A driver can obtain one of four general Insurance Services Offices (ISO) forms of automobile insurance: Personal Auto Policy (PAP), Family Auto Policy (FAP), Special Auto Policy (SAP), and the Basic Auto Policy (BAP). The PAP is the most widely used form for auto insurance; therefore, we will focus on the characteristics of the PAP.
It is important to understand the many components of the Personal Auto Policy. The PAP provides protection against legal liability, injury to the insured or members of the insured’s family, and damage to or loss of the auto itself. The PAP is divided into the following six parts: liability coverage, medical payments coverage, uninsured motorist coverage, physical damage coverage, duties after an accident or loss, and general provisions. Below is an explanation of each part.
Part A: Liability Coverage
This is the only portion of auto insurance that is mandatory. This coverage protects others from suffering a financial loss if the insured causes them property damage or bodily injury. Liability coverage usually provides a maximum of $50,000 for bodily injury (to any one person), $100,000 for bodily injury per accident, and $50,000 for property damage.
Under liability coverage, the following people are protected:
- The named insured or family member (child, spouse).
- Anyone who is allowed to drive the insured’s covered vehicle.
- Anyone driving for an organization to which the insured lends their covered vehicle (the organization is also protected).
- The insured who is driving another vehicle that is lent to an organization (the organization is also protected).
Not all vehicles owned by the insured may be covered. A covered auto is defined as any vehicle listed in the declarations section of the policy, any new vehicle (as long as the insurance company is notified within 30 days), any trailer owned by the insured, and any vehicle the insured is using as a substitute for a covered vehicle that is not being used because of theft, repair, breakdown, destruction, or servicing.
There are some exclusions for liability coverage:
- Vehicle being used for business.
- Losses that are already covered under different sections of the policy.
- Someone who is not permitted to be driving the vehicle (a thief).
Under the PAP, supplemental benefits may be found under the liability coverage. These benefits include:
- Interest on a judgment.
- Funds for bail bonds that are required because of an accident.
- Premiums on bonds used in covered lawsuits.
- Dollars per day of lost earnings from attending a trial (at the company’s request).
- Coverage on required higher limits if an accident occurs outside of the state of residence.
Part B: Medical Payments Coverage
This coverage provides benefits to the insured and anyone riding in the insured’s vehicle. Payment for injury must be made within three years of the accident. Funeral expenses are included as benefits. Benefits are extended to injuries received while a covered person is a pedestrian, riding a bicycle, or is struck by a licensed vehicle. It is important to note before obtaining medical payments coverage through an auto policy that an insured and the insured’s family may already be covered through the insured’s health care insurance (if insurance exists).
Exclusions to medical payments coverage include:
- Riding in a vehicle with less than four wheels (except for a bicycle).
- Riding in a vehicle that is not a covered auto.
Part C: Uninsured Motorist Coverage
This coverage provides protection for an insured who is involved in an accident with another driver who does not have insurance or who has inadequate insurance. When an accident is considered to be a hit and run, or if another driver is at fault in an accident and that driver has no insurance, uninsured motorist coverage will provide payment for the loss. Most agents will recommend high limits on this type of coverage.
Exclusions to uninsured motorist coverage:
- Payments will not be made if the insured was in a vehicle that did not have the coverage.
- The insured will not receive benefits if another insured vehicle owned by the insured is at fault.
- Benefits will not be paid if the insured settles with the other insurance company without the approval of his or her own insurance company.
- Benefits will not be paid if the vehicle is being used for business.
Part D: Physical Damage Coverage
This type of coverage consists of two parts: damage by collision (when the insured hits something) and damage other than by collision (when something hits the insured). Collision coverage also pays for damage done to a covered auto when the insured is at fault (hitting another car, running over a mailbox). Damage other than collision coverage pays for damage done when the insured is not a fault (hail damage, debris falling out of the back of a truck). Both types of coverage extend to a vehicle not owned by the insured but used by any insured and any vehicle being used as a substitute for a covered vehicle (same as in liability coverage).
Exclusions to physical damage coverage:
- Benefits will not be paid if the vehicle is being used for business.
- Benefits will not be paid for general wear and tear or breakdowns.
- Benefits will not be paid for damages sustained by an act of war or damages sustained by nuclear weapon discharge.
- Benefits do not extend to “upgrades,” such as radar detectors, custom murals or decals, accessories, etc.
Part E: Duties after an Accident or Loss
After a loss or an accident occurs, the insured should take the following actions:
- Provide notice to the insurer of a claim and that a loss has occurred.
- Cooperate in any investigation.
- Send copies of all papers relating to the claim to the insurance company.
- Submit to a physical exam for any claim (if requested).
- Provide authorization to the insurer to examine medical records.
- Submit any required proof of loss.
- Take reasonable steps to prevent further damage to vehicle.
- Notify police of any hit and run accident or theft.
- Permit the insurer to inspect damage before any repairs are done.
Part F: General Provisions
There are some general provisions that apply to the PAP:
- Bankruptcy of the insured does not eliminate obligations.
- Changes in the policy must be done by endorsement.
- Coverage will not be provided if the insurer commits a fraudulent act.
- If the insured does not comply with his duties under the policy then he or she cannot take legal action.
- If a third party is found liable and the insured’s company has already paid, the company is paid back before the insured receives additional compensation.
This section also provides provisions regarding policy period, geographic area in which coverage is provided, termination of policy, and the transfer of insured’s interest in the policy.
Bottom Line
The PAP covers damage on an actual cash value basis. This is the depreciated value. The question of when full coverage is enough will eventually arise. When the time comes that it no longer makes sense to have full coverage, an insured should consider dropping coverage to liability only on car insurance.
Again, liability protection coverage has a basic format that covers three areas: bodily injury per person, bodily injury per accident, and property damage. There are variable minimums that are imposed by each state. Dollars spent on insurance versus risk assumed is a question only the insured can answer. Factors such as the age and the condition of the car should be taken into account. The insured will need to evaluate his or her own personal situation to determine which coverages are still necessary or affordable. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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