Part A: Liability Coverage

Hi there, as a residents of a US state, you should be aware of your personal auto policy and how the liability coverage may affect you.

What Is It?

Assume you are a car owner. You're concerned about liability in the event of a car accident. You have a personal auto policy (PAP). You want to purchase new, or additional, insurance to protect yourself from liability claims.

Under section B.1., "family member" is the important term. "Family member," as defined by the policy, means anyone related to you by blood, marriage, or adoption who lives in your household. All of your "family members" who live with you are covered under liability whenever they're driving any vehicle.

Tip: The "family member" is "insured" while driving any car, not just a vehicle listed on your policy.

Under section B.2., the definition of "insured" includes any person using "your covered auto." "Your covered auto" is any vehicle listed on the Declarations Page of your policy, or any replacement vehicle. Under section B.3., "insured" includes any person or organization held legally responsible for the "acts or omissions" of anybody else covered by the policy, who is driving a car listed on your policy.

Example(s): Your son Ron is learning to drive. You hire Lisa to teach Ron to drive. Lisa teaches Ron by taking him out on daily drives in your car. While approaching one stoplight, Lisa says, "Don't stop, Ron, go through the light!" Ron, being a novice driver, barrels right on through the light and into Jennifer's car. It's determined that Lisa is legally responsible for Ron causing the accident. Under B.1., Ron is "insured" under your policy because he is a "family member." Under section B.3., Lisa is also covered because she is legally responsible for Ron, who is covered and is driving an auto listed on your policy. Section B.4.is a twist on B.3. The difference is that section B.4. applies only when the car involved in the accident is not one of "your covered vehicles".

Example(s): Tammy borrows her friend John's car to deliver pizzas for Pizza Store. Tammy is an employee of Pizza Store, and she's using the car for work. Tammy is involved in an accident. Because she's at work, let's assume Pizza Store would be responsible. Section B.4. includes Pizza Store as "insured" under Tammy's policy because it is responsible for her actions. Incidentally, under section B.3. Pizza Store would also be considered "insured" under John's policy. Being insured in multiple ways is okay, especially since John or Tammy may have no insurance or may be underinsured. If Pizza Store owned the car, section B.4 would not apply. In that case, Pizza Store doesn't need the extra protection because the vehicle would be insured through the company's own policy.

The Insurer Will Settle or Defend Any Claims Against You

The insuring agreement contractually obligates the insurance company to settle or defend any claims against you, up to the policy limit.

Caution: The insurance company has the choice of whether to settle or defend the case. It's the insurer's choice, because it is ultimately responsible for paying any judgment against you (up to the limit).

Before you get ready for that dramatic moment of the trial where the other driver admits running the red light, remember that around 90 percent of all cases settle before trial. More often than not, the insurance company is willing to settle the case. Like insurance itself, deciding whether to settle is a matter of risk management. The insurance company estimates how much the case is worth, and when it's in the best interest to settle. Don't feel bad if the insurance company settles a claim that you believe you are not responsible for. If your insurer rejects a settlement offer within your stated coverage amount and an award is later issued against you in excess of your stated coverage amount, your insurer might be required to pay the entire award, including the portion that exceeds your stated coverage limit.

Supplementary Payments

In General

This section outlines the payments that the insurance company will make above and beyond the policy limits for certain limited expenses you incur. These include bail-bond payments and other expenses related to legal claims against you.

Bail Bonds

When you are involved in a traffic accident or accused of a traffic violation, you may be required to pay a certain amount of money as a bail bond. The bond is designed to ensure that you return to court for your next appearance. As part of your coverage for supplementary payments, your insurance company may pay up to $250 for the cost of a bail bond or bond premium. This supplementary coverage is usually provided only if the accident results in "bodily injury" or "property damage" covered under your PAP.

Tip: While $250 may not seem like much protection, bail bondsmen usually charge only a premium on the face value of the bond. Typically, it's 10 percent of the face value. For example, a bail bond is set at $1,000. You can typically pay a bail bondsman $100 as a premium to make bail for you.

Appeal Bonds

Your insurance company will pay the costs of any appeal bonds in any case it defends. After a loss at trial, an appeal bond can be filed in order to stay execution of the judgment pending appeal. The appeal bond is an amount of money used as a guarantee that the judgment will be paid if the appeal fails.

Attachment Bonds

The insurer will pay the costs of any bonds necessary to release attachments on your property. The other party may attach your property as a method of ensuring that they will have something to collect from you if they win the case.

