Part A: Liability Coverage (liability to others)
Under the PAP, the following persons are covered: (a) the named insured; (b) the spouse living in the principal household; (c) the relatives of the first person named in the declaration; (d) any other person who obtained the consent of the insured or the spouse; and (e) any other person or organization liable for the use of such a car by one of the previously mentioned insureds. The coverage is not extended to automo- biles used in any business or occupation, or to persons working in any car business.
APAP feature is the single limit coverage for both bodily injury and property damage. The limit of liability included in the policy is the maximum limit of lia- bility for bodily injury and property damage resulting from any one accident.
Each of the two liabilities is now discussed.
Bodily Injury Liability. In buying auto insurance, the major concern should be to protect against others’ claims arising from bodily injury or death caused by the members or employees of the family. When a policy is purchased that includes liability, the insurance company promises to honor the claims of the aggrieved party or parties up to the financial limits stipulated in the policy. These limits are often expressed as a split limit, such as 25/50, which means that the insurance company is liable for up to $25,000 for any one person injured and up to $50,000 for all persons injured in the same accident. Most states now prescribe the mini- mum amount of liability insurance that residents must carry. However, as a bare minimum, one should carry at least a 100/300 coverage, which means $100,000 coverage for one person and up to $300,000 for all persons per accident. The financial planner should analyze the net worth and annual income of a family to determine the satisfactory level of liability insurance that family should buy.
Property Damage Liability. This coverage applies when the insured’s car damages the property of others. The property may be the car of the other person or it may be other properties, such as lamp posts, buildings, or telephone poles. Property damage
liability coverage provides protection in the form of legal defense and indemnifica- tion through the payment of damages for which the driver is legally liable. This cov- erage can be purchased in amounts ranging from $10,000 to $100,000, or more. For this potential liability, a minimum of $50,000 coverage is recommended.
Part B: Medical Payments Coverage
Unlike homeowner’s insurance which provides coverage for medical payments to others, medical payments in the auto policy cover the cost of medical ser- vices provided for the insured, the relatives, and anyone else in the insured’s car.
This coverage, however, does not apply to other pedestrians or to occupants of the other vehicle. Besides carrying liability insurance, the main benefit of having the automobile medical payments coverage is that the payment is prompt, since no time is wasted in determining liability. For Part B, the amount of cover- age is low, typically $1,000 per person, but this amount can be raised by endorse- ment. Part B also covers the insured and the insured’s family if they are injured by another vehicle while walking as a pedestrian or riding on a bicycle.
Part C: Uninsured Motorists
Under this coverage the insurance company protects the driver against losses inflicted by someone who: (a) has no insurance, (b) has insurance with a carrier that is virtually insolvent, or (c) turns out to be a “hit-and-run” driver. However, in order to collect on a claim under this provision, it is necessary to clearly demonstrate that the other driver was at fault. Incidentally, this coverage applies only to bodily inju- ries, and the payment for injury by the insurance company is limited to the state’s maximum liability amount.
A variation of this feature protects against underinsured motorists. Here, the other driver is at fault but does not have sufficient insurance to cover the losses.
The planner will need to read Part C of the client’s contract. This determines if
“underinsured motorists” are covered as part of the “uninsured motorist” cover- age. If that is not the case, it is recommended that the underinsured motorist protection be added as a policy endorsement.
Part D: Coverage for Damage to Insured’s Auto (Part D) There are two elements to Part D: collision, and “other-than-collision.”
Collision/Overturn. If the car is damaged by a person other than the driver, it should be possible to get the car repaired or replaced at the cost of the person at fault, provided the guilty person has coverage. However, if the guilty person does not
carry liability insurance, that person may refuse to pay for the damages. The insur- ance company representing the driver at fault may also delay paying for the dam- ages. Then the driver must pay the auto repair cost. The situation becomes complicated if the insured causes damage to the car by colliding with another car (own fault), another object (e.g., a tree or a street sign), or by overturning the vehi- cle. To cover such contingencies, it is desirable to purchase collision insurance. That obligates the insurance company to pay for any damage to the car should it collide with another vehicle or object, regardless of who is responsible for the accident.
Collision insurance normally has a deductible amount of $100 or more. An effi- cient way to reduce the auto premium is to take a higher deductible, such as
$250, $500, or $1,000. The insured risks losing the amount of the deductible if the car is damaged, but the premium savings resulting from using that strategy are substantial. Another sensible strategy is to skip the collision coverage alto- gether if the car is old with a small “book value.” This decision can easily be made by comparing the market value of the car with the collision premium charged.
