Chapter 13

1Lecture 7Chapter 22

Auto Insurance(part 1)

12OutlineBackgroundPersonal Automobile Policy (PAP)EligibilityDefinitionsPAP policy componentsRating Factor of Auto Insurance

23The High Cost of Automobile Losses Auto insurance premiums account for more than 40% of property-casualty insurance net premiumsPersonal auto accounts for more than 35%More than 80% of Americans own a car

Average expenditure for auto insurance is $815 in 2012New Jersey $1219(Highest)Idaho $534 (Lowest)California $749.8 (rank 22th)

In 2013, 32,719 people died in motor vehicle crashes, down 3.1 percent from 33,782 in 2012, according to the National Highway Traffic Safety Administration.Source: http://www.iii.org/fact-statistic/auto-insurance3MOTOR VEHICLE DEATHSMotor Vehicle DeathsPer 100,000 Persons By Age, 2012Motor Vehicle Deaths By Activity Of Person Killed, 2012

Motor Vehicle Deaths By Driver BehaviorSpeedingDrunk DrivingDrunk Driving and SpeedingRed Light RunningFatigueDistracted DrivingCellphone Use56Insurance Claims Insurers have been faced with rising claims Liability claimsAverage bodily injury losses$14,653 in 2012 (0.95% probability)Average property damage losses$3,073 in 2012 (3.50% probability)

Physical Damage to YOUR auto claimsCollision$2,950 (5.56% probability)Other-than- collision (comprehensive)$1,585 (2.62% probability)67Relative Injury Claims Frequency per Insured Vehicle

Average=10078Relative Average Collision Loss Payments per Insured Vehicle

Average=10089Personal Automobile Policy (PAP)The 2005 Personal Auto Policy (PAP) is widely used throughout the USDrafted by the ISO, it replaces the 1998 formSome leading insurers use their own version of policy slightly different from PAP910Eligibility of PAPEligible VehiclesA four-wheeled motor vehicle owned or leased by the insuredA pick-up truck or van with a gross vehicle weight rating of 10,000 pounds or lessIt is used in ranching or farming It is occasionally used to deliver or transport goods for the named insureds business of installing, maintaining, repairing or furnishing equipments1011Definitions-Covered Auto (ISO, p.1, J)Any vehicle shown in the declarations A newly acquired autoCoverage depends on whether it is an additional vehicle or a replacement vehicle and whether the declarations indicates at least one auto for collision coverageAny trailer owned by the named insured A temporary substitute vehiclewhich is a nonowned auto or trailer used temporarily because of mechanical breakdown, repair, servicing, loss, or destruction of a covered vehicle1112Newly acquired auto(ISO, p.1, K)Any coverage except Coverage For Damage To Your AutoAdditional vehicleNotify the insurer within 14 days for the existing coverage to be effective from the purchase date.Replacement vehiclesCoverage is provided without asking insurer to insure it

Coverage For Damage To Your AutoIf your original policy has physical damage coverageYou must notify the insurer within 14 days.If your original policy does not have physical damage coverageYou must notify the insurer within 4 days If a loss occurs before you notify the insurer, a $500 deductible will apply12Loss Exposure Checklist on Your CarOther passengers in your carProperty in your carYou as a pedestrian14Personal Auto Policy Components Part A: Liability CoveragePart B: Medical Payments CoveragePart C: Uninsured Motorists CoveragePart D: Coverage for Damage to Your AutoPart E: Duties After an Accident or LossPart F: General Provisions1415I. (Part A) Liability (ISO, p.2. Insuring agreement A)Protects a covered person against a suit or claim arising out of the ownership or operation of a covered vehicle

Insurer will Cover Bodily injury and Property damage that insured is legally responsible due to an auto accidentSettle or defend claims for insuredPay all defense cost that insurer incurs

1516Liability(ISO, p.2. Insuring agreement B)Definition of Insured in liability section The named insured and any resident family member for the ownership, maintenance or use of any auto or trailer

Any person using the named insureds covered auto with permission

For your covered auto,If a fellow employee drives your car on company business Your employer is covered under your policy if an accident occurs and your employer is sued

