Automobile Insurance — the Personal Auto Policy (PAP)
Auto insurance, in spite of the name, covers most types of motor vehicles that are not primarily commercial vehicles, including cars, trucks, and vans. Auto insurance (aka car insurance) provides insurance coverage for damage or injury to others, in the form of liability insurance, and can also provide coverage for injuries or damages to the insured. Collision coverage covers damage to the insured's motor vehicle because of a collision; comprehensive coverage covers all other insurable losses to the insured's motor vehicle that is not the result of a collision, such as windshield damage from stones, vandalism or theft. Collision and comprehensive coverage is usually optional, which most people buy if they have a newer vehicle. However, if the motor vehicle was purchased with a loan, then most lenders require collision and comprehensive coverage to protect their collateral.
In 1927, Massachusetts become the 1st state to require liability insurance for motor vehicles. In 2012, liability insurance to cover the operation of motor vehicles is required in 49 states and the District of Columbia. Only New Hampshire does not require the purchase of auto insurance if the driver can demonstrate that he has the financial wherewithal to pay for damages in the event of an accident.
Most insurance companies use standardized insurance policies rather than creating their own from scratch. The most common standardized policy is the Personal Auto Policy (PAP), developed by the Insurance Services Office, for insuring personal vehicles, although some insurers, such as State Farm and Allstate use their own forms.
The PAP covers personal vehicles, but not recreational vehicles. The PAP also covers pickups or vans weighing less than 10,000 pounds, if they are not used for business delivery, except for incidental use of installing, repairing, or maintaining furnishings or equipment, such as would be the case for a carpenter or plumber; or if used in ranching or farming.
Auto insurance premiums vary widely. The base premium primarily depends on the state, locality, and age of the insurance applicant. This base premium is then modified by a merit rating system that looks at not only the number of accidents that the insurance applicant had, but also traffic violations. More accidents and traffic violations results in higher premiums. Additionally, states have widely varying requirements that auto insurance must cover, so the premium charged in any given state depends heavily on those requirements and on the premium tax percentage charged by that state. The premium tax, like many business taxes, are assessed on the insurance company, but the insurance company passes the cost of this tax to the consumer in the form of a higher premium, which usually is not itemized.
Covered autos include any listed in the declarations section of the insurance contract, a newly acquired vehicle, a trailer owned by a named insured, or a temporary substitute vehicle. It also includes any personal vehicle leased for at least 6 months.
A newly acquired vehicle has the broadest coverage of any vehicle shown in the declarations, except collision coverage. Coverage begins when you are the new owner. For coverage for collision and other-than-collision damage, you must notify the insurer within 14 days, if any of the vehicles in the declarations section has such coverage. If not, then notice must be given within 4 days. However, if it is an additional vehicle, the insurer must be notified with 14 days.
A temporary substitute vehicle is any vehicle that you are driving because you are unable to use your insured vehicle, and you do not own the temporary vehicle.
Part A: Liability Coverage
Automobile liability coverage pays for any damages and liabilities that you are legally obligated to pay for, and also pays defense costs. The cost of defense is over and above the limit of liability. However, no defense is provided if the liability is not covered. When the liability is covered, the insurer has the right to investigate and settle any claims independently of the insured.
The limit of liability can be a single limit or a split limit. The standard policy provides for a single limit that is the limit for all liability, no matter how it is apportioned. By using an endorsement, many people opt for a split limit. A split limit divides the limit of liability into 3 parts: the limit for each person, the total limit, and limit for property damage. The split limit is expressed in the format ###/###/### in thousands for liability limit per person/total liability limit/property damage limit. Thus, a split limit of 100/300/50 would have a limit of liability of $100,000 for each person, a total limit of $300,000, and a limit of $50,000 for property damage.
For instance, suppose you injure 3 people and caused $25,000 damage to their car. One is severely injured with $125,000 worth of damages, one is moderately injured with $75,000 of damages, and the other is the least injured with $50,000 of damages. If your policy had a single limit of $300,000, then you would be entirely covered. With a 100/300/50 split policy, $25,000 of damages to the severely injured person would not be covered. You would have to pay for that.
