operated by the named insured or a relative who is employed in the automobile business.

Exclusion 13 excludes coverage for loss to a rental vehicle if the rental company is precluded from recovering for the loss because of the provisions in the rental agreement or in the applicable state law.

Exclusions 4, 5, 7, 9, and 10 exclude loss to specific types of equipment. Exclusion 4 deals with electronic equipment that reproduces, receives, or transmits audio, visual, or data signals. This includes, for example, radios and CD systems, personal computers, video entertainment systems, telephones, and televisions. This equipment is excluded unless it is permanently installed in the auto, in which case the exclusion does not apply. However, under the Limit of Liability provision, if the equipment is permanently installed in a location other than that used by the auto manufacturer for installation, payment is limited to $1000.¹³ Exclusion 5 eliminates coverage for tapes, records, disks, or other media designed for use with equipment described in Exclusion 4.

Exclusion 7 deletes coverage on camper bodies, trailers, or motor homes not listed in the declarations and facilities or equipment used with such vehicles. Facilities and equipment include, but are not limited to, cooking, dining, plumbing and refrigeration facilities, and awnings or cabanas. There are two exceptions to the exclusion. First, it does not apply to nonowned trailers or camper bodies (including facilities and equipment). (Under the Limit of Liability provision of the physical damage section, there is a $1500 limit for loss to nonowned trailers, but no dollar limit on camper bodies.) In addition, the exclusion does not apply to newly acquired trailers or camper bodies. The insurer must be notified of the acquisition within 14 days.

Exclusion 9 excludes loss to equipment designed or used for the detection and location of radar (i.e., “fuzz-busters”) or laser.

Exclusion 10 eliminates coverage on custom furnishings or equipment in or on any pickup or van. The exclusion cites carpeting and insulation, furniture or bars, height-extending roofs, or custom murals, paints, or other decals or graphics.¹⁴ An exception to the exclusion extends coverage to caps, covers, and bedliners, which are covered while in or upon a pickup.

Diminished Value Exclusion In some states, when a vehicle is involved in a collision requiring repairs in excess of a stated amount, say $3000, a notation of the damage and repair is made on the auto title. This can affect the trade-in or sale value at a later time. This loss (or potential loss) in the vehicle's value is referred to as diminished value, a concept that has sparked considerable debate between consumers and insurers. Most states have concluded that the PAP's collision and comprehensive coverages do not cover claims for diminished value.¹⁵

Other Physical Damage Provisions

In addition to the insuring agreement and exclusions, the physical damage section includes a number of other important provisions.

Limit of Liability—Payment of Loss The company's liability under the physical damage coverage is limited to the lesser of (1) the actual cash value of the stolen or damaged property or (2) the amount required to repair or replace the property with other property of like kind and quality. An adjustment for depreciation and physical condition will be made in determining the actual cash value in the event of a total loss. The contract further provides that if repair or replacement results in betterment to the insured, the insurer will not pay for the betterment. The Payment of Loss provision gives the insurer the option of deciding how to settle the claim. The company reserves the right to repair the damage, replace the auto, or pay for the loss in cash. In the event of theft, the insurer has the right to return the stolen auto. If the stolen auto has been damaged, the company must pay for the repair of the damage.

Aftermarket Parts Generic auto crash parts (also known as aftermarket parts or competitive parts) are large collision replacement parts, usually made of sheet metal or plastic that are built by a manufacturer other than the original automaker. Generic crash parts were developed to address the problem of skyrocketing costs to replace car parts, which were previously available only from the original auto manufacturer, known as the original equipment manufacturer (OEM). Proponents of generic parts point out that without generic parts, auto manufacturers have a monopoly on the sale of replacement parts. Generic parts encourage competition, which provides better products at lower prices. Generic auto parts also reduce the cost of automobile repairs, thus reducing auto insurance premiums. Many states have passed laws regulating the use of aftermarket parts in repairs. About three-fourths of states require the estimate to disclose when aftermarket parts are used. A few states require the policyholder's consent.¹⁶

In November 1999, a Marion, Illinois, jury awarded a $1.2 billion judgment against State Farm, the nation's largest insurer, for its use of generic auto parts, concluding that the use of after-market parts violated State Farm's contract with its policyholders. This verdict was overturned by the Illinois Supreme Court, and the U.S. Supreme Court refused to hear an appeal in March 2006, handing a victory to State Farm. Nonetheless, in the aftermath of this litigation and continuing litigation against other insurers, some insurers have stopped using generic parts.

