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CHAPTER 12
The Personal Auto Policy
I. SUGGESTED CLASSROOM TIME: 160–180 MINUTES
II. CHAPTER OVERVIEW
As was the case with the Homeowner’s Policy, the Personal Auto Policy (PAP) is a subject
where student interest will be high since most students drive cars and are curious about
their auto insurance. Students will generally have responsibility for cars, whether they own
one or are using their parent’s or their friend’s car. This presumed level of interest allows
III. LECTURE OUTLINE
A. Introduction: How PAP differs from homeowners.
1. Liability coverage provided first.
B. Review of Tort Liability System (as it operates in an Auto Insurance—case in text)
1. Rita is injured by Rex’s negligence.
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C. The Personal Auto Policy Layout
1. Declarations Page
D. Definitions: Designed to minimize ambiguous features of the contract. The student
E. Part A—Liability
1. Insuring agreement commits insurer to pay for bodily injury (BI) or property
damage (PD) on behalf of a COVERED PERSON.
2. Limit of liability
a. Either a single or a split limit of liability may be chosen.
b. A single limit represents the maximum amount paid for any one accident,
regardless of whether one or more people are insured or damage is to property
3. Insurer agrees to provide legal defense. The cost of the defense does not reduce
amount available for claims payment. This is paid in addition to the limits of
liability.
4. Insurer has the right to settle any claims without litigation and without the
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6. Main exclusions
a. Intentional injury
b. Using personal auto as a public conveyance or taxi
c. If BI is (should be) covered by workers’ compensation
F. Part B—Medical Payments
1. Covered persons: named insured and family members when occupying (or being
struck by) a covered car
G. Part C—Uninsured Motorists Coverage
1. Uninsured motorists means those without insurance. (It does not apply to
inadequate amount of coverage unless coverage is below statutory minimum.) The
term does include hit-and-run drivers.
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H. Part D—Damage to Your Auto
1. Collision means contact between a covered auto and another object it upsets.
However, several types of “collisions” are not considered collisions (see list in text
I. Loss Settlement
1. Coverage D is settled on an ACV basis.
J. Part E—Duties after an Accident or Loss
1. Prompt notification
K. Part F—General Provisions
1. Bankruptcy—does not relieve insurer of obligation
IV. ANSWERS TO REVIEW QUESTIONS
1. Briefly, how does the tort liability system apply to automobile accidents?
2. Explain the difference between primary and excess coverage in automobile
insurance. Primary coverage refers to the insurance policy that pays first before other
coverage pays. Excess coverage pays after the primary coverage has exhausted its
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3. Several distinct categories of drivers are insured under the terms of the
PAP. Identify three categories of drivers covered by the PAP and give
examples of each category. Category 1 covers the named insured and resident
family members who are covered for the ownership, maintenance, or use of any auto,
insured driving an owned versus a nonowned vehicle.
4. Explain whether each of the people described in the following scenario has
coverage under Part A of the PAP and say why or why not:
Bob, the named insured, is an auto mechanic. Bob and his wife, Belle, own
and drive a Ford. They have two children, Ben and Bill. Ben, age 26, is in
the U.S. Army and comes home to visit about twice a year. Bill is 16, lives at
home, and has a learner’s permit but no permanent driver’s license. Ben
often rents cars on weekends and drives battle tanks as his Army
assignment. Bob drives the church van to pick up nondriving members
each Sunday. He also test drives vehicles after he has repaired them at his
place of employment, Barney’s Garage. Bill has been known to lend the
family car to his teenage pal, Bubba. Once, Bubba actually lent the auto to
his girlfriend, Brenda.
Bob and his wife Belle are both insured under the PAP. Ben is insured because he is
5. Does the PAP provide coverage if a named insured drives a nonowned
auto? What is the definition of a nonowned auto? The PAP provides coverage
for the named insured while driving a nonowned auto. “Nonowned auto” means 1. any
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6. What are the four general areas of protection provided by Coverages A
through D of the PAP? A. Liability coverage in the event of property damage or
bodily injury caused by an insured; B. limited medical expense coverage for insureds,
7. Assume that an insured causes an automobile accident that injures five
people and damages one auto. Assume that each of the injured parties
successfully sues for $20,000. The damaged auto was worth $10,000. How
much would the insurer pay if:
a) the insured carried 10/20/5 limits?
b) the insured carried 50/100/5 limits?
c) the insured carried 100/300/50 limits?
a) A total of $25,000 would be paid: $20,000 for the five injured people, and $5,000
8. Why is damage to an insured’s own property excluded under Part A?
Coverage A provides liability insurance. Liability insurance is designed to protect an
insured against the successful lawsuits of others. Since one cannot be liable to oneself,
9. Identify other major categories of exclusions under Part A.
1) “Intentionally causing bodily injury or property damage.” Since intentional injuries
are not