—Part I Risk Management for Auto Owners Chapter 13 Trieschmann, Hoyt & Sommer

Trieschmann, Hoyt & Sommer
Risk Management for Auto Owners—Part I
Chapter 13
©2005, Thomson/South-Western
Chapter Objectives
• Define the key terms in the personal automobile policy
• Identify the major parts of the personal automobile policy
• State four major exclusions of the personal automobile
policy
• Distinguish between collision and loss other than
collision
• State limitations on the insurance company’s right to
cancel an auto insurance policy
• Describe the various approaches to dealing with the
problem of uninsured drivers
• Describe the key factors that determine variation in auto
insurance premiums across individuals
2
The High Cost of Automobile
Losses
• Automobile losses represent exposures to risk that nearly all
individuals and risk managers must consider
• Of the $377 billion spent by individuals and business on propertycasualty insurance premiums in 2002
– About 43% was for auto insurance
• The human toll of auto losses is very high
– Over 40,000 Americans die every year in auto accidents
– However substantial progress has been made over the years in
improving the situation
• Table 13-1 shows fatality rates for recent years
• A disproportionate number of automobile accidents involve young
drivers
• Over the last several years falling accident rates indicate a
significant improvement in driving records
– May be explained by society’s greater emphasis on loss prevention and
safer cars
– And the reduction in the number of youthful drivers
3
Table 13-1: Death Rate per 10,000
Cars
4
Insurance Claims
• Insurers have been faced with rising claims for
most types of automobile insurance protection
• Table 13-2 shows statistics illustrating the level
to which claims have risen
– Notice that the average property-related losses have
risen steadily over the years
• While average bodily injury losses have fluctuated
– Average collision and property damage liability claims
rose dramatically faster than inflation from 1992-2002
• While average bodily injury liability losses fell slightly over the
same time period
5
Table 13-2: Average Insurance
Claims
6
Insurance Claims
• The federal government has adopted some minimum
vehicle safety and antipollution standards
– Aimed at improving the environment in which automobiles
operate
• Table 13-3 lists some 2000-2002 passenger autos with
respect to injury claims frequency
– These frequencies do not reflect only the actual safety of the
vehicles—they also reflect who is driving the vehicle
• Table 13-4 shows the relative average collision loss
payment per insured vehicle
– This number varies widely across different vehicles
7
Table 13-3: Relative Injury Claims
Frequency per Insured Vehicle …
8
Table 13-4: Relative Average Collision
Loss Payments per Insured Vehicle …
9
The Need for Insurance
• What should the average driver do to protect
against the financial consequences of the high
cost of automobile accidents and the substantial
probability of being involved in one?
– Risk managers of large corporations that own many
automobiles often retain the risk of physical damage
to the vehicles
– However, for nearly all individuals, the answer has
been insurance
• Despite its high cost
• In many states auto liability insurance is a legal requirement
• Self-insurance is not usually an option as few individuals own
more than two or three automobiles
10
Personal Automobile Policy (PAP)
• Introduced in 1977 as part of the consumer
movement designed to produce easier-to-read
insurance policies
• Replaced the more difficult to read Family
Automobile Policy
• Eligibility
– A car must be owned or leased by an individual or
jointly owned by a husband and wife
– PAP is primarily designed for private passenger cars
used for pleasure or business
• But a pickup truck or van used in farming may be insured as
may a pickup truck or van that is used to deliver or transport
goods
11
Definitions
• You and your are used to refer to the
named insured and spouse, if a resident of
the same household
• We, us, and our refer to the insurance
company
• No fault means that the insured does not
have to prove another person negligent
before compensation can be received from
an insurer
12
Definitions
• The term covered auto includes these
categories
– Any vehicle shown on the declarations page of the
policy
– Any of the following types of vehicles that you acquire
ownership of during the policy period
• A private passenger auto
• A pickup truck or van meeting certain requirements
– Any trailer you own
– Any auto or trailer you do not own
• While used as a temporary substitute for any other vehicle
described in this definition that is out of normal use because
of its breakdown, repair, servicing, loss, or destruction
13
Definitions
• With respect to replacement vehicles
– One must only notify the insurer in order to obtain
coverage for physical damage to the auto
– Liability protection is automatically provided for the
policy term
– The insurer must be notified to obtain physical
damage coverage because there is a high probability
that a greater exposure exists
• A trailer is defined as