Transportation Expense Coverage is provided for temporary transportation expenses (the cost of renting a car or using public transportation) incurred by the insured in the event of loss to the covered auto or a nonowned auto. Coverage applies for loss by collision only if collision coverage has been purchased and for loss other than collision if comprehensive coverage has been purchased. The limit for this coverage is $20 per day with a maximum of $600.¹⁷ The coverage applies to expenses incurred by the insured for loss to an insured owned auto. For a nonowned auto, Transportation Expenses coverage applies for the loss of use expense for which the insured is legally liable. Except for losses caused by theft, coverage applies to expenses beginning 24 hours after the auto has been withdrawn from use. Coverage for transportation expenses resulting from theft begins 48 hours after the theft and ends when the auto is returned to use or the insurer pays for the loss.

POLICY CONDITIONS

The two final parts of the contract, designated Parts E and F, contain the general policy provisions, some of which have been noted.

Part E—Duties after an Accident or Loss

Part E of the PAP lists the duties of the insured and other persons seeking coverage under the policy in the event of loss. An introductory statement requires the insurer be notified promptly of how, when, and where the accident or loss happened. In addition, a person seeking coverage under any of the provisions of the policy must do the following:

1. Cooperate with the insurer in the investigation, settlement, or defense of any claim.
2. Promptly send the insurer copies of any notices or legal papers received in connection with the accident or loss.
3. Submit to physical examinations by physicians selected by the insurer as often as the insurer reasonably requires. The insurer pays the cost of the examinations. A person seeking coverage under the policy must agree to submit to examination under oath if required by the insurer.
4. Authorize the insurer to obtain medical reports and other pertinent records.
5. Submit a proof of loss when required by the insurer.

A person seeking coverage under the Uninsured Motorist Coverage must promptly notify the police if a hit-and-run driver is involved.

With respect to the Physical Damage coverages (Damage to Your Auto), the insured must take reasonable steps after the loss to protect the auto and its equipment from further loss. The insurer will pay any expenses incurred by the insured in providing such protection. The insured must notify the police if the covered auto is stolen. Finally, the insured must permit the insurer to inspect and appraise the damaged property before it is disposed of or repaired.

Part F—General Provisions

There are nine general provisions in the PAP, some of which are similar or identical in wording with their similarly titled counterparts in the Comprehensive Personal Liability form.

Bankruptcy Bankruptcy or insolvency of an insured does not relieve the insurer of its obligation under the policy. If the insured is sued and declares bankruptcy, discharging his liability, the insurer is still obliged to pay that part of the judgment covered by the insurance.

Changes The policy's terms cannot be changed or waived except by endorsement. If a change requires a premium adjustment, the premium will be adjusted as of the effective date of coverage. This provision includes a liberalization clause; if the insurer revises its policies to provide broader coverage without additional premium, existing policies are automatically broadened to include the new coverage.

Fraud The fraud provision stipulates that the insurer will not provide coverage for any insured who has made fraudulent statements or engaged in fraudulent conduct in connection with any accident or loss. Like most other policy provisions dealing with fraud or misrepresentation, this provision merely affirms in the contract the right the insurer would have at common law.

Legal Action Against Us No legal action may be brought against the insurer until the insured has complied with all the policy's terms. Furthermore, a claimant does not have the right to bring the insurer into an action to determine the insured's liability. (Some states have laws that permit an injured party to sue the insured and his or her insurer. In these jurisdictions this provision is invalid.)

Our Right to Recover Payment This is the subrogation clause. It applies to all coverages under the policy and requires the insured to assign any right of recovery against a third party to the insurer, to the extent that payment is made to that insured. The insured is required to do whatever is necessary to enable the insurer to exercise its right of recovery and may do nothing to prejudice that right.

Policy Period and Territory The policy applies only to accidents and losses that occur during the policy period (shown in the declarations) and within the policy territory. The policy territory is the United States, its territories or possessions, or Canada. Coverage applies for accidents or losses while the covered auto is being transported between ports of the United States, its territories or possessions, or Canada. There is no coverage under the policy in Mexico. If the insured drives into Mexico, he or she must obtain coverage from an insurance company licensed to write auto insurance in Mexico.¹⁸ Coverage can usually be purchased at the border.

Termination The termination provision outlines the conditions under which the insured or the company may cancel the policy and the rights of both parties with respect to nonrenewal and related provisions.

First, the named insured may cancel the policy at any time, either by returning the policy to the company or by giving written notice of the date of cancellation.

The insurer's right to cancel depends on the period for which the policy has been in force. If the policy has been in force for fewer than 60 days, the company may cancel by giving 10 days' written notice. However, once the policy has been in force for 60 days, the insurer can cancel only for nonpayment of premium, if the named insured or any resident relative has his or her driver's license suspended or revoked, or if the policy was obtained through material misrepresentation. Cancellation for nonpayment requires 10 days' written notice. Cancellation for revocation or suspension of license requires 20 days' written notice. Renewal policies (or extensions of direct billed policies) are considered to have been in force for more than 60 days and are, therefore, cancelable only for nonpayment of premium, revocation or suspension of license, or material misrepresentation in obtaining the policy.