For any auto or trailer, other than your covered auto,If you drive a fellow employees car and have an accident The employer is covered under your policy if a lawsuit results 1617Limit of Liability (ISO, p.4)Defined using the split limits approach The limit is described by three numbers For example: $100,000/$300,000/$50,000$100,000: maximum limit of bodily injury liability to any one person in an accident$300,000: maximum limit of bodily injury liability resulting from any one accidentRegardless of the number of persons involved $50,000: limit of liability for all property damage resulting from any one accident 1718Exclusions (1) (ISO, p.3)Intentional loss by insuredLoss from Road rageDamage to property owned or being transported by an insured Your friends suitcase and camera are damaged in a car accident when you and your friend travel together.Property rented, used or in the insureds careBut property damage to a rent residence or private garage is covered.Vehicles used as a public or livery conveyanceE.g. use your car as a taxi but share-the-expense car pools are covered1819Exclusions (2) Vehicle with fewer than four wheels Thus, motorcycles are not coveredUse a vehicle without reasonable belief of permissionDoes not apply to a family member who is using a covered auto owned by the named insuredVehicle furnished or made available for the named insureds regular useE.g. you employer furnishes you with a carNo protection is given to someone in automobile business (selling, repairing, storing, parking, road testing and delivery)Racing vehicle1920Other Liability Conditions (ISO, p.4)Out-of-state coverageIncluding coverage in a Canadian province

If you have an accident in a state with higher required liability limits than your state The policy will pay up to the higher limits

Other Insurance When your owned auto is involved, your policy is primary When your policy applies to a nonowned vehicle, it is excess If two policies are applicable to the same owned auto The PAP will pay its pro-rata share of the loss 20Liability Coverage-ExampleKen is the named insured and borrows Karens car with her permission. Both policies will cover any loss. Ken has $50,000 of liability insurance and Karen has $100,000. Ken negligently injures another motorist and must pay damage of $125,000. How much each company pays for the loss?21Answer: It is Karens car, so Karens insurance is primary, paying $100,000; Kens insurance is excess and pays $25,000.22II. (Part B) Medical Payments (ISO, p.4)Covers all reasonable medical and funeral expenses incurred by an insured in an accidentYou need to check your own policy if you have itBenefits are paid without regard to faultIf you have the coverage, medical payments can be paid to you and other passengers in your car even if you are at faultCovers medical services rendered within three years from the date of the accident

For medical payments, insured means Named insured and family members when occupying any motor vehicle (owned or non-owned)Or as a pedestrian when struck by a motor vehicle Other persons while occupying your covered auto 2223Medical Payments - ExampleWhile driving your car, you run into a tree. The accident is your fault. You are injured and incur $2,000 in medical bills. Will you be paid by your PAP policy?

Answer: Yes because medial payments coverage is no-fault coverage 2324Exclusions (ISO, p.5) Similar to the exclusions for Liability Coverage

Using the vehicle as a residence is excludedTo eliminate medical payment associated with a mobile homeE.g. if you own and occupy a camper trailer as a residence when camping, medical expenses are not available if you burn yourself while cooking on a stove in the trailer

No coverage is available for injuries occurring during employment if workers compensation is supposed to provide benefits 2425Other Conditions (ISO, p.5)PAP medical payments limits are on a per-person basis, regardless of the number of vehicles insuredE.g. $2000 per person

The policy states that no one can collect under the medical payments portion of the policy as well as under the liability or uninsured motorists portion

If more than one auto policy covers a loss:The insurer pays its pro rata share of the loss for an owned vehicleThe insurance coverage is excess over any other insurance for a nonowned vehicle 2526III. (Part C) Uninsured Motorists (ISO, p.6)Pays for your bodily injuries caused by An uninsured motoristA hit-and-run driverA negligent driver whose insurance company is insolventIn some states, property damage is also coveredThe uninsured motorist must be legally liable

Insured persons include The named insured and family membersAnother person while occupying a covered autoAny person legally entitled to recover damages because of injury in the first two categories E.g. surviving spouse26Exclusions (ISO, p.6) Coverage does not apply whenAn insured is injured in, or by, a vehicle owned by the named insured, but not insured under the policy The vehicle is used as a public livery or conveyanceDoes not apply to a carpoolWhen workers compensation benefits are applicableIf the injury is sustained while using a vehicle without reasonable belief of permission

Your insurance is excess insurance when it applies to a non-owned vehicle27IV. (Part D) Coverage for Damage to Your Auto (ISO, p.8) The insurer agrees to pay for any direct and accidental loss to a covered auto or any nonowned auto