– A vehicle designed to be pulled by a private
passenger-type auto, pickup or panel track, or van
– It also includes a farm wagon or farm implement
towed by one of these vehicles
14
Definitions
• A family member is defined by the PAP as
– A person related to you by blood, marriage, or
adoption who is a resident of your household
• Occupying is defined as
– In, upon, getting in, on, out, or off
• In the PAP, bodily injury means bodily harm,
sickness, or disease, including any death that
results
• Business means trade, profession, or occupation
• Property damage is defined as physical injury to,
destruction of, or loss of use of tangible property
15
Personal Auto Policy Components
• PAP has six major components
–
–
–
–
Liability
Medical payments
Uninsured motorist
Physical damage to your auto
• The first four sections provide four different coverages
• The definitions of terms may vary between sections
– Duties after an accident or loss
– General provisions
• Insurance policies must be read very carefully in
order to be properly understood
16
Liability
• The insurer promises to pay bodily injury and property
damage claims for which any insured becomes legally
responsible due to an auto accident
• The insurer will either settle or defend, at its own
discretion, any covered claim or suit
• The insurer agrees to pay for all defense costs, and
these are paid in addition to the policy limits
• There is no duty to defend the insured in situations
where the coverage is excluded
– Or after the limits of liability for direct damages have been
reached
• Many courts have held the insurance company’s duty to
defend is greater than the duty to pay damages
17
Liability
• The policy defines the insured as follows
– For the ownership, maintenance, or use of any auto or trailer, you or
any family member
– Any person using your covered auto
– For your covered auto, any person or organization
• But only with respect to legal responsibility for acts or omissions of a person
for whom coverage is afforded under liability coverage
– Would apply when 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, any person or
organization, but only with respect to legal responsibility for acts and
omissions of you or any family member for whom coverage is afforded
under liability coverage
• This provision applies only if the person or organization does not own or hire
the auto or trailer
• Would apply when you drive a fellow employee’s car and have an accident
– The employer is covered under your policy if a lawsuit results
18
Supplementary Benefits
• In addition to the policy limits
– Bail bonds up to $250 are covered for an accident resulting in
bodily injury or property damage
• A bail bond posted for a speeding violation or driving
while intoxicated is not covered unless bodily injury or
property damage occurs
• Premiums on appeal bonds and bonds to release
attachments are insured
• Interest that accrues after a judgment and reasonable
expenses incurred at the insurer’s request are also
included
• Up to $200 per day is available for loss of earnings
resulting from attending trials or hearings at the insurer’s
request
19
Limit of Liability
• Defined using the “split limits” approach
• The limit is described by three numbers
– Such as $100,000/$300,000/$50,000
• The first number is the maximum limit of liability for
all damages arising out of bodily injury to any one
person
• The second number is the maximum limit for all
damages for bodily injury resulting from any one
accident
– Regardless of the number of persons involved
• The third number is the limit of liability for all property
damage resulting from any one accident
20
Exclusions
• No coverage exists for persons who intentionally
cause a loss
• Damage to property owned or being transported
by an insured is excluded
– As is property rented to, used by, or in the care of an
insured
• Except for damage to a residence or private garage
• Vehicles operated as a public or livery
conveyance are not covered
– However share-the-expense car pools are not
affected by this exclusion
21
Exclusions
• If an employee of the insured is injured, the
insured’s PAP does not provide liability coverage
– Unless the injury is to a domestic employee for whom
workers’ compensation is not required
• No protection is given to someone in the
automobile business unless the insured’s
covered auto is being driven by
– The insured
– A family member
– Any partner, agent, or employee of the insured or any
family member
22
Exclusions
• For those in any other type of business, liability coverage
is provided for the business use of private passenger
cars and pickup trucks and vans
• No requirement is made in the PAP that the insured have
permission to operate the vehicle involved in an accident
– However, the policy excludes liability coverage for anyone using
a vehicle without reasonable belief that he or she is entitled to do
so
• Another exclusion excludes coverage for injury or
damage for which the insured has coverage under a
nuclear energy liability policy
23
Exclusions
• No coverage is provided for the use of any vehicle with
fewer than four wheels
– Thus, motorcycles are not covered