Although the company's right to cancel is limited after the policy has been in force for 60 days, the company may still choose not to renew a policy. If the company elects not to renew the policy, it must give the insured at least 20 days' written notice of its intent not to renew. Furthermore, on policies that are written for less than a full year, nonrenewal may take place only on the anniversary of the original effective date.

This condition makes provision for automatic termination in the event the company offers to continue or to renew the policy and the insured does not accept. Failure to pay the required premium when due is considered failure of the insured to accept the offer to renew.

Finally, the termination provision states that any state laws concerning cancellation of auto insurance take precedence over the policy provisions. If laws in the state where the policy is sold impose greater restrictions on the insurer's right to cancel or to refuse renewal, the state law applies.

Transfer of Your Interest in This Policy This provision is an assignment clause and stipulates the named insured's rights and duties under the policy may not be assigned without the insurer's written consent. Automatic coverage is provided, however, if the named insured dies, for the surviving spouse or the named insured's legal representative.

Two or More Auto Policies This special “other insurance” clause provides that when an insured has two or more policies with the same company applicable to the same accident, the maximum payable under all policies will not exceed the highest applicable limit of liability under any one policy. For example, if Jones has two autos insured with the same company and has an accident while using a nonowned auto, the maximum payable under the two policies will be the highest limit under those policies.

ENDORSEMENTS TO THE PAP

The PAP may be modified by endorsement to meet special needs or to reflect the statutory requirements of individual states. The following are a few of the more important endorsements available for use with the PAP. Although these endorsements represent a small fraction of those available, they are among the most important and reflect PAP's extreme flexibility.

Extended Nonowned Coverage

The PAP may be extended by endorsement to cover certain nonowned autos that would otherwise be excluded. The need for broadened drive-other-car coverage arises from the restrictions in the PAP that eliminate coverage on certain types of nonowned autos. For example, recall that the policy excludes coverage for autos furnished for the regular use of the named insured or resident relatives. The exclusion's intent is that these autos be covered under their own policies and coverage for the named insured and resident relatives while operating such autos be provided by the other policies. However, there are instances in which the insured desires his or her own coverage which will apply excess over the specific coverage on the nonowned auto.

These exclusions for autos furnished for the regular use of the insured or resident relatives may be addressed by the Extended Non-owned Coverage—Vehicles Furnished or Available for Regular Use Endorsement (PP 03 06).¹⁹ The endorsement deletes the exclusion of vehicles furnished for the regular use of the named insured and promises to provide “Liability Coverage on any vehicle, other than ‘your covered auto,’ which is furnished or available for the regular use of the named individual.” Thus, for example, this endorsement could be used to provide excess coverage for a company car. Extended nonowned coverage is written for the named individual or for the named individual and family members. The endorsement broadens coverage only for those indicated on the endorsement.²⁰

Named Non-Owner Policy

Occasions sometimes arise in which an individual who does not own an auto desires coverage for those instances in which he or she may borrow an auto. As the reader may recall, under such circumstances, coverage for the borrower is provided under the auto policy applicable to the borrowed car, provided the borrower had permission of the named insured under that policy. However, the possibility always exists that the borrowed auto might be uninsured or the limits of liability on the borrowed car might be inadequate. When borrowers have their own policy, coverage under their policy will apply on an excess basis; for the individual who does not own an auto, there could be a serious deficiency.

A special form of coverage, Named Non-Owner coverage, may be written for a person who does not own an auto but who desires his or her own coverage in the event that a borrowed auto is inadequately insured. Coverage is normally provided under the PAP, with a special endorsement called Named Non-Owner Coverage. Coverage may be written for a named individual or for named individuals and family members. Coverage is provided for liability arising out of the use of any auto not owned by the named insured or spouse or by any member of the named insured's household.²¹ The coverage is excess over any other coverage applicable to the borrowed auto and does not apply to the owner of the auto. However, as in the PAP, other persons or organizations held vicariously liable for the operation of the borrowed auto by the named insured or spouse are covered.

Although the endorsement is designed to provide coverage on nonowned autos, it provides automatic coverage for 14 days on a private passenger auto or a pickup, panel truck, or van not used in business other than farming that is acquired by the insured during the policy period.

Miscellaneous Type Vehicle Endorsement

The increasing popularity of motorcycles and motorscooters has brought about a corresponding increase in demand for insurance for such vehicles. At the same time, recreational motor vehicles such as go-carts, minibikes, and all-terrain vehicles have increased in popularity, creating a demand for insurance suited to the needs of their owners.