Additional Expenses

Additional expenses include some general costs of litigation that don't really fit in anywhere else. They're basically self-explanatory. They are:

• Interest accruing after a judgment is entered in a suit defended by the insurance company

• Up to $50 a day for loss of earnings because of attendance at hearings or trials at the request of the insurance company

• Other reasonable expenses incurred at the insurance company's request

Exclusions

In General

The exclusions section of your insurance policy specifically sets out the limitations and restrictions on the coverage provided by the insuring agreement. Under the liability portion of your PAP, coverage is generally excluded for intentional damage, duplicate coverage, business use, and nonstandard risks. Your liability coverage provides what is called "open perils" coverage. That means that all events resulting in automobile liability are covered unless they are specifically excluded in this section.

Intentional Damage

You are not covered under your PAP if you intentionally cause "bodily injury" or property damage. Your PAP is meant to protect you against accidents, not intentional acts.

Duplicate Coverage

Your PAP is not meant to cover damages that are already covered (or could be covered) by a different area of insurance. Some big areas that are generally excluded:

• Where workers' compensation applies, your PAP will not

• Damage to property owned or being transported by you. Property damage is often covered by homeowners insurance, so your PAP is not going to cover it.

Business Use

Your PAP will not provide coverage when you're using a vehicle for business purposes. Commercial insurance policies are better suited for business purposes. For instance:

• Your PAP is not intended to provide liability coverage when you are using an auto as a livery (transporting people or goods for a fee)

• Your PAP does not apply when you're in the business of selling, repairing, servicing, storing, or parking vehicles designed for use mainly on public highways. This does not exclude you from driving in your covered vehicle, however.

• Your PAP contains a "catch-all" exception that excludes you from coverage while maintaining or using any vehicle while you are otherwise engaged in any business

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• Tip: The "catch-all" does not apply to the maintenance or use of a private vehicle, or to farming and ranching.

• Example(s): Ron has a PAP and uses his own car for his job as a copier technician. The job requires Ron to drive from site to site servicing copiers. Is Ron covered under his PAP? Yes. The "catchall" exclusion does not apply to the use of a private passenger auto.

Nonstandard Risks

There are some nonstandard risks that your insurer does not intend to cover. The liability portion of your policy excludes many nonstandard risks that you, or your covered auto, could be subjected to. They include:

• Unlawful use--Anyone who uses your vehicle without a reasonable belief that they are entitled to do so is not covered (e.g., a car thief or joy rider)

• Nuclear energy--Your PAP does not cover nuclear disasters. The nuclear power industry purchases nuclear energy liability policies to cover such risks

• Off-road vehicles--Your PAP will not cover vehicles with fewer than four wheels or which are designed for off-road use. This exception does not apply to such vehicles when there is a medical emergency, or in the case of a trailer.

• Autos not listed in the PAP--Any auto that you own, or that is owned by a "family member," that is not listed on your PAP Declarations Page is not covered. This exception does not apply to you (or your spouse) if you're in a vehicle that is owned by a different "family member."

Example(s): Your son Rob owns a vintage car. He is 18, lives with you at home, and has no insurance. If you take the car for a test ride around the block and have an accident, you are covered under your own policy. If Rob has an accident while taking the same test drive, he is not covered under your PAP.

Insurers can calculate risks only on your known vehicles. If you own a vehicle that is not listed on your policy, you will not be covered while driving it.

• Racing--You guessed it: no liability coverage when you compete in, practice for, or prepare for any prearranged or organized racing or speed contest. If you're a race-car driver, you should purchase insurance that is designed to cover the obvious risks of race-car driving.

Limit of Liability

In General

The limit of liability is the maximum amount that will be paid by the insurance company for an insured loss. State laws often require you to purchase a minimum amount of liability coverage to drive a vehicle legally. In liability coverage there are two formulas that insurance companies use to limit their liability: single limit and split limits.

Which formula your insurer uses often depends on the requirements of state law. The first option is for the insurer to limit liability to one total amount for both bodily injury and property damage. The second option is for the insurance company to have separate limits for each type of coverage.

Single Limit of Liability

In a state that requires auto policies to state a single limit of liability, your policy will state a single dollar-amount limit for all damages. It could be $200,000 for both bodily injury and property damage claims, for example. Once all the losses equal this limit, you must bear the burden of any further losses. If you need additional coverage, see Personal Umbrella Liability Policy .

