The Producer Online In Action—April 2011—PERSONAL AUTO COVERAGE FORM ANALYSIS

ISO '05 ED. PERSONAL AUTO POLICY ANALYSIS

(August, 2010)

This is a discussion of Insurance Services Office's (ISO) 2005 of the Personal Auto Policy (PAP). A popular coverage standard that is used by many insurers to cover personal driving exposures.

Related Article: Comparing The Latest Editions of the PAP - An overview of the differences between the PAP's '05 edition and its predecessors.

AGREEMENT

This opening section merely states that payment of applicable premium initiates the automobile contract as stated in the sections that follow the Agreement.

DEFINITIONS

This section defines the terms that are critical to understanding how the policy responds to eligible losses. The following is a summary of the defined terms:

A. The policy uses the terms "you" and "your" in reference to the "named insured" shown in the declarations and the named insured's spouse (if the spouse lives in the same household).

Once a spouse is in a different address or location, he or she still qualifies under the definitions of "you" and "your" until the earliest of the following:

· they have been out of the household for 90 days

· the former spouse gets his or her own policy where he or she is the named insured

· the policy period ends.

Example: An insured and her spouse are insured under a PAP with a policy term of 3/2/10 to 3/2/11. On 5/5/10, the couple split up; with the husband leaving (the wife was the named insured). On 6/25/10, the husband buys a used Chevy Malibu and insures it in his name. The husband no longer qualifies under the definition of "you" or "your" when (choose one of the following options):

· he leaves the household on 5/5/10?

· he insures his car on 6/25/10?

· his wife's policy's renewal date of 3/2/11?

· he's been out of the household for more than 90 days; in this case, 8/2/10?

The answer is the last option since that is the earliest event of the three options provided by the latest edition of the PAP.

Note: A spouse who becomes a named insured on his or her own auto policy is no longer an insured under their former resident spouse's coverage.

B. The terms "our," "us" and "we" mean the company that issues and maintains the personal auto policy coverage.

C. The PAP considers any private passenger type of auto to be an owned vehicle if there is a written lease that covers a period of six months or longer.

D. "Bodily injury" refers to sickness, disease, or bodily harm. This definition even includes death if it is a direct result of sickness, disease or bodily harm.

Example: Klarence is insured under a PAP. Two months ago, while in a hurry to see his girlfriend, he ran a stoplight and crashed into an SUV, injuring several persons. Today Klarence gets a notice from the injured family's lawyer. The family is suing him for medical treatment, vehicle damage and other expenses. Klarence turns in the information to his insurer. The company's claims expert tells Klarence to send any additional paperwork on the loss to her immediately. Three weeks later, Klarence gets another notice. The father of the family died from infections to wounds suffered in the collision. The complaint has been amended for additional damages.

E. "Business" means any trade, profession or occupation. In other words, it is any regular activity that generates income.

Example: Jay Humerguy has been busy this past weekend. He's spent Saturday and Sunday transporting older members of his church between their homes and the annual church festival. Jay collects a $10 fee for each trip. While driving one couple home, Jay hits the rear of a car of another church-member who was also leaving the festival. Jay's adjuster from Grinch Mutual denies coverage for the loss because Jay was transporting people for money. The company changes its mind when they later discover that Jay had, before even making his first trip, arranged for all of the money to go to his church as a donation.

F. A "family member" is any person who is a relative by blood or by marriage. Any persons who are adopted, wards or foster children qualify as "family members," but only for as long as they reside in the same household as the named insured or spouse.

G. "Occupying" means in, upon, getting in, getting on, getting out or getting off.

Example: While driving, Jenny's car gets a flat tire. She parks her car and attempts to get her spare temporary tire out of the trunk. The spare is very difficult to unload and Jenny begins to tug on the tire with all of her strength. Suddenly, the tire comes free; Jenny falls backwards and lets go of the spare; the spare rolls onto the sidewalk and knocks down a toddler who's walking with her mom. The child's fall results in a couple of deep facial cuts and a broken arm. While this is a use of a vehicle, it doesn't fall within the meaning of "occupying."

Further, the PAP definition doesn't mention whether being under a vehicle is occupying it.

Example: Fred's '08 Mazda's engine light went on while he was driving to pick up his fiancée for dinner. Fred stops the car and gets out. He sees a pool forming under his car. He gets his tools from the trunk and crawls under the car. He sees where the oil filter has cracked and is leaking oil. Fred tries to stop the leak. After a few minutes at the futile effort, Fred yells a loud curse and flings a wrench. This happens just as a car is passing by the Mazda. The loud profanity and the clanging of the wrench near her car startle Samantha, who slams on her brakes, skids in the leaked oil and causes a collision.

H. "Property damage" means the loss of use of, damage to or destruction of tangible property.

While this simple definition is inclusive, it still permits some elements of a loss to be denied.