Initially, the liability and physical damage exposure of recreational motor vehicles were handled in various ways. Specialty insurers developed specialized policies for each of the various types of recreational motor vehicles, usually based in one way or another on the automobile policy. Thus, one company offered a Snowmobile Policy, while another insurer offered an All-Terrain Vehicle Policy, and another offered a Go-Cart Liability Policy. Although these contracts are available through specialty insurers, there is a standard Miscellaneous Type Vehicle Endorsement available for use with the PAP to provide protection for the owner of a recreational motor vehicle.²²

The types of vehicles that are eligible for coverage under the Miscellaneous Type Vehicle Endorsement include motor homes, trailers designed for use with private passenger autos or pickup trucks, motor-cycles, mopeds, motorscooters, motorbikes, go-carts, and other similar vehicles, all-terrain vehicles, dune buggies, and golf carts.

The Miscellaneous Type Vehicle Endorsement may be used to provide all the standard PAP coverages on the miscellaneous-type vehicle, including liability coverage, medical payments, uninsured motorist coverage, and physical damage coverage. The endorsement may be added to a PAP used to insure vehicles that meet the PAP's standard eligibility requirements This means that private passenger autos and miscellaneous-type vehicles may be insured in the same policy. Provisions pertinent to private passenger automobiles remain in full effect and apply to any private passenger autos insured under the contract.

“Your Covered Auto” Redefined The Miscellaneous Type Vehicle endorsement adds a new definition of your covered auto to the contract, corresponding to the particular type of vehicle being insured. Coverage is extended to include newly acquired miscellaneous-type vehicles of the same type as shown in the schedule or declarations, subject to the same reporting requirements for additional and replacement autos under the regular personal auto policy. This means that a newly acquired motorcycle is covered only if the vehicle described in the policy is a motorcycle. A newly acquired miscellaneous-type vehicle is treated the same as a newly acquired auto in the PAP. If it is an additional vehicle, as opposed to a replacement vehicle, liability coverage applies for only 14 days. Physical damage coverage applies for 4 or 14 days, depending on whether physical damage coverage was provided for any other vehicles.

In addition to the coverage on newly acquired vehicles of the type scheduled in the endorsement, the endorsement provides coverage for any newly acquired private passenger auto, pickup, panel truck, or van (not used in any business other than farming). The owner of a motorcycle insured under the PAP has automatic coverage for 14 days in the event he or she acquires an eligible automobile. The definition of your covered auto includes any temporary substitute auto while used for a covered auto withdrawn from use because of mechanical breakdown, servicing, repair, loss, or destruction. There is no restriction as to the type of vehicle that qualifies as a temporary substitute; a temporary substitute may be a vehicle of the type insured or it could be a private passenger auto or a truck.

Coverage Features Perhaps the most significant provision of the endorsement is the definition of covered persons. With respect to the scheduled vehicle (“your covered auto”), coverage applies for the named insured, family members, and other persons, subject to the usual exclusion of anyone using an auto without a reasonable belief of being entitled to do so. In addition, the endorsement covers the vicarious liability of any person or organization for the acts or omissions of another insured person. Although coverage is provided for this range of persons with respect to the owned vehicle, there is no coverage for anyone, including the named insured, for nonowned vehicles. The only exception is that coverage applies for the named insured while using a nonowned vehicle as a temporary substitute for a vehicle described in the endorsement.

Liability Exclusions The exclusions applicable to miscellaneous-type vehicles differ from those in the PAP in two respects. First, the standard PAP exclusion of any vehicle with fewer than 4 wheels is modified so coverage is provided for the vehicle scheduled in the endorsement. The similarly worded exclusion applicable to medical payments is also modified to include coverage for the scheduled vehicle.

The second exclusion is an optional exclusion of liability to passengers. It is activated by an indication in the endorsement. A 20 percent premium credit is granted for the passenger liability exclusion for liability written with a single limit. When the policy is written with split limits, a 40 percent credit applies. If activated, this would, for example, exclude coverage for liability of a motorcyclist to someone transported in the passenger seat or in a sidecar. The exclusion of liability to passengers is an undesirable feature and should be avoided.

Physical Damage Coverage Physical damage coverage may be written to include collision coverage and loss other than by collision (comprehensive).²³ Physical damage coverage on the insured miscellaneous type vehicle applies to nonowned vehicles only when being used as a temporary substitute and not otherwise.

Motor Home Endorsement When the Miscellaneous Type Vehicle Endorsement insures a motor home, an additional endorsement is attached to the policy, entitled Miscellaneous Type Vehicle Amendment (Motor Homes). This endorsement excludes liability, medical payments, and physical damage coverage on the motor home when the named insured rents or leases it to others. Full liability coverage for rental situations can be bought back in the same endorsement. The additional premium for buy-back of the rental coverage exclusion varies with the number of weeks per year for which the motor home is rented.

In addition to the exclusion of damage or loss to the motor home while rented (which may be eliminated for an additional premium), the motor home endorsement excludes loss due to dishonest or fraudulent acts by a person to whom the motor home has been rented or loaned. This exclusion cannot be removed.

