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Lecture 7

Chapter 22

Auto Insurance
(part 1)

Outline

Background
Personal Automobile Policy
(PAP)

Eligibility
Definitions

PAP policy components


Rating Factor of Auto
Insurance
2

The High Cost of Automobile


Losses

Auto insurance premiums account for more than


40% of property-casualty insurance net premiums

Personal auto accounts for more than 35%

Average expenditure for auto insurance is $815 in


2012

More than 80% of Americans own a car

New 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-insurance

MOTOR VEHICLE DEATHS


Motor Vehicle Deaths
Per 100,000 Persons By Age, 2012

Motor Vehicle Deaths By


Activity Of Person Killed, 2012

Motor Vehicle Deaths By Driver


Behavior

Speeding
Drunk Driving
Drunk Driving and Speeding
Red Light Running
Fatigue
Distracted Driving
Cellphone Use
5

Insurance Claims

Insurers have been faced with rising claims


Liability claims

Average bodily injury losses

Average property damage losses

$14,653 in 2012 (0.95% probability)


$3,073 in 2012 (3.50% probability)

Physical Damage to YOUR auto claims

Collision

$2,950 (5.56% probability)

Other-than- collision (comprehensive)

$1,585 (2.62% probability)

Relative Injury Claims


Frequency per Insured
Vehicle

Average=100
7

Relative Average Collision Loss


Payments per Insured Vehicle

Average=100
8

Personal Automobile Policy


(PAP)

The 2005 Personal Auto Policy (PAP)


is widely used throughout the US

Drafted by the ISO, it replaces the 1998


form
Some leading insurers use their own
version of policy slightly different from
PAP

Eligibility of PAP

Eligible Vehicles

A four-wheeled motor vehicle owned or


leased by the insured
A pick-up truck or van with a gross
vehicle weight rating of 10,000 pounds
or less

It 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 equipments
10

Definitions-Covered Auto
(ISO, p.1, J)

Any vehicle shown in the declarations


A newly acquired auto

Coverage depends on whether it is an additional


vehicle or a replacement vehicle and whether the
declarations indicates at least one auto for
collision coverage

Any trailer owned by the named insured


A temporary substitute vehicle

which is a nonowned auto or trailer used


temporarily because of mechanical breakdown,
repair, servicing, loss, or destruction of a covered
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vehicle

Newly acquired auto


(ISO, p.1, K)

Any coverage except Coverage For Damage To Your


Auto

Additional vehicle

Replacement vehicles

Notify the insurer within 14 days for the existing coverage to be


effective from the purchase date.
Coverage is provided without asking insurer to insure it

Coverage For Damage To Your Auto

If your original policy has physical damage coverage

You must notify the insurer within 14 days.

If your original policy does not have physical damage coverage

You must notify the insurer within 4 days


If a loss occurs before you notify the insurer, a $500 deductible will
apply
12

Loss Exposure Checklist on Your Car


Who

Whose
Car

You & Your


family
member
(listed
drivers)

Your
insured car

Other
people
(your
friends,
your
colleague)

Temporary
substitute
vehicle
(borrowed
car , rental
car)

You as a
pedestri
an

Other passengers
in your car

Property in your
car

Third Party
Other cars (person and property);
pedestrian; telephone pole, tree,
traffic light signal box, other
objects
Other cars who are at

fault

They may hit you but with no


insurance; hit and run; inadequate
coverage
Perils other than

collision

Theft, fire, lightening, flood,


earthquake, etc.

Personal Auto Policy


Components

Part A: Liability Coverage


Part B: Medical Payments Coverage
Part C: Uninsured Motorists Coverage
Part D: Coverage for Damage to Your
Auto
Part E: Duties After an Accident or
Loss
Part F: General Provisions
14

I. (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 accident
Settle or defend claims for insured
Pay all defense cost that insurer incurs
15

Liability
(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


16 auto,

Limit 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 accident

Regardless of the number of persons involved

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$50,000: limit of liability for all property

Exclusions (1)
(ISO, p.3)

Intentional loss by insured

Damage 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


care

Loss from Road rage

But property damage to a rent residence or


private garage is covered.

Vehicles used as a public or livery


conveyance
18

Exclusions (2)

Vehicle with fewer than four wheels

Use a vehicle without reasonable belief of


permission

Does not apply to a family member who is using a


covered auto owned by the named insured

Vehicle furnished or made available for the


named insureds regular use

Thus, motorcycles are not covered

E.g. you employer furnishes you with a car

No protection is given to someone in


automobile business (selling, repairing, storing,
parking, road testing and delivery)
19
Racing vehicle

Other Liability Conditions


(ISO, p.4)

Out-of-state coverage

If you have an accident in a state with higher


required liability limits than your state

Including coverage in a Canadian province

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

20

Liability CoverageExample

Ken 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?
21

Answer: It is Karens car, so Karens insurance is primary, paying $100,000; Kens insurance is excess and pays $25,000.