Part B: Medical Payments Coverage
The automobile medical payments coverage is a no-fault payment for injuries or funeral expenses caused by vehicles designed for the road to the insured to prevent the need for litigation. Thus, if the insured is a passenger in a car or riding public transportation, or was simply walking, and is injured by a motor vehicle, she will be covered. However, there is no coverage when the vehicle is not designed for road travel, such as tractors or bulldozers, nor does it cover her if she is a passenger on a motorcycle. Only expenses incurred within 3 years of the accident will be paid.
Part C: Uninsured and Underinsured Motorists Coverage; Stacking
Most states require licensed drivers to have to at least a minimum of auto insurance coverage. However, many drivers, nonetheless, drive without insurance. According to the Insurance Information Institute, the number of uninsured drivers usually varies between 13.5% and 14.5%, although in some states, such as Mississippi and Texas, it may be much higher. The Uninsured Motorists Coverage will cover the insured if they suffer damages from uninsured motorists, which are defined as drivers without insurance, drivers with less than the required minimum, hit-and-run drivers, and drivers insured by insolvent insurance companies. The cost of uninsured motorist coverage depends on the number of uninsured drivers in a state, with higher rates in states with a higher number of uninsured motorists. No-fault insurance also helps to mitigate any losses due to uninsured motorists, since an injured party can collect from his own insurance company if the injuring party has inadequate or no insurance.
Uninsured motorists' coverage does not cover underinsured motorists. So, if you are injured by someone that has insurance, but not enough to cover your damages, then you will not get any more than what you can collect from the person that injured you and his insurance company. However, you can purchase an endorsement for underinsured motorists insurance. Any deficiency of compensation for injuries caused by someone with inadequate insurance to cover your losses can be collected from your own insurance company, up to the policy limits.
The price of uninsured and underinsured motorist coverage will depend on whether the state allows stacking, which allows the insured to collect up to the total limits of coverage for all vehicles owned by the insured, whether they are insured under the same or different policies. Obviously, stacking only benefits those with more than one insured vehicle. So if the insured owns 2 vehicles, each insured for up to $25,000 for uninsured motorist coverage and $15,000 for underinsured coverage, then an insurance policy that allows stacking will provide up to $50,000 of uninsured motorist coverage and $30,000 for underinsured motorists for an incident; otherwise the $25,000 limit for that vehicle would apply. Obviously, a policy that allows stacking will cost more, since it increases the insurance companies potential liability. According to the Property Casualty Insurers Association of America, half the states prohibit stacking, as of 2012. Generally, stacking is allowable if not specifically prohibited.
Part D: Coverage for Auto Damage
There are 2 different types of coverage for your auto: collision and other-than-collision, or what is sometimes called comprehensive coverage. Collision coverage covers any damage caused by a collision with another vehicle or object. Other-than-collision coverage covers damage from anything else, which includes missiles or falling objects; fire; theft or larceny; explosion or earthquake; windstorm; hail, water or flood; malicious mischief or vandalism; riot or civil commotion; collision with animals; or breakage of glass. Although collision coverage usually has a deductible, some of the damage covered under the other-than-collision coverage has no deductible.
Generally, the loss settlement consists of actual cash value or the cost of repair. If the cost to repair the vehicle exceeds its worth, then the loss will be declared a total loss, and the actual cash value for the vehicle will be paid.
If the vehicle can be repaired, the insurer will usually use cheaper after-market parts, unless the vehicle is fairly new. If the insured insists on original manufacturer's equipment (OEM) for an older vehicle, then he must pay for the betterment by paying the difference between the price of the OEM part and the after-market part.
The 2005 edition of the personal auto policy includes up to $1,000 coverage for most electronic equipment that is permanently installed.
Tip: Save Big by Dropping Collision and Comprehensive Coverage for Older Vehicles
The premium for collision and comprehensive coverage is almost as much as the liability coverage. Moreover, this part of the premium does not generally decline even as the value of your vehicle is declining, which is especially rapid in the early years. Therefore, if you have an older vehicle, especially one older than 5 years, then consider dropping collision and comprehensive coverage. Find the value of your vehicle online at these sites:
Remember that the most you will receive from collision and comprehensive coverage is the value of your vehicle minus your deductible. So if your car is worth $2500, and you have a $1000 deductible, then you will only receive $1500 at the most, regardless of the damage done to your vehicle.