• An auto (other than the covered auto) that is owned by
you or furnished or made available for your regular use
is excluded
• Any vehicle, other than the covered vehicle, that is
owned by, furnished to, or available for the regular use of
any family member is excluded
– An exception to this exclusion exists when such a vehicle is
driven by the named insured or spouse
• Liability coverage is excluded for any vehicle
participating in an organized racing or speed contest
while located inside a racing facility
24
Other Liability Conditions
• Another provision in the PAP is out-of-state
coverage
– Including coverage in a Canadian province
• If you have an accident in a state having higher
required liability limits than your state
– The policy will pay up to the higher limits
• PAP liability coverage can be primary or excess
– 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
25
Medical Payments
• PAP will make medical payments on a no-fault basis for
reasonable and necessary medical expenses caused by
an auto accident and sustained by an insured
• Such expenses must be incurred and paid within three
years of the accident
– If more treatment is needed but has not yet been paid, the policy
will not cover it
• For medical payments, insured means
– You or any family member when occupying, or as a pedestrian
when struck by, a motor vehicle designed for use mainly on
public roads or by a trailer of any type
– Any other person while occupying your covered auto
26
Exclusions
• The medical payments coverage does not apply
to any injuries sustained when riding a
motorcycle
– But if a motorcycle collides with you or your vehicle,
you are insured
• No protection is available while your vehicle is
used to carry people or property for a fee
– Share-the-expense carpools are exempted from this
restriction
• Any bodily injury received while occupying a
vehicle located for use as a residence or
premises is also excluded
27
Exclusions
• No coverage is available for injuries occurring in the
course of employment if workers’ compensation is
supposed to provide benefits
• No protection exists while occupying an owned auto
(other than your covered auto) or one furnished or
available for your regular use
• No coverage exists while occupying a vehicle without a
reasonable belief that you are entitled to do so
• Injuries sustained by occupying a vehicle while it is being
used for business is excluded unless the vehicle is
– A private passenger auto
– An owned pickup or panel truck or van
– A trailer used with a vehicle described in the first two
• Other exclusions are losses due to war, radiation, and
racing
28
Other Conditions
• The medical payments limits are on a per-person basis
• PAP specifically states that the maximum amount
receivable is the per-person limit stated on the
declarations page
– This limit is the maximum, regardless of the number of autos
insured
• 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
• PAP pays on a pro-rata basis in cases where other
insurance applies on an equal basis
– However, with respect to nonowned automobiles, it is always
excess
29
Uninsured Motorist
• Pays for your bodily injuries that result from an accident with another
vehicle if the other driver is negligent and does not have any
insurance
– Or has insurance less than that required by law
• Punitive damages are not covered
• Insured persons include
– The named insured and family members
– Any person occupying your covered auto
– Other persons who are entitled to recovery because of injury in the first
two categories
• Insureds purchase uninsured motorist insurance to protect
themselves against other drivers who are uninsured
– While many states require or strongly encourage liability insurance,
many people do not purchase it
– Table 13-5 gives the uninsured motorist rates for the nine highest-rate
states
30
Table 13-5: State Uninsured
Motorist Rates (in %)
31
Uninsured Motor Vehicles
• A land motor vehicle or trailer of any type with the
following specifications
– One to which no bodily injury liability bond or policy applies at
the time of the accident
– One to which a bodily injury liability bond or policy applies at the
time of the accident
• But with a limit for liability less than the minimum limit specified by
the financial responsibility law of the state in which your covered
auto is principally garaged
– One that is a hit-and-run vehicle whose operator or owner
cannot be identified and that hits you or any family member, a
vehicle occupied by you or any family member, or your covered
auto
– One to which a bodily injury liability bond or policy applies at the
time of the accident
• But that is covered by a bonding or insuring company that denies
coverage or becomes insolvent
32
Uninsured Motor Vehicles
• None of the following is considered an uninsured
motor vehicle
– One owned by, furnished to, or available for the
regular use of you or any family member
– One owned or operated by a self-insurer under any
applicable motor vehicle law unless the self-insurer
becomes insolvent
– One owned by any government unit or agency
– One operated on rails or crawler treads
– One designed mainly for use off public roads while