Snowmobile Endorsement The ISO has developed a Snowmobile Endorsement for use with the PAP in insuring snowmobiles. A “snowmobile” is defined as a land motor vehicle designed for use mainly off public roads on snow or ice and propelled by wheels, crawler treads, or belts. A vehicle powered by airplane-type propellers or fans is specifically stated not to be a snowmobile.

The principal difference between the Snow-mobile Endorsement and the Miscellaneous Type Vehicle Endorsement relates to coverage on newly acquired vehicles. Unlike the Miscellaneous Type Vehicle Endorsement (and the PAP), notice to the insurer is required within 14 days from the date of acquisition for replacement vehicles and additional vehicles.

Coverage is provided for a temporary substitute used by an insured when the covered snowmobile is withdrawn from use because of mechanical breakdown, servicing, or repair. As in the case of the PAP, a temporary substitute may not be owned by the named insured.

Two additional exclusions under the Snowmobile Endorsement must be noted. The first excludes coverage on any snowmobile while rented or leased to any person or organization other than the named insured. This means there is no coverage if the covered snowmobile is leased or rented to others. Coverage would apply, however, to a snowmobile leased to the named insured. Although the named insured has coverage while operating a leased or rented snowmobile, other family members do not. The second exclusion eliminates coverage for any snowmobile operated or used in practice or preparation for any racing or speed contest regardless of whether the contest is prearranged or organized. In addition to the exclusion of leased or rented snowmobiles and the racing or speed contest exclusion, there is an optional exclusion of liability to any passenger on the snowmobile. This exclusion leaves the insured with a serious uninsured exposure and is an unacceptable restriction in coverage. Coverage for the passenger hazard is an essential coverage and should be included in all snowmobile policies.

BUYING AUTOMOBILE INSURANCE

Auto insurance can be costly, and it promises to become more so. Although paying large premiums to insurers is dissatisfying, it is distressing to do so and then find at the time of a loss that the coverage purchased is inadequate for the need.

Purchasing auto insurance should follow the principles of risk management and insurance buying we originally encountered in Chapter 4. There, we established a priority ranking for insurance coverages, based on the financial impact that each exposure might have. Those exposures that have the potential to generate losses that might result in bankruptcy are critical, and insurance against these exposures is essential. Those that would require one to borrow rank next in order, and insurance against these losses is important. The last category represents optional coverages: the possible losses that could be met out of existing assets or current income. We will begin our discussion with the essential auto coverage: the liability coverage.

Liability Coverage

In purchasing auto insurance, one logically begins with liability coverage. The question is not whether to buy liability coverage but how much to buy. While “how much is enough” is difficult to measure, the minimum limits of coverage required by the financial responsibility laws fall short of adequate protection.

One of the poorest ways to save premium dollars in buying auto insurance is to purchase only the minimum required limits of liability. Fortunately, the cost of increased limits of liability coverage is far less proportionately than the basic limits. Table 30.1 provides an example of the cost of increasing limits based on one company's premiums. The $20,000/40,000 basic limit can be increased to $100,000/300,000 for an additional 56 percent in premium and the $15,000 property damage limit can be increased to $50,000 for an additional 8 percent. There is no scientific way to determine what protection level is adequate, but it makes good sense to purchase as much as you can reasonably afford (or the amount required as underlying coverage when a personal umbrella is purchased). The small premium required for the higher limits of protection is a small price to pay for the security it provides.

TABLE 30.1 Premium Increases for Increased Liability Limits: Personal Auto Policy

Medical Payments Coverage

Automobile medical payments coverage represents something of a dilemma in the application of risk management principles. From one point of view, it can be argued that it violates risk management principles by focusing on the cause of a loss rather than on the effect. Protection against catastrophic medical expenses is important, but such protection is needed for medical expenses from any source, not just those caused by auto accidents. If an individual has purchased proper health insurance coverage to protect against catastrophic medical expenses, the auto medical payments coverage represents a duplication.

However, one argument is in favor of the coverage. Automobile medical payments coverage protects the insured, family members, and guests in the auto. Responsible motorists feel a sense of obligation to their passengers, and medical payments coverage serves as a mechanism for meeting this obligation. In some jurisdictions a guest statute may prevent a passenger from collecting medical expenses sustained as a result of the driver's negligence. Even where there is no guest statute, medical expense coverage may eliminate the need to make a federal case out of the accident. Adequate medical payments coverage may even serve as a loss-prevention device, reducing the possibility of a liability suit when a guest is injured. One of the main reasons for carrying auto medical expense coverage is to provide for the payment of medical expenses incurred by guests or passengers.

Like the cost of increased liability limit, the cost of higher medical payments is relatively low. For example, in a midwestern city in mid-2013 the cost of medical payments coverage was as follows:

The individual needs a comprehensive medical expense program to provide coverage for medical expenses from all sources, not just those associated with the auto. Even though the cost of the coverage is low, purchasing medical payments coverage is probably a good idea. The coverage is not an essential one and should not be purchased at the expense of adequate liability coverage.

