This text is furnished solely by C.E.I.S. as a reference to be used in Continuing Education. It is to be used as educational material only and it is not intended to provide advice, legal or professional. The readers of this text must consult their own legal advisor for legal advice on any information contained herein.
Because Personal Automobile insurance is a rapidly changing area, the latest available information on this subject is contained in this text, however, due to legislation, legal situations or industry practice, the information contained in this text may change or become obsolete. This text should never be used as an original source of authority on any legal matters.
Any laws and regulations that are referenced in this text, have been edited and summarized for purposes of brevity and clarity.
Any names used in this text are fictional and have no relationship to any person, living or deceased.
The Insurance Agent may be familiar with the old adage “Life Insurance is sold, Property and Casualty Insurance is bought.” Automobile Insurance is certainly “bought,” and in many jurisdictions it is not only bought, a vehicle may not be licensed until proof of insurance can be established. Because Auto insurance is so important, many states now require “Uninsured Motorists” coverage which provides coverage if an automobile that is not insured is involved in a claim. Even with such legislation there are a large number of automobiles on the roads which are uninsured.
Automobile Insurance is written as simplistic as possible so that the policyholder can understand the provisions. Unfortunately the percentage of insureds who actually understand their policy is miniscule and most policyholders do not bother to read their policy until time of claim. Even then, they prefer to contact their agent to interpret their policy. There are so many ways that claims can arise that an agent must be well versed not only in the policy language, but also in basic insurance principles. It would be impossible for an agent to know how automobile insurance operates in the millions of circumstances involving an automobile in some fashion, so an agent must continually research and study not only Automobile Insurance, but all areas of insurance that may have some relativity.
An Automobile insurance policy does not simply state: “If you have an accident with your automobile, we (the insurance company) will fix your car.” Not only does the policy pay for repairs, it must also indemnify for damages to others’ automobiles or property, and by doing so it becomes not only a service contract, but also a liability policy. If injuries to another occurs, it provides medical coverage. In some states, certain types of automobile insurance coverage are mandatory, and other types are optional.
Automobile Insurance cannot prevent accidents involving automobiles, but it is designed to protect the financial interest in the automobile, protect against legal liability and to provide medical coverage for those injured. Of course not all possible expenses or losses will be covered as an automobile insurance policy has limitations and exclusions, but it will save most policyholders from severe financial losses as the result of an automobile accident.
Please note that examples of various provisions and situations that may arise regarding Personal Automobile Insurance will be presented as “CUSTOMER APPLICATION” and will be boxed. The names and locations used in these “APPLICATIONS” are fictitious, however the situations have appeared in actual practice. There are voluminous case studies of situations involving automobile insurance, but further examples of the application of the policy provisions is outside the scope and purpose of this text.
Study questions appear at the end of various sections in multiple – choice questions. The answers to the Multiple choice appear at the end of the text.
A GLOSSARY of commonly used insurance terms in this text appears at the end of the text, just before the “answers.” For those not familiar with the insurance terminology, a review of the GLOSSARY prior to reading the text may be in order.
A complete dissertation on the Principles of Insurance is beyond the scope of this text, but the reiteration of certain principles is pertinent to the information in this text.
Risk has a variety of meanings, depending upon the usage. It has been used to represent “insured,” “exposure,” and a variety of other things. For the purpose of this discussion, it will be defined as the “chance of financial loss.” The principal purpose of insurance is to protect an insured against financial loss which is accidentally created by a specific cause(s).
Loss is generally defined as the value of an asset owned by the insured being reduced, and the financial consequences thereof. Losses are considered as either direct or indirect which is best defined using examples. An automobile involved in an accident which “totals” the insured auto, is a direct loss. The insured must rent or lease a car until his car can be replaced, such expenses are considered as indirect.
In addition to Risk, closely associated are Perils and Hazards. While these terms are frequently confused, basically Perils are the cause(s) of loss, while Hazards are anything that increases the frequency or severity of a loss. As examples, with an Auto Policy the theft of an auto is a Peril; leaving the key in the ignition and the door unlocked while parked on a city street at night could be considered as a Hazard.
Most insurance courses consider three types of hazards: physical, moral and morale:
A physical risk is a tangible risk, i.e. it can be felt, or touched or seen. An auto parked in a garage filled with gasoline-soaked rags would be an example of a physical risk.
A moral risk is a little more difficult to describe, as it is so subjective. Inspection companies are a primary source of information of moral risks. It must be kept in mind that an insurance policy is a contract and is executed in good faith. If a person has a reputation for less than honest dealings, such as being a known drug dealer or has been bankrupt several times, it is doubtful that they would be welcomed as an insured.