not on public roads
– One located for use as a residence or premises
33
Exclusions
• In addition to the exclusions under the definition
of an uninsured motor vehicle
– The uninsured motorist coverage has five exclusions
for bodily injury
• If the injury is sustained while occupying, or when struck by,
a motor vehicle or trailer of any type owned by you or any
family member that is not insured for this coverage
• If the claim is settled by the insured or the insured’s legal
representative without consent of the insurer
• If the injury is sustained while occupying your covered auto
when it is being used to carry people or property for a fee
• If the injury is sustained while using a vehicle without
reasonable belief that you are entitled to do so
• If the coverage directly or indirectly benefits any insurer or
self-insurer under any workers’ compensation, disability
benefits, or similar law
34
Other Conditions
• The maximum limit of liability is the amount
shown on the declarations page
• Split limits are used
– The number of persons or vehicles insured does not
affect this limit
• No stacking is allowed
• Coverage is excess on nonowned vehicles
• When a dispute develops between the insured
and the insurer on a claim
– The policy gives either party the right to ask for
binding arbitration
35
Physical Damage to Autos
• The insurer provides protection for direct
accidental loss to the covered auto or to a
nonowned auto
– A nonowned auto is defined as any private passenger
auto, pickup truck, van, or trailer not owned or
furnished for the regular use of you or any family
member while in the custody of or being operated by
you or any family member
• As well as any auto or trailer while used as a temporary
substitute for your covered auto while it is out of normal use
• Coverage for a nonowned auto is equal to the broadest
protection provided for any covered auto
36
Physical Damage to Autos
• Coverage is separated into two sections
– Collision
• Defined as upset of your covered auto or nonowned auto or
its impact with another vehicle or object
• Definition is new to PAP
– It clarifies what some persons thought was awkward in the old
definition
» Which used the word collide to define the term collision
– Other than collision
• 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
37
Physical Damage to Autos
• If breakage of glass is caused by a collision
– You may elect to have it considered a loss caused by collision
• Without this alternative approach on glass
– A deductible could be required for the collision loss and another
deductible on other than collision for the glass
• The advantage to the insured for not having the
preceding perils considered collisions is
– Coverage for other than collision usually has a lower deductible
than collision coverage
• Additionally, other-than-collision claims often will not
raise an insured’s rates
– Whereas collision claims usually will
38
Exclusions
• The physical damage section excludes loss resulting from the
operation of a vehicle used to carry persons or property for a fee
• Damage resulting from war, radioactive contamination, and
discharge of any nuclear weapon is excluded
• Loss to equipment designed for the reproduction of sound
– Unless the equipment is permanently installed in or designed to be
solely powered by the electrical system of your covered auto
• Loss to any of the following or their accessories
–
–
–
–
–
–
–
–
Citizens-band radio
Two-way mobile radio
Telephone
Scanning monitor receiver
Television monitor receivers
Video cassette recorders
Audio cassette recorders
Personal computers
39
Exclusions
• Loss to tapes, records, discs or other
media used with the equipment described
previously
• Loss to laser or radar detection equipment
• Loss to a camper body, trailer, or motor
home not shown in the declarations, as
well as associated equipment
• Loss to custom furnishings or equipment
in or upon a pickup or van
40
Exclusions
• No coverage is given for a nonowned or
temporary substitute vehicle used by you or a
family member without a reasonable belief that
the person is entitled to do so
• Rental car companies are not covered for
coverage on a car you rent from them unless
you can be held liable under the rental
agreement or a state statute
• Damage from wear and tear, freezing,
mechanical or electrical breakdown or failures,
and road damage to tires
41
Transportation and Towing
• PAP will pay up to $20 a day for temporary transportation
expenses incurred by you in the event of a covered loss
to your auto
– In the case of theft, you must wait 48 hours in order to recover
• For an additional premium, towing and labor cost
coverage may be added
• The insurer’s limit of liability is generally about $50
– All labor must be performed at the site of the disablement
• Given the roadside assistance plans that accompany
many car purchases
– Most persons probably do not need this coverage
• But because the premium is so low many purchase it
42
Other Provisions
• The insurer limits its liabilities to the actual cash value of
the loss
– Or the amount necessary to repair or replace the property,
whichever is less