Other-than-collision. Other-than-collision insurance (also called comprehensive physical damage) protects the car against various perils, including: theft, vandal- ism, falling objects, windstorm, glass breakage, fire, lightening, impact with ani- mals, hail, water, flood, and earthquake. However, this coverage does not apply to cars damaged in a collision with another car or object, or to cars which lose value because of normal wear and tear. The extent of the coverage is specified in the policy, and the amount of deductible varies from one policy to another. A number of comprehensive fire and theft policies also reimburse the policy- holder for a rental car during repair or until a new car can be purchased.
Part E: Duties after Accident or Loss
In case of a claim, a policyholder must: (a) send the insurance company accident-related paperwork duly filled out, (b) authorize the insurance com- pany to obtain medical and other pertinent records, (c) submit proof of loss, and (d) cooperate with the insurance company in settling the claim.
Part F: General Provisions
The key provisions of a PAP are listed as follows:
1. The terms of a policy may be changed or waived only by an endorsement signed by the company.
2. The policyholder does not have a right of action against the company until all the terms of the policy have been met, and under the liability
coverage, until the damage amount an insured is legally liable to pay has been determined.
3. The policyholder may cancel the policy by notifying the company in writing of the date of cancellation, signing a lost policy release, or returning the policy.
Factors Affecting Premiums
The cost of auto insurance depends partly on whether the insured has a high or low accident probability. Factors considered by insurers when cate- gorizing drivers and determining premiums include age, gender, and mari- tal status. Individuals over the age of 25 are less likely to be involved in an accident than younger drivers. Women have fewer accidents than men, and married drivers have fewer accidents than single drivers. Insurers also con- sider:
Personal Driving Record. Drivers with a history of accidents and/or traffic vio- lations (especially driving under the influence of alcohol) are more likely to incur losses than those with clean records. Some insurers give discounts for completing defensive driver or driver education courses.
Type of Vehicle. High-performance vehicles and sports cars are considered higher risk. Insurers may offer preferential rates for vehicles that have cer- tain safety features (e.g., anti-lock brakes, air bags).
Cost to Repair Vehicle. Repair expenses can vary widely, even among vehicles that have comparable original purchase prices.
Vehicle Use and Location. Daily commuters in densely populated urban areas pose a higher risk than occasional drivers in rural areas.
Multi-policy Discounts. Individuals who purchase homeowners and auto poli- cies through the same company generally receive preferred rates on both policies.
Miscellaneous Considerations
Cost of Auto Insurance. Every state requires that drivers have some automobile insurance or financial capacity to withstand losses incurred due to an auto accident.
And even if someone does not, it would be madness to drive without some form of protection. That is because a single accident could bankrupt the driver.
For many people, the auto policy can be expensive. The biggest bite of auto insurance comes from liability protection, which is effectively divided into bodily injury protection and property protection. This is one element of auto insurance no driver can afford to shortchange. However, to reduce the cost, one should consider raising the deductibles, which is the portion of the expense the driver has to pay before coverage kicks in. Pushing up deductibles to $500 or even higher can significantly cut the premiums. Another way to reduce the pre- mium is to eliminate collision coverage if the car is too old.
Other ways of cutting cost include: (a) a good safety record, because drivers with good records get better rates, (b) insuring every car with the same com- pany, since multicar packages often mean lower premiums, (c) avoiding smok- ing, because smokers reportedly have more accidents than nonsmokers, and (d) college study, because if the driver is in college and getting good grades, the insurance company is likely to reduce the premiums.
Loopholes in Auto Insurance. Generally, when someone drives a person’s car with the owner’s permission, the insurance company covers the driver. However, if the driver lives in the same house and is not listed on the policy, then that gen- eral rule may not apply. Therefore, it is important to get this issue resolved by the insurance company. Experts recommend that the children should be included in the policy of the owner even if they are away at school. Also, the insurance company should be informed if a nanny or a housekeeper will be using the car regularly.
One area of contention is when the car is used for business, since the insurance company may not cover the car for accidents that occur during business use.
Another concern is when a traveler rejects insurance coverage by a car rental company on the assumption that this or her own policy will automatically cover it. This might not always be a wise decision, since American companies typically cover damages only in the USA and Canada. Even in the USA, drivers should con- sider buying insurance coverage through a rental company if they have dropped collision and comprehensive coverage on an old car.