Example: Natasha's '06 Jetta is with her dealer, awaiting repairs. A few days earlier, it was damaged during an ice storm when Natasha slid off the road and hit a utility pole. Natasha has rented a car from EZ-Ride Rental. She agrees to rent the car for a week and, at the end of the rental period, Natasha is able to pick up her own car. However, Natasha doesn't return the rental until two days later. Natasha also drops off the rental after hours and she leaves the car's radio on. When EZ Ride opens, an employee finds that the rental's battery is dead and has to be replaced after repeated attempts to charge the battery fail. The car has to be towed to another branch of EZ-ride so the car is not available for rental for another full day. The rental agency sends Natasha a bill for four additional days' rental and for the costs of labor and material getting the rental back into operation. Natasha turns the huge additional bill over to her insurer for payment. Her insurer tells her that the bill has no connection to her covered loss and it isn't insured.

I. "Trailer" is any vehicle made to be pulled by a private passenger auto, pickup or van. The definition includes a farm wagon or farm implement while towed by a private-passenger auto, pickup or van.

Note: Farm implements and farm wagons qualify as trailers ONLY for the time that they are being towed by an eligible vehicle.

Examples:

a child is hurt when he falls off a boat trailer that's parked in an insured's driveway - covered by PAP
a child is hurt when he falls off a manure spreader that's parked in an insured's driveway - NOT covered.
an insured is towing a small trailer that is loaded down with vacation luggage. The insured swerves back into his lane after attempting to pass a vehicle; the trailer swings out and hits a passing van – covered by PAP.
an insured is towing a large grass mower attachment on a trailer. The insured swerves back into his lane after attempting to pass a vehicle; the trailer swings out and hits a passing van – covered by PAP.
an insured is towing a large grass mower attachment on a trailer. The trailer is usually towed by the insured's personal vehicle and the mower attachment is used for the insured's very large yard. However, since his wife is using his pick up, the trailer was hitched to a small truck that is used in the insured's landscaping service. The insured swerves back into his lane after attempting to pass a vehicle; the trailer swings out and hits a passing van – NOT covered since the towing vehicle is not a covered vehicle.

J. The definition of "your covered auto" refers to:

· Vehicles that are described in the PAP declarations

· Autos that an insured acquires after the beginning of the policy period (called "newly acquired autos")

· Trailers that are owned by any insured

· Trailers or other vehicles that, while not owned by an insured, are used as a substitute for a covered vehicle. However, the substitution has to be due to the other vehicle being serviced, repaired, lost or destroyed.

Following are situations that would qualify as covered vehicles under a PAP's liability coverage.

Examples:

· a '06 Chrysler the insured borrowed from his neighbor while his car is having its brakes inspected

· the '09 Dodge Ram that is a "loaner" from the body shop which is removing rust spots and re-painting the insured's custom van

· an '08 Taurus a dealer lends to the named insured's spouse because her regular car is having its transmission replaced

· a '10 Hyundai which an insured rents after a severe oil leak stops his own car's engine.

If the operator caused an accident during the above situations, this would qualify as a covered vehicle for injury or damage caused to other parties. It is important to note that the auto definition section on substitute vehicles (definition J.4) does not apply to "Coverage For Damage To Your Auto."

The exception for situations involving "Coverage For Damage To Your Auto" is very important. If an insured is using a car that he or she DOES NOT own and that car suffers a loss that normally is covered under either Collision or Other than Collision coverage, then that loss does not qualify for protection as a "covered auto."

Example: Sara and Cindy are roommates who are transporting their belongings to a new apartment on the other side of town. Sara's car suddenly breaks down on the freeway. She pulls it over to the breakdown lane and puts on her flashers. Cindy sees this and pulls up behind Sara. Since Sara knows the town better, Cindy says she'll stay with Sara's car while Sara drives Cindy's car to a garage to get a tow truck. While turning into a towing service that's just a few miles away from the freeway, Sara doesn't apply the brakes hard enough and runs Cindy's car into a cement barrier. The barrier is fine, but the front end of Cindy's car is heavily damaged. This damage would NOT be covered by Sara's policy.

In the above example, although Cindy's car is a substitute for Sara's car and would be covered if, while using Cindy's car, she caused bodily injury or property to someone else or their property; there is no coverage for damage suffered by the vehicle she is using. Such coverage would have to be provided by Cindy's policy. This should be considered to be a fair application of coverage. If Cindy carries "Coverage For Damage To Your Auto" on her policy, the damage to her car is covered. If Cindy only carries liability coverage under her policy, the result is that she doesn't acquire broader coverage if a person she allows to drive her car damages that car.