Physical Damage Coverage

The decision to purchase auto physical damage insurance is influenced by various factors. If the car is financed, the lender may insist on insurance to protect its financial interest. In this case, the only decision the buyer must make is with respect to the deductibles. In the case of an older car, insurers may be unwilling to provide the coverage. Although some car owners have little choice in the matter, many owners must make a decision on the physical damage coverage.

Obviously, the auto's value and the other financial resources of the individual are important factors. For some, an auto is a major asset, representing perhaps a half a year's salary. In such cases, the loss of the auto can be a serious financial blow; although it does not have the same grave implications as does a liability suit, the loss can be a heavy one.

In those cases in which the loss of the auto would be a serious loss beyond the individual's margin for contingencies, the risk management concept dictates that coverage should be purchased against as wide a range of perils as possible, which means that comprehensive and collision would be purchased. Although the advice may seem wearisome at this point, the judicious use of deductibles can generate substantial economies. Table 30.2 is an example of premium credits available for differing deductible levels for comprehensive and collision coverage. Because the credits are a percentage of the premium, larger deductibles will be most attractive to persons with high-priced autos or high rating classifications. In general, however, you should select as large a deductible as you can afford.

TABLE 30.2 Personal Auto Policy Physical Damage Deductible Credits

Uninsured Motorist Coverage

Uninsured Motorist coverage (and Underinsured Motorist coverage) represents a somewhat different dilemma from the medical payments coverage. Because it provides coverage based on the cause of loss rather than the effect, it falls short of the ideal from a risk management perspective. However, it covers a potentially catastrophic loss and is the only way in which some losses related to auto accidents can be covered. Although complete life insurance, disability coverage, and major medical insurance would cover a part of the loss caused by an uninsured driver, it would not cover disfigurement, physical impairment, or general damages (such as pain and suffering) for which a negligent uninsured driver might be liable. Most informed authorities treat Uninsured Motorist coverage as an essential form of protection and recommend purchasing the highest limits possible.

Cost Differences among Companies

As a final note, there are wide variations in price among automobile insurers. Although a comparison of costs should not be the sole criterion in selecting a company, the insurance buyer should at least investigate alternative sources and their costs. Although those companies with the lowest premiums are usually ultraselective, wide differences in prices exist among insurers with similar underwriting philosophies, differences that result from different efficiencies and differences in expenses.

SUMMARY

Automobile liability insurance is an essential coverage for every driver. The contract under which this coverage is provided may be used to provide Medical Payments coverage, Uninsured Motorists coverage, and Physical Damage coverage on the vehicle. Given the range of coverages that may be included in the auto policy and of circumstances under which it provides coverage, the contract's provisions are necessarily complex. Despite the complexities, if you have mastered the material in this chapter, you will have a good grasp of the technical aspects of automobile insurance.

IMPORTANT CONCEPTS TO REMEMBER

Personal Auto Policy (PAP)

private passenger automobiles

insureds

your covered auto split

limit of liability

supplementary payments

occupying

physical damage coverage

comprehensive

collision

transportation expense

nonowned auto

uninsured motorist coverage

underinsured motorist coverage

Named Nonowned coverage

Miscellaneous Type Vehicle Endorsement

QUESTIONS FOR REVIEW

1. Briefly describe the four basic coverage sections of the Personal Auto Policy and explain the nature of the coverage under each section.

2. Who is included in the definition of Insured with respect to the owned automobile under the Personal Auto Policy? Who is included in the definition of Insured with respect to nonowned automobiles?

3. What coverage is provided under the PAP for individuals or organizations held vicariously liable? Under what circumstances is there no coverage for a person who is held vicariously liable?

4. The definition of insured property under the Homeowners Policy includes property owned or “used by an insured.” Briefly describe the coverage under the Personal Auto Policy that parallels this provision.

5. Ed Jones drives to work every day and carries two fellow employees, who pay him $10 per week for this service. He has been told this voids his automobile liability insurance and comes to you for advice. What do you tell him?

6. Jones Jr. borrows a friend's pickup truck and is involved in a collision in which the pickup and another car are demolished. Although Junior does not own an automobile, he lives with his parents who have a PAP, written to include liability and “Coverage for Damage to Your Auto.” Describe the coverage that may be applicable to this situation, indicating the specific policy provisions that will control whether coverage applies.

7. Smith is injured by an uninsured driver. She sues the driver and obtains a $100,000 judgment. Will the Uninsured Motorist coverage of her Personal Auto Policy pay this amount? Why or why not? Explain the manner in which amounts payable under the Uninsured Motorist coverage are determined.

8. Why might a person who does not own an automobile want to purchase automobile liability insurance? How can such a person obtain this protection?