II. (Part B) Medical Payments


(ISO, p.4)

Covers all reasonable medical and funeral expenses


incurred by an insured in an accident

You need to check your own policy if you have it

Benefits are paid without regard to fault

If you have the coverage, medical payments can be paid to


you and other passengers in your car even if you are at fault

Covers 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


22 auto

Medical Payments Example


While 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?

23

Answer: Yes because medial payments coverage is no-fault coverage

Exclusions
(ISO, p.5)

Similar to the exclusions for Liability


Coverage

Using the vehicle as a residence is


excluded

To eliminate medical payment associated with


a mobile home
E.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


24
occurring during employment if workers

Other Conditions
(ISO, p.5)

PAP medical payments limits are on a per-person


basis, regardless of the number of vehicles
insured

E.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 vehicle
The insurance coverage is excess over any other
25
insurance for a nonowned vehicle

III. (Part C) Uninsured


Motorists
(ISO, p.6)

Pays for your bodily injuries caused by

An uninsured motorist
A hit-and-run driver
A negligent driver whose insurance company is
insolvent

In some states, property damage is also


covered
The uninsured motorist must be legally liable

Insured persons include

The named insured and family members


Another person while occupying a covered
auto
Any person legally entitled to recover
26

Exclusions
(ISO, p.6)

Coverage does not apply when

An 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 conveyance

Does not apply to a carpool

When workers compensation benefits are applicable


If 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 vehicle
27

IV. (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 available

Collision coverage
Other-than-collision coverage

Also called Comprehensive coverage


28

IV. Coverage for Damage to Your


Auto (ISO, p.8)

Collision coverage

The upset of your covered auto or nonowned auto or its


impact with another vehicle or object
Examples

A car plunges off a bridge into a river


You hit another car, a telephone pole, a tree or a
building
You car is parked, and you find the rear fender
dented when you return
You 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 fault

29

IV. Coverage for Damage to Your


Auto (ISO, p.8)

Other than collision coverage

Example

Losses 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

A moving car caught fire and wrecked


Your car was flooded when Hurricane Katrina attacked

Other-than-collision claims often will not raise an insureds


rates

Whereas collision claims usually will


30

Transportation and Towing


(ISO, p.8)

Part D also pays for temporary


transportation expenses, e.g., for train, bus,
taxi expenses

The expense must be the result of a covered loss

In the case of theft, you must wait 48 hours in order to


recover

Coverage is subject to a daily and total limit


Includes charges from a rental car company for
loss of daily rental
Coverage for towing and labor costs can be
added by an endorsement
31

Exclusions
(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 know

Some insurers have first accident waivers or accident forgiveness


(if you are at fault)

Need Gap insurance if you have car loan or a leased car

Pays the difference between the amount paid by your insurer and the
amount owed on the lease or loan

Some insurers have New Car Replacement Policy

All state

All state, Liberty Mutual

Purchase Collision Damage Waiver (CDW) if you rent a car, at least


for short-term rentals
32

Other 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
33

V. Duties after an Accident


or LossConditions on
insured
Promptly notify the insurance
company (or your agent) of how,
when, and where the accident or
loss occurred;
and
Proof of loss
Cooperate investigation, etc.

34

http://www2.iii.org/video/podcast-f
iling-an-auto-insurance-claim.html

http://www2.iii.org/video/informed-c
itizen-rental-car.html

http://www2.iii.org/video/auto-acciden
t.html

http://www2.iii.org/video/rental-car-i
nsurance-podcast.html

http://www2.iii.org/video/saving-mo
ney-on-auto-insurance-five-tips.htm
35

VI. General Provisions


(ISO, p.12)

Territory

US, Puerto Rico, and Canada


Mexico is not covered

Obtain an insurance from a Mexican insurer if you


want to drive in Mexico

Policy Cancellation

Insured can cancel at any time by returning


the policy or giving written notice of the time
when the insured intends to cancel
If 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
36

Policy Cancellation

During 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
misrepresentation
37

Auto Insurance Premium


Rating Factors

Territory
Age, gender, and marital status
Use of the auto
Driver education
Number and types of cars

Good student discount


Individual driving record

A multicar discount is available if the insured owns two or


more cars

Many insurers offer a safe driver plan for drivers with


clean records

An insurance score, based on an applicants credit


record
38

Selection 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
premium
Raise your limit from 500,000 to $1,000,000
will increase another 10% of your premium
39

Problem set
(chapter 22)

Review questions #1, 2, 3, 5, 6, 7,


8, 9, 10

Application questions #1, 2, 3, 4,


5, 6, 7

40

Supplementary question

A thief steals the insureds car and


wrecks it. Is this a collision loss or
a theft loss?

41

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