K. "Newly acquired auto"

1. This term applies to a private passenger auto pickup, or van that any insured obtains possession of during the policy period (but after the policy period's inception date). However, van and pickup eligibility is subject to a weight and a use restriction. Pickups and vans are ineligible as covered autos if they are used for business activities. The policy makes an exception for incidental business use (as part of a repair or maintenance business). It also allows covered auto status for such vehicles that are used on a farm or ranch business. Though not specifically referenced, SUVs are treated as private passenger autos and are subject to the following weight restriction.

In order to be eligible, a pickup or van has to have a maximum Gross Vehicle Weight RATING of 10,000 lbs. ISO states that the use of GVW rating rather than just GVW makes the term conform to what is used in the U.S. Government's vehicle classification manual. The reference does not affect vehicle eligibility.

Example: Joe Karluver has a PAP with a policy period of February 10, 2010 to August 10, 2010 and it covers a '09 Taurus. Given this information, which of the following qualifies as a "newly acquired auto"?

An '08 Chrysler Joe bought on 03/16/10 - qualifies
A '07 Chevy 2-ton truck Joe bought on 06/10/10 - doesn't qualify
An '09 Buick which Joe's grandfather left to him in a will on 07/20/10 - qualifies
An '02 Chevy pickup that Joe gets by trading a boat and trailer to his neighbor on 05/03/10 - qualifies
An '03 Chevy pickup that Joe gets by trading a boat and trailer to his neighbor on 05/03/10 AND the pickup is hired out to a couple of businesses for making deliveries - doesn't qualify
A '06 Explorer that Joe bought on 02/02/10, but doesn't list on his new policy - doesn't qualify.

However, even if an additional car, pickup or van clears the vehicle type, vehicle use and date of acquisition hurdles, there are other requirements. Paragraph K.2. covers the issue of when to report an additional vehicle to the insurance company. The timing of reporting the vehicle has a direct impact upon coverage.

Note: The required reporting period varies according to the type of coverage involved and whether the vehicle is a replacement.

2. The coverage that is available for newly acquired autos depends on the type of coverage provided by the PAP. However, in order for coverage to apply beyond the automatically provided coverage, the insured must report the newly acquired auto within the applicable time period. If not reported as required, there is no coverage on the auto between the time of automatic coverage and the date the formal request is made.

a. All coverages other than Coverage D-Coverage For Damage to Your Auto.

The insured has to report a new auto no later than 14 days from its acquisition. During those 14 days, the coverage is equal to the broadest coverage existing for an auto that appears on the policy declarations. If the new vehicle replaces a vehicle that is listed on the policy, the replacement does not have to be reported.

Now this is an area that should be clarified by the policy wording. The implication is that a vehicle would have to be reported by the renewing term because, once the policy renews, the replacing vehicle loses its status as a newly acquired auto. However, since the policy states "If a 'newly acquired auto' replaces a vehicle shown in the Declarations, coverage is provided for this vehicle without your having to ask us to insure it," a case may be made that the insured has no obligation to EVER report the vehicle. While there are other portions of the policy which would support an implicit requirement that a vehicle should be reported, it would help matters if the policy specifically stated that such a vehicle would have to be reported at the policy's renewal.

· a newly acquired ADDITIONAL car qualifies for coverage if it is reported to the insurer within 14 days of the date it is acquired. Within that timeframe, the vehicle is covered for the broadest level of coverage (i.e., highest insurance limits, etc.) that is written under the policy. If the vehicle is never reported, it is not eligible for any coverage after 14 days. If the vehicle is reported after 14 days, coverage applies on the date it is reported.

Example: Dill E. Dally's PAP covers a '02 Mercury, has a policy period of April 15, 2010 to October 15, 2010, and it has the following coverages:

Bodily Injury	$100,000/$300,000
Property Damage	$100,000
Medical Payments	$10,000
Uninsured Motorist	$25,000/$50,000

Scenario A: On September 3, 2010, Dill buys a '04 Ford Ranger. On September 16, Dill collides with another car when he ignores a stop sign. He causes $22,000 in injuries to the other driver, $4,500 in damages to the other driver's car and $6,700 in damages to his Ranger. Dill reports the accident to his insurance company on September 18 and that is the same day that the insurance company learns of the new car. Under these circumstances, the soonest that ANY coverage can apply to the Ford is on September 18. Even though the loss occurred within the first 14 days, the car was not reported in time.

Scenario B: On September 3, 2010, Dill buys a '04 Ford Ranger. On September 16, Dill collides with another car when he ignores a stop sign. He causes $22,000 in injuries to the other driver, $4,500 in damages to the other driver's car and $6,700 in damages to his Ranger. Dill reports the accident to his insurance company on September 17 and that is the same day that the insurance company learns of the new car. Under these circumstances, the loss would be eligible for coverage, but only for the injury to the other driver and the damage to the other driver's car.

b. Coverage for Damage to Your Auto - Collision

Collision coverage is granted for a "newly acquired auto" on the date it becomes an owned auto. HOWEVER, the insured MUST report the auto:

(1) within 14 days of becoming the vehicle's owner when at least one auto on the existing policy lists a car with collision coverage.