• Actual cash value includes an adjustment for
depreciation and the physical condition of the auto
• In the case of antique or customized automobiles
– A stated-amount endorsement may be used
• The insurer reserves the right to pay for the loss in
money, repair, or replacement of the damaged or stolen
property
– If the car is stolen, the insurer will pay for the cost of returning
the vehicle to the owner
– If the cost of repair or replacement is greater than the value of
the property
• The insurer may declare the loss a total loss and pay the actual
cash value of the vehicle
43
Other Provisions
• New wording in the policy states that if the repair or replacement
results in betterment of the property
– The insurer will not pay for the amount of the betterment
• The betterment provision and the used of “aftermarket” parts has
caused significant concern to consumers and insurance companies
– Insurers have argued that aftermarket parts are just as good as those
made by the auto manufacturer
• They cost less so everyone wins because of lower premiums to insureds
and lower costs to insurers
• Another provision states that the insurance shall not directly or
indirectly benefit any carrier or bailee
– Such persons include a railroad or shipping line that transports your
vehicle as well as a parking lot operation
– This allows the insurer to subrogate against the bailee when the bailee
is negligent in damaging your auto
• All coverage for nonowned autos is excess over any other collectible
insurance
44
Duties after an Accident or Loss
• The insured must promply notify the insurance company
of how, when, and where the accident or loss occurred
– Typically, reporting such information to your agent is considered
reporting it to the company
• Any person seeking coverage under the PAP must be
willing to
– Cooperate with the company in the investigation, settlement, or
defense of any claim or suit
– Promptly send the company copies of any notices or legal
papers received in connection with the accident or loss
– Submit, at the company’s expense and as often as reasonably
required, to physical examinations by physicians selected by the
company and to examination under oath
– Authorize the company to obtain medical reports and other
pertinent records
– Submit a proof of loss when required by the company
45
Duties after an Accident or Loss
• A person seeking uninsured motorist coverage must also
be willing to
– Notify the police promptly if a hit-and-run driver is involved
– Send copies of the legal papers to the company if a suit is
brought
• When a claim is made under the coverage for damage to
your auto, you must
– Take reasonable steps after a loss, at company expense, to
protect your covered auto and its equipment from further
damage
– Notify the police promptly if your covered auto is stolen
– Permit the company to inspect and appraise the damaged
property before its repair or disposal
46
Duties after an Accident or Loss
• If you have an accident, the insurer will pay
towing expenses
• If the disabled vehicle was left at the scene of
the accident
– There is a chance that someone will strip it of its
salable parts
• Promptly notifying the police when theft occurs
increases the probability of recovery
– It also reduces the moral hazard of an insured’s
selling or hiding the vehicle and reporting it as stolen
to the insurer
47
General Provisions
• The policy states that its territorial limits are the U.S. and
Canada
• Transportation of the auto between any of these points is
also covered
– Note that Mexico is not a covered territory
• All policy modifications must be in writing
• When a policy is changed to give greater coverage
without additional charge
– The insured’s policy is automatically modified
• The insured cannot start legal proceedings until full
compliance with all policy terms has been met
• The policy cannot be assigned without the written
permission of the insurer
• Bankruptcy of the insured does not relieve the insurer of
its obligation
48
Policy Cancellation Provisions
• The PAP policy has a rather lengthy termination
provision
• The insured can cancel at any time by returning
the policy or giving written notice of the time
when the insured intends to cancel
• Termination by the company is more complex
– 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
49
Policy Cancellation Provisions
• The insurer has 60 days to investigate the insured and
make its underwriting decision
– During the first 60 days, the insurer must give ten 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
• If your state requires longer notice than the PAP gives
– Your state law will determine the notification period
• The insurance company is obligated to give you a refund
of the premium if one is due
– However, it is not required to tender the refund when it cancels
• You may have to ask for it
50
Endorsements to the PAP
• The PAP may be endorsed to give physical damage
coverage to owned trailers
– Made on a schedule basis
• When nonowned autos are furnished for your regular
use
– The extended nonowned liability endorsement is needed
• In the case of a custom van
– The insured needs to add a covered property endorsement