Split Limits of Liability

Under this type of system, the insurance company sets separate policy limits for bodily injury and property damage. The bodily injury limit is then further broken down into separate per person and per accident limits. A typical PAP could state that you have bodily injury coverage of $50,000 for each person and $100,000 for each accident, along with $50,000 property damage coverage per accident. This could be expressed as 50/100/50 coverage.

Example(s): Ron has a PAP that provides for 50/100/50 coverage. Ron is found responsible for injuring four people in a car accident--Rob, Tom, Tammy, and Jennifer. Rob's medical expenses are $10,000, Tom's are $25,000, Tammy's are $55,000, and Jennifer's are $10,000. Because the policy is limited to a $50,000 per person limit, Ron's PAP will cover all the medical bills except the last $5,000 of Tammy's $55,000 bill. Ron will be responsible for that uncovered amount.

Total per Accident

The total maximum liability listed on the Declarations Page is the maximum dollar amount that your insurance company will pay for any one accident. It's the most the insurance company will pay regardless of the number of:

• Insureds

• Claims made

• Vehicles or premiums shown on the Declarations Page

• Vehicles or premiums involved in the auto accident

The insurance company is responsible for paying up to specified limit and no higher. That limit does not change depending on how many "insureds" there are, or how many of "your covered autos" are involved in the accident.

Example(s): Hal has a PAP that covers his two autos. Hal's policy limits the per accident liability to $100,000. Hal's friend Liz borrows car #2 for a trip to the mall. Hal's wife, Sue, takes car #1 to the mall on the same day. On the way home, Sue and Liz crash into each other. Result: The total liability of the insurance company is $100,000, the single accident limit. If Sue and Liz were involved in two separate accidents, the coverage limit would be $100,000 for each accident, or $200,000 total.

Financial Responsibility Laws

In General

Financial responsibility laws are in place as protection against negligent drivers who cannot pay for the damages they cause. These laws force financial responsibility by requiring all drivers to purchase a minimum amount of liability insurance on their PAP.

The minimum amount is usually stated in the form of a split limit such as $10,000 per person, $25,000 per accident, and so on. State financial responsibility laws vary widely as to the minimum amount of liability insurance that is required.

Out-Of-State Coverage

In General

The out-of-state coverage provision indicates how your chosen liability limits will apply if you are involved in an accident that occurs outside of your home state.

Tip: If the state you are driving in has a higher minimum liability limit for non-residents than the amount you are insured for on your PAP, your policy may be interpreted as providing that higher minimum limit, but a conflict between your state's laws and the law of the state in which you are driving may ultimately have to be resolved by the courts.

For example, the state you live in requires $10,000 per person, $50,000 per accident, liability insurance on your auto. Based on this requirement, you get that exact amount of insurance on your car. While driving in another state that requires $50,000 per person, $150,000 per accident, you are involved in an accident. Result: For purposes of this accident, your policy may be interpreted as having the higher limit of $50,000/$150,000 to meet the state financial responsibility requirements; alternately, your own state's lower limit may apply.

Other Insurance

In General

When you're in a car accident, it's likely that more than one auto insurance policy is in effect. The other insurance clause limits your insurer's liability when there is another policy that might also cover your loss. Generally, your insurer will pay its pro rata share of the loss. That share is the proportion that your policy's liability limit bears to the total amount of any other liability insurance in effect.

Example(s): Hal is in an accident causing $30,000 in "bodily injuries" to Ken. Hal has $50,000 liability insurance through his PAP and $25,000 worth of personal umbrella liability coverage. Which policy pays? Hal's PAP will pay its share of the loss based on the total available insurance. The PAP is providing $50,000 of the $75,000 available insurance, which is two-thirds. The umbrella policy is providing $25,000 of the $75,000 available, which is one-third. Result: The PAP pays two-thirds of the $30,000 in damages, or $20,000. The umbrella policy will pay one-third of the $30,000, or $10,000.

The second part of the other insurance clause limits liability even further. When your insurer is providing liability coverage for a vehicle that you do not own, it will make payment only if the primary liability coverage on the vehicle is insufficient.

Example(s): Tammy works for Pizza Store. She owns a PAP for her own vehicle that has a $100,000 per accident liability limit. She is involved in an accident while driving one of Pizza Store's vehicles. Pizza Store's policy limits liability to $50,000. Pizza Store's policy would provide the primary coverage for the first $50,000. Tammy's policy will provide the excess coverage for amounts exceeding Pizza Store's policy and up to Tammy's liability limit.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

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