9. John Jones has a motorcycle insured under a PAP that has been endorsed with the Miscellaneous Type Vehicle endorsement. What coverage exists under John's policy for the following situations?

1. John borrows a friend's private passenger auto for a date and loans his motorcycle to the owner of the borrowed car. The friend's car is uninsured.
2. John borrows a pickup truck to use while his motorcycle is in the shop for repairs.

10. Under what circumstances is it advisable that the Extended Non-owned Coverage endorsement be added to the PAP?

QUESTIONS FOR DISCUSSION

1. The agent delivering a PAP tells a client, “This policy will cover you when you are driving my car, and it will cover anyone when they are driving your car.” How accurate is this statement?

2. Cassandra owns a late-model car insured under a PAP with a $300,000 liability limit, $5000 medical payments, $100 deductible comprehensive, $200 deductible collision, and $300,000 uninsured motorist coverage. Which of the coverages would apply to each of the following losses? (If there is no coverage, indicate why not.)

1. Cassandra parks the car on a riverbank but forgets to set the brake or put the car in park. It rolls into the river and the damage amounts to $800.
2. Cassandra is changing a tire when the car slips off the jack and breaks her leg.
3. Thieves break into the car and steal the car radio, a spare tire, and an overnight bag full of clothing.
4. Cassandra borrows a trailer from a neighbor (who has no insurance). While backing the car up to the trailer, Cassandra misjudges the clearance and smashes into the trailer. Damage to the car amounts to $300 and the damage to the trailer is $250.

3. Robert and Francesca are not married but live together. Robert owns an automobile, which they use and which is insured under a PAP. Are there any special dangers related to the automobile coverage of which they should be aware?

4. Robert carries full coverage on his automobile under a PAP, including liability, medical payments, physical damage, and uninsured motorist coverage. He enjoys a financial windfall and decides to purchase a second car. He drives the new car home and parks it in the driveway, then goes into the house to call his insurance agent and report the purchase. Cassandra, who is driving Robert's old car, wheels into the driveway and is unable to stop, colliding with the new car and causing extensive damage to both vehicles. Robert is heartbroken because the agent's line was busy, and he had not completed his call. Attempt to console him.

5. In what sense does the purchase of automobile medical payments coverage violate the principles of risk management? Is the same criticism valid with respect to Uninsured Motorist coverage? Why or why not?

SUGGESTIONS FOR ADDITIONAL READING

Fire, Casualty, and Surety Bulletins, Personal Lines Volume. Erlanger, Ky.: National Underwriter Company. Available electronically at: http://cms.nationalunderwriter.com/.

Cook, Mary Ann. Personal Risk Management and Property-Casualty Insurance, Malvern, Pa.: American Institute for Chartered Property Casualty Underwriters/Insurance Institute of America, 2010.

Widiss, Alan I., and Jeffrey E. Thomas. Uninsured and Underinsured Motorist Insurance, 3rd ed. Anderson Publishing, 2005.

WEB SITES TO EXPLORE

Information Information Institute	www.iii.org
ISA, A Verisk Company	www.iso.com
International Risk Management Institute	www.irmi.com
NAIC InsureU	www.insureuonline.org
National Underwriter	www.nationalunderwriter.com

¹The Personal Auto Policy is a direct descendant of the Family Automobile Policy, the standard bureau auto policy that preceded it and is still used by a few companies. The Family Automobile Policy, as its name implies, was developed to provide auto insurance for the entire family.

²Autos owned jointly by residents who are not husband and wife (e.g., father and son) or by nonresident relatives may be insured, but the coverage is limited by a special endorsement.

³Personal autos owned by a trust may be covered by endorsement if certain conditions are met.

⁴The changes in the policy provisions when the PAP is used to insure motorcycles and other miscellaneous vehicles are so pronounced that it is almost a different contract than the standard PAP. Coverage for motorcycles and other miscellaneous types of vehicles is discussed later in the chapter.

⁵The term covered auto is defined in the policy and has a precise meaning. For the present, we may consider the covered auto to be the auto described in the policy.

⁶The coverage on newly acquired pickups and vans applies only if the vehicle meets the PAP's eligibility requirements.

⁷A livery conveyance is a vehicle used indiscriminately in conveying the public, without limitation to certain persons or particular occasions or without being governed by special terms (Elliott v. Behner, 150 Kan. 876 96 P.2d 852, 857). A public conveyance is one that holds itself out as a common carrier (Merchants Parcel Delivery v. Pennsylvania Public Utility Commission, 150 Pa. Super. 120, 28 A.2d 340, 344).

⁸Some students may say, “That may be true, but the only thing necessary is for Brown to say he had given permission; if he is willing to do this, both policies will apply.” As you will recall from the discussion of vicarious liability as it relates to the auto, the owner of an auto may be held liable for its operation by anyone who is operating it with the owner's permission. By admitting that White had his permission, Brown would leave himself open for a substantial amount of liability; therefore, he may be reluctant to give his permission.