Morale hazards involve the attitude of the insured. If an individual has the attitude that they can drive carelessly because they are insured, they would not be considered prime prospects for auto insurance. A review of their Motor Vehicle records could indicate their lack of care.
CONSUMER APPLICATION
Bruce Bentley is a highly successful attorney, married with 3 children, all in college. He buys a new car every year, alternating between the 4 cars in the family. He lives in an upper-income area and is a member of the local Country Club.
Bruce’s brother owns a local insurance agency, and finally convinces Bruce to change his auto policy to a company represented by Bruce’s brother. The new insurer orders an inspection report and discovers that Bruce had been trying to get a private pilot’s license but the instructor considered him too reckless in handling an airplane, and has refused to give him a license.
The new company’s underwriting department felt that the Morale hazards here were too great, as if he is reckless in handling airplanes, he would have an inclination to be reckless in his driving ability. An underwriter may not accept Bruce, even though his driving record has only two tickets for minor infractions over the past 5 years.
Related to this discussion is the Insurable Interest rules. In Property and Casualty insurance the basic rule is that the policyholder must have an insurable interest in the property at the time of the loss. In auto insurance, the question of Insurable Interest may arise in the situation of a leased vehicle, but generally this is covered by insurance regulations. Also, a previous owner may not assign their insurance to the new owner.
CONSUMER APPLICATION
Roger sells his 1995 Ford pickup to Ralph. Ralph is leaving on a trip and will be pulling a trailer with the pickup, but he doesn’t have time to obtain new insurance. Ralph agrees to assign his insurance to Ralph until he returns. The title has already been transferred.
If Ralph has an accident, Roger’s insurance would not cover the results of the accident. Practically, Ralph could probably have gotten a binder for auto insurance from an agent that handles any of his other insurance (such as another car, etc.).
CONSUMER APPLICATION
Roy and Betty apply to Automobile Insurance Co. (AIC) for insurance on their two cars, a 1997 Ford Taurus and a 1993 Subaru. AIC reviewed their applications to determine whether they would accept Roy and Betty as policyholders.
Both cars appear to be acceptable, with both cars having low mileage. The Ford is driven by Roy to and from work, a one way distance of 8 miles. Betty uses the Subaru for household errands to take the children wherever they need to go. They are both garaged. Roy had a speeding ticket 5 years ago, 15 miles over the speed limit. Betty has never had a ticket. Betty was driving a previous auto when a neighbor backed into her car, but she was not held liable and there was no traffic citation issued.
Roy and Betty are “average” family parents, active in School and church activities. Roy is considered as a rather conservative individual as he is a quiet-spoken Public Accountant. Betty is not known to drink. Roy will have a beer on occasion with the neighborhood friends, but has never been seen intoxicated. They live in a two-story home in an upper-middle income neighborhood. There are no particular problems in the neighborhood.
They would be considered as meeting the criteria for insurance by AIC.
STUDY QUESTIONS
1. Life Insurance is ___________, Property & Casualty Insurance is ____________.
A. sold, bought
B. bought, sold
C. expensive, inexpensive
D. always available, rarely available
2. In many states, automobile insurance is
A. mandatory before a drivers license is issued.
B. mandatory before a vehicle may be licensed.
C. never mandatory.
D. automatically issued to everyone who has a drivers license.
3. If a policyholder does not understand their insurance policies, they usually
A. throw them away.
B. write the insurance company for clarification.
C. read it until they do understand it.
D. call their agent for interpretation
4. An automobile insurance policy is not only a service contract, it is also a
A. repair and replace contract.
B. life insurance policy.
C. Liability and Medical Coverage policy.
D. sales contract.
5. An automobile insurance policy is designed to
A. protect against legal liability.
B. allow consumers to purchase more expensive automobiles.
C. repair personal automobiles when they have mechanical problems.
D. supplement other liability insurance policies.
6. Risk can be defined as
A. the value of an asset being reduced.
B. causes of loss.
C. chance of financial loss.
D. a hazard.
7. Loss is generally defined as
A. chance of financial loss.
B. asset value being reduced & the financial consequences thereof.
C. anything that increases the frequency of loss.
D. a situation or complication reimbursed for damage by insurance.
8. Perils are
A. anything that increases the frequently of a loss.
B. anything that increases the severity of a loss.
C. the result(s) of loss.
D. the cause(s) of loss.
9. A physical risk is a
A. a tangible risk.
B. an intangible risk.
C. a moral risk.
D. a situation where there is injury to a person.
10. A moral risk is
A. a subjective risk and difficult to describe.
B. a hazard involving the attitude of the insured.
C. something that can be felt or touched.
D. a situation where there has been damage to a school or church.
ANSWERS TO STUDY QUESTIONS
1A 2B 3D 4C 5A 6C 7B 8D 9A 10A