(2) within four days after becoming the vehicle owner if no car on the existing policy has Collision Coverage. If you comply within the required timeframe and a loss occurs before the insured requests coverage (reports the auto), a Collision deductible of $500 will apply.

Example: Duhreece Smith's PAP covers car 1, a '03 Volkswagen and car 2, an '06 Volvo, and has a policy period of June 5, 2010 to December 5, 2010; it has the following coverage:

Coverage	Car One	Car Two
Collision	No coverage	$500 Deductible

Scenario A: On October 9, Duhreece's grandfather gives her his '05 BMW. On October 20, she sells her VW (car one), but doesn't report either action to Poorpay General Insurance Corp. On November 2nd, Duhreece slams against a brick wall while trying to get through an alley that led to a parking area for a jazz club. The brick wall was unscathed but the BMW suffered $1,900 in damages. Later that evening, when Duhreece reports the loss, she's told that the damages are not covered.

In order to qualify for Collision coverage, Duhreece should have reported the acquisition of the BMW by October 23. Even though the BMW eventually replaced the VW which did not have physical damage coverage, she's entitled to this for 14 days because those coverages do appear for car two. If neither car neither one nor car two had Collision Coverage, Duhreece could only qualify for full protection if she had requested full coverage by October 13.

c. Coverage for Damage to Your Auto - Other Than Collision Coverage

Other than Collision Coverage for a "newly acquired auto" is available once the auto is owned by an insured, as long as that insured:

(1) reports the auto within 14 days of acquisition, but only if at least one existing car on the policy rated for Other Than Collision Coverage.

(2) reports the auto within four days of acquisition if no existing (listed) vehicle is rated for Other Than Collision Coverage. If a loss occurs to a car within the reporting timeframe (for instance on day three after acquisition) an Other Than Collision deductible of $500 will apply.

Let's make use of the Duhreece situation again.

Example: Duhreece Smith's PAP covers car 1, a '03 Volkswagen and car 2, an '06 Volvo, and has a policy period of June 5, 2010 to December 5, 2010; it has the following coverage:

Coverage	Car One	Car Two
Other Than Collision	No coverage	$1,000 Deductible

Scenario B: Things are nearly the same as in scenario A. This time, though, the action occurs on October 21 (the day after she sells her VW) instead of on November 2. On that date, two of Duhreece's friends lose control of a roll-top desk that they are moving into her home. The desk tumbles out of their flailing arms and smashes onto the hood and windshield of the BMW. The heavy desk causes $1,200 in damages. When she reports this loss, the Poorpay adjuster tells her that her loss is covered but, big deal, there's a $1,000 deductible.

Example: Scenario C: Everything is the same as in Scenario B except Duhreece still has the 'VW and the roll-top desk are dropped onto the BMW on October 12. When Duhreece reports the loss and the information on the car on October 13th, she's told that the loss is covered. IRONICALLY, a $500 deductible applies since the loss occurred BEFORE the car was reported within the four day deadline

The consumer-friendly mechanics of the deductible that applied in scenario C are probably an unintended result of the definition for a "newly acquired auto" which may be handled in future editions of the PAP. Of course, a subscribing company may also handle this situation by filing its own endorsement.

Note: Pickups and Vans

The above vehicle type, due to its size, weight and use, disqualifies it from coverage under the PAP.

The PAP considers pickups and vans eligible vehicles as long as their gross vehicle weight rating does not exceed 10,000 pounds and they aren't used commercially. The PAP is intended to provide coverage for personal exposures. Where the language regarding pickups and vans excludes business use of such vehicles (since commercial policies are available), its approach is reasonable, since it makes exceptions for incidental business use and for farming or ranching. The exceptions recognize the fact that such use is still consistent with what an insurer would consider a personal loss exposure. Another qualifier for providing coverage to pickups or vans is that no other coverage applies. Both owned and non-owned "trailers" are defined as covered autos. Finally, if they're pulled by an eligible vehicle, farm wagons and implements are also defined as "trailers," which are eligible for coverage.

It is important to give special attention to situations involving pickups and vans, since their weight, existence of other coverage and use may disqualify them for protection under the PAP. In this case, the disqualification comes from the fact that more appropriate, commercial coverage should be sought in these instances. The premiums related to commercial auto insurance is justified because of larger, more expensive vehicles being used in a manner (commercially) that exposes them to a greater chance of loss (such as delivery trucks rushing through traffic to meet deadlines or that are driven more frequently – rather than primarily to and from work).