• The underinsured motorists endorsement provides the
insured protection when another person who is
inadequately insured causes the insured to be injured
• In some states underinsured motorist insurance is
included in uninsured motorist coverage
– These provisions apply only if the other driver is at fault
51
Motorcycles and Other Vehicles
• Through the use of the “Miscellaneous Type of
Vehicle Endorsement”
– Under the PAP a person can insure motorcycles,
motor homes, golf carts, or other similar types of
vehicles
• In addition, a private passenger auto owned
jointly by two or more resident relatives other
than a husband and wife may be insured
• Coverages available include liability, medical
payments, uninsured motorists, collision, and
loss other than collision
52
Motorcycles and Other Vehicles
• This endorsement creates three changes
– Newly acquired miscellaneous vehicles are
covered if they are like the insured vehicle
– Temporary substitute autos of any kind are
covered
– Exclusion with respect to vehicles with fewer
than four wheels is changed when a
motorcycle is insured
53
Snowmobiles
• May be insured by endorsement to the PAP
• This approach has advantages over purchasing
snowmobile insurance through the homeowners
program
– One can purchase uninsured motorist and physical
damage insurance in addition to the liability insurance
– Snowmobiles subject to motor vehicle registrations
can be covered
– The named insured and family members may be
covered under medical payments
54
Auto Loan/Lease Coverage
• Also known as “gap” insurance
• Provides protection to the insured and/or
the lending institution
– For the difference between the actual cash
value of a car and the outstanding debt or
residual value on a lease
• This endorsement may be of benefit to
recent college graduates who have limited
current resources
55
Automobile Insurance and the Law
• What happens if you’re seriously injured in an auto
accident caused by another driver
– But the at-fault driver has no assets and no insurance?
• In the U.S. and Canada, legislatures have passed some
form of automobile insurance law designed to deal with
the problem of the uncompensated victim of financially
irresponsible automobile drivers
– Laws have taken the following forms
•
•
•
•
•
Financial responsibility laws
Compulsory liability insurance laws
Unsatisfied judgment funds
Uninsured/under insured motorist coverage
No-fault laws
56
Financial Responsibility Laws
• Represent a common approach to the general problem
of the uncompensated victim of the financially
irresponsible motorist
• Most such laws have these basic requirements
– Motorists without liability insurance who are involved in an
automobile accident must obtain and maintain liability insurance
or other proof of financial responsibility of a specified character
for a given period, usually three years, as a condition of
continued licensing of the operator and registration of the vehicle
– Motorists without liability insurance who are involved in an
automobile accident must pay for the damages they have
caused
• Or give evidence that they were not to blame as a condition for the
continued operation of their vehicle
57
Financial Responsibility Laws
• Financial responsibility laws have no
penalty other than the suspension of
driving privileges
– They are not guarantees that the
uncompensated victim will actually be paid
• The effectiveness of the laws rests on the
hope that most drivers will purchase
insurance rather than face possible loss of
their driving privileges
58
Financial Responsibility Laws
• Financial responsibility laws have serious
drawbacks including
– No assurance is made that all drivers will
have liability insurance
– The penalty for not complying with the law is
weak
– No protection is given against hit-and-run
drivers, people driving stolen cars, or
motorists driving illegally
59
Compulsory Insurance Laws
• Because of the inherent weaknesses of financial
responsibility laws
– Most states have implemented compulsory insurance
laws
• Require that auto liability insurance with at least
specified minimum limits be purchased before a
vehicle can be licensed or registered
• Even in states with compulsory insurance laws
– A large number of drivers are uninsured
60
Unsatisfied Judgment Fund
• Set up by a state to pay automobile
accident settlements that cannot be
collected by other means
• If the negligent motorist is insolvent, does
not carry liability insurance, or has voided
insurance through violation of a policy
provision, or if the insurer is insolvent
– The innocent victim may collect from the
unsatisfied judgment funds after every other
means of collection is exhausted
61
Uninsured/Underinsured Motorist
Coverage
• Usually applies only to bodily injury claims
• If it is determined that an insured driver is injured
by a driver who is uninsured
– The injured driver can collect from his or her own
insurance company any damages that the negligent
uninsured motorist would be legally obligated to pay
• Up to the insured’s own uninsured/underinsured motorist
coverage limit
• The insurer has the right to collect from the
negligent uninsured motorist for any damages