Remember, however, that most auto loans have provisions requiring that you maintain insurance on the vehicle, including collision and comprehensive coverage, until the loan is paid off. So pay off the loan 1st, which will allow you to save on additional interest charges, then drop the coverage.
Part E: Duties after an Accidnt or Loss
As with almost all insurance contracts, the insured has certain duties in the event of a loss, which if neglected, can nullify coverage under the policy.
Most duties are commonsensical. Notify the insurer in the event of a loss, and tell the insurer how, when, and where the loss occurred, so that it can be investigated. The insured must protect the property from further damage, and the insurer will pay reasonable costs, such as towing and storage for its safekeeping. The insured will also have to cooperate with the insurer in providing evidence, testimony in court or for discovery, and help in finding or identifying witnesses.
If the loss is caused by a collision with another vehicle, especially if it was a hit-and-run collision, the insured must notify the police immediately after the incident or after it is discovered.
Part F: General Provisions
Some of the general provisions, which are part of most insurance contracts, include the following:
- If the insured declares bankruptcy and he is relieved of liability to the injured party, this does not relieve the insurer of making reparations, if the insurer would have been liable otherwise.
- Any fraud committed by the insured voids the policy.
- The insurer cannot be sued by the insured until all requirements of the policy are met.
- The insurer has the right of subrogation— in essence, taking the place of the insured as to rights and remedies.
- Insurance is only valid in covered territories, which includes the United States, Puerto Rico, and Canada, but most other foreign countries are not covered, including Mexico.
- The policy cannot be assigned except by written consent of the insurer.
- There is also an anti-stacking provision that prevents the insured from collecting from more than 1 insurance policy for the same loss. When there is more than 1 policy covering the loss, the policy limit will be no higher than the highest policy limit of any policy that covers the loss. (Multiple Insurance Coverage: Pro Rata Liability, Contribution Of Equal Shares, And Primary And Excess Insurance)
- What is required for termination by the insured or by the insurer, which includes cancellation, nonrenewal, automatic termination, and other provisions regarding termination. All states restrict the right of the insurer to cancel. An endorsement alters the standard policy to cover the differing state laws. Usually, an insurer may only terminate a policy because of nonpayment of the premium if the delinquency lasts for more than 60 days; material misrepresentation in the insurance application; or because the insured's license has been suspended or revoked.
Insuring Motorcycles and Other Vehicles
Usually excluded from the standard auto insurance policy are motorcycles, mopeds, motor scooters, motor homes, snowmobiles, and most other recreational vehicles. However, all states require the purchase of motorcycle insurance by owners of motorcycles except New Hampshire, Montana, Washington, and Hawaii. Coverage can be obtained by purchasing a miscellaneous-type vehicle endorsement.
However, a snowmobile requires a different endorsement. One primary difference between the personal auto policy and motorcycle coverage is that liability is not covered on a non-owned motorcycle, unless it is a temporary substitute. In this case, the insurance of the owner of the motorcycle would apply.
Proof of Insurance
Most states have laws regarding the proof of insurance and when that proof must be shown to authorities, usually the police. Most of the states require proof in the form of an insurance card, which generally must be shown to police when stopped or when involved in a traffic accident. Half of the states also require proof of insurance when registering a vehicle.
Some states are allowing motorists to show proof of insurance electronically with their smart phone. In 2012, Idaho and Arizona have become the 1st states to allow showing proof of insurance with smart phones. Arizona even allows proof by showing a PDF copy of the insurance card on a smart phone and, presumably, on other portable devices such as tablets. In Colorado, motorists only have to show proof of insurance when registering their vehicle.
Increasingly, the states are using databases to verify insurance by comparing all the drivers with vehicles registered in state with the records in the databases of all insurance companies that operate within the state to flag owners with registered vehicles that do not have corresponding records of insurance for that vehicle.
Failure to drive without the required insurance can result in hefty penalties, Including license or registration suspension, or even revocation, or fines as high as $5,000 for repeated offenses. License plates may be confiscated and even the vehicle may be impounded for repeat violators.
Pay Lower Premiums for Less Driving
Many insurance companies now offer lower premiums for policyholders who drive less. The number of miles driven can be determined by the vehicle's navigational system or by a phone app.