⁹A seldom recognized facet of this exclusion is it does not apply to a nonowned auto furnished for the regular use of the named insured if that vehicle is being used as a temporary substitute for any other Covered Auto. Suppose Brown's employer furnishes him a company car. Normally, Brown's PAP will not apply to that company car. However, if the company car is being used as a temporary substitute for Brown's personal car, coverage will apply. This quirk results from the inclusion of a “temporary substitute auto” in the definition of “Your Covered Auto,” which is excepted from this exclusion.

¹⁰Uninsured motorist coverage was originally designed to cover bodily injury only. In many states, however, it has been extended to cover property damage. Insurers must offer Uninsured Motorist Property Damage (UMPD) coverage in Alaska, Arkansas, Delaware, Georgia, Indiana, Illinois, Indiana, Maryland, Mississippi, New Hampshire, New Jersey, New Mexico, North Carolina, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, and the District of Columbia. In the following states, insurers must offer UMPD coverage to insureds who do not have collision coverage: Colorado, Louisiana, Ohio, and Utah. In some states, the insured may reject the coverage and purchase coverage for bodily injury only; in other states, it is inseparable from the coverage for bodily injury. Deductibles on UMPD range from $100 to $500. (Uninsured Motorist Coverage by State, FC&S OnLine, January 2003).

¹¹In some states, uninsured motorist coverage and underinsured motorist coverage are merged into a single coverage.

¹²The National Association of Insurance Commissioners has developed a Collision Damage Waivers Act, which provides for the regulation of rental companies when issuing CDWs. The act provides definitions and establishes standards to which rental companies must adhere and makes certain practices unfair or deceptive practices under the statutory provisions on fraud.

¹³Coverage for loss in excess of $1000 can be bought back by endorsement for an additional premium.

¹⁴Coverage for such property is available by endorsement for an additional premium.

¹⁵However, the liability coverage does cover diminished value if the insured is held liable for that amount. This is because Coverage D pays for “direct and accidental loss,” while Coverage A pays for damages for which the insured is legally responsible. Insurers are not required to pay diminished value on first-party claims except in four states, where some court decisions have held otherwise: Georgia, Mississippi, South Carolina, and Tennessee. In 1999, ISO filed a new endorsement: Coverage for Damage to Your Auto Exclusion (PP 13 01). This clarified coverage by explicitly excluding diminished value. However, not all states have approved this endorsement.

¹⁶In November 1999, a Marion, Illinois, jury awarded a $1.2 billion judgment against State Farm, the nation's largest insurer, for its use of generic auto parts, concluding that the use of aftermarket parts violated State Farm's contract with its policy-holders. This verdict was overturned by the Illinois Supreme Court, and the U.S. Supreme Court refused to hear an appeal in March 2006, handing a victory to State Farm. The Certified Automotive Parts Association (CAPA) a nonprofit organization with membership including collision repairers, distributors, and the insurance industry was established in 1987 to certify quality of aftermarket parts. For more information on CAPA, see http://www.capacertified.org.

¹⁷The limit of coverage may be increased by endorsement for an additional premium.

¹⁸Failure to purchase Mexican insurance can lead to serious complications in the event of loss. In Mexico, jurisdiction for criminal and civil law rests in a single court. It is customary to impound the vehicle and hold the driver in jail until an investigation is completed and a court hearing is held. If the driver has insurance with a Mexican-licensed insurer, the arresting officer has the authority to waive the incarceration and impounding of the auto.

¹⁹Endorsement PP 13 05—Extended Non-owned Coverage—Vehicles Furnished or Available for Use as Public or Livery Conveyances is used when the furnished vehicle is used for public or livery purposes. PP 13 05 was introduced with the 2005 revisions to the Personal Auto Policy.

²⁰A second problem area in which coverage for nonowned autos may be expanded by endorsement pertains to individuals in the automobile business (i.e., the business of selling, repairing, servicing, storing, or parking cars). Recall that the PAP excludes nonowned autos while the insured is engaged in the automobile business. Endorsement 03 96—Extended Non-owned Coverage for Named Individual (Auto Business) deletes this exclusion, providing coverage for the insured while, for example, driving a customer's car.

²¹Under the 2005 revisions to the PAP, liability and medical payments coverage is excluded for vehicles furnished or available for the regular use of the named insured (such as a company car). However, this coverage may be added back for an additional premium.

²²Snowmobiles are covered under a separate endorsement, described later.

²³Some insurers offer named-peril physical damage coverage for the perils of fire, theft, and Combined Additional Coverage. Combined Additional Coverage (which is sometimes written on autos) includes windstorm, hail, earthquake, explosion, riot, civil commotion, aircraft, flood, malicious mischief and vandalism, and external discharge or leakage of water.