paid to the insured motorist
– In the unlikely case that the uninsured driver has the
assets to pay
62
Risk Management and Personal
Automobile Rating
• The average expenditure for auto
insurance in the U.S. in 2001 was $718
• Thus, insurance is a significant factor in
the cost of owning or operating
automobiles
63
Rating Factors
• Two of the key determinants of auto insurance
premiums are the age and sex of the driver
– Youthful drivers, and especially youthful male drivers,
tend to pay significantly more for auto insurance than
older drivers
– Generally, a person is considered a youthful driver
until age 25 if female
• And age 30 if male
• Young drivers are involved in a disproportionate
number of auto accidents
64
Rating Factors
• The difference in premiums between males and
females is driven by multiple factors
– Males tend to drive more than females which leads to
more accidents
– Males are involved in more fatal accidents per mile
driven than females
• Marital status also affects insurance premiums
– Young married drivers pay lower auto insurance
premiums than young unmarried drivers
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Rating Factors
• Territory is also a major rating factor
• In 2001 the lowest average expenditure on auto
insurance was in South Dakota ($510)
– While the highest was in New Jersey ($1,128)
• Even within a state, premiums vary dramatically
by territory
– Premiums in urban areas tend to be higher due to
higher accident rates in cities compared to rural areas
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Rating Factors
• The principal use of the car is also a rating
factor
– Rates vary depending on whether the auto is
used to drive to and from work, and, if so, how
far each day
– Rates also vary depending on whether the
auto is used generally for business or farm
purposes
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Rating Factors
• Some factors affecting the cost of auto insurance are
within the control of the individual
– For instance, the type of auto driven can significantly influence
insurance premiums
• Sports cars are more costly to insure for liability than sedans, for
example
– Good students can obtain discounts on their auto insurance
– Youthful drivers who complete a driver education course can
obtain discounts
– Insuring multiple vehicles under one policy can yield a multi-car
discount
– Purchasing auto and homeowners insurance from the same
insurer can yield a multi-policy discount
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Rating Factors
• Probably the most important thing a person can
do to control the cost of his or her auto
insurance in the long run is to drive carefully
– The insured’s driving record has a major influence on
premiums
• Auto accidents, speeding tickets and other moving violations,
and convictions for driving while intoxicated all lead to higher
premiums
– Another rating factor used by some insurers is credit
history
• Statistics show that people with poor credit tend to have
higher auto insurance claims
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Deductibles for Damage to Your
Auto
• In the PAP, deductibles exist for collision
and for loss other than collusion
• Higher deductibles reduce premiums
• Table 13-7 shows examples of credits for
collision and comprehensive deductibles
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Table 13-7: Examples of Credits for
Collision and Comprehensive Deductibles
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The Youthful Driver Dilemma
• Insurance companies are more sensitive
to claims in the automobile line than they
are in most other lines
• It may not take more than one claim to
cause an insured’s cost to increase
significantly
• This statement is especially true with
respect to male drivers under 25 and
females under 21
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The Youthful Driver Dilemma
• Given the sensitivity, the smart move for many young
drivers may be to not purchase collision coverage
because
– Any claim for which the insured is responsible, liability or
collision, will cause rates to be increased
– It usually takes at least three years of claim-free driving before
rates will be lowered
– It is often difficult to obtain coverage, even when paying higher
rates
– Given the above factors, the insured should not make any kind of
collision claim
• So it is not wise to purchase insurance that will not be used
• This strategy works best when the car involved is worth
only a few thousand dollars and there is no outstanding
loan on the car
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Selection of Liability Limits
• When people are choosing their liability limits
– If they have any meaningful amount of assets to
protect, they should think big
• Each year awards increase as both economic
inflation and social inflation occur
– On a relative basis, higher liability limits are not overly
expensive
– Table 13-8 shows a typical schedule
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Table 13-8: Liability Rate Factor for
Personal Auto Policy
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