Two optional coverages are availableCollision coverageOther-than-collision coverageAlso called Comprehensive coverage2829IV. Coverage for Damage to Your Auto (ISO, p.8) Collision coverageThe upset of your covered auto or nonowned auto or its impact with another vehicle or object ExamplesA car plunges off a bridge into a river You hit another car, a telephone pole, a tree or a buildingYou car is parked, and you find the rear fender dented when you returnYou open the car door in a parking lot, and the door is damaged when it hits the vehicle parked next to you.Paid regardless of fault29IV. Coverage for Damage to Your Auto (ISO, p.8) Other than collision coverageLosses to an auto caused by missiles, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, contact with a bird or other animal, or breakage of glass

ExampleA moving car caught fire and wreckedYour car was flooded when Hurricane Katrina attacked

Other-than-collision claims often will not raise an insureds rates Whereas collision claims usually will

3031Transportation and Towing (ISO, p.8)Part D also pays for temporary transportation expenses, e.g., for train, bus, taxi expensesThe expense must be the result of a covered lossIn the case of theft, you must wait 48 hours in order to recover Coverage is subject to a daily and total limitIncludes charges from a rental car company for loss of daily rentalCoverage for towing and labor costs can be added by an endorsement

3132Exclusions (ISO, p.9)A long list, read the textbook and ISO p.9 for detail.Contents in your car is NOT covered

Not tested but interesting to knowSome insurers have first accident waivers or accident forgiveness (if you are at fault)All state

Need Gap insurance if you have car loan or a leased carPays the difference between the amount paid by your insurer and the amount owed on the lease or loan Some insurers have New Car Replacement PolicyAll state, Liberty Mutual

Purchase Collision Damage Waiver (CDW) if you rent a car, at least for short-term rentals3233Other Provisions (ISO, p.10) The insurer limits its liabilities to the actual cash value (ACV) of the loss

In the case of antique or customized automobiles A stated-amount endorsement may be used E.g. maximum payment $5,000

The insurer reserves the right to pay for the loss in money, repair, or replacement of the damaged or stolen property

All coverage for nonowned autos is excess over any other collectible insurance 3334V. Duties after an Accident or LossConditions on insuredPromptly notify the insurance company (or your agent) of how, when, and where the accident or loss occurred; and Proof of lossCooperate investigation, etc.34http://www2.iii.org/video/podcast-filing-an-auto-insurance-claim.htmlhttp://www2.iii.org/video/auto-accident.htmlhttp://www2.iii.org/video/informed-citizen-rental-car.htmlhttp://www2.iii.org/video/rental-car-insurance-podcast.htmlhttp://www2.iii.org/video/saving-money-on-auto-insurance-five-tips.html

3536VI. General Provisions (ISO, p.12)TerritoryUS, Puerto Rico, and CanadaMexico is not coveredObtain an insurance from a Mexican insurer if you want to drive in MexicoPolicy CancellationInsured can cancel at any time by returning the policy or giving written notice of the time when the insured intends to cancelIf insurer wants to terminate: During the first 60 days of the policy the insurer may cancel for any reason It may cancel for nonpayment of premium at any time 3637Policy CancellationDuring the first 60 days, the insurer must give 10 days notice before canceling

After the policy has been in effect for 60 days the insurer can cancel only For nonpayment of premium If the insured or a resident of the household, or someone who regularly uses the auto, has his or her license suspended or revoked If the policy was obtained through material misrepresentation3738Auto Insurance Premium Rating Factors TerritoryAge, gender, and marital statusUse of the autoDriver education Number and types of carsA multicar discount is available if the insured owns two or more carsGood student discountIndividual driving recordMany insurers offer a safe driver plan for drivers with clean recordsAn insurance score, based on an applicants credit record3839Selection of Liability Limits If you are rich and have meaningful amount of assets to protect You should choose a higher limit

On a relative basis, higher liability limits are not overly expensive E.g. raise your limit from 40,000 to $500,000 will increase 45% of your premiumRaise your limit from 500,000 to $1,000,000 will increase another 10% of your premium3940Problem set(chapter 22)Review questions #1, 2, 3, 5, 6, 7, 8, 9, 10

Application questions #1, 2, 3, 4, 5, 6, 7

4041Supplementary questionA thief steals the insureds car and wrecks it. Is this a collision loss or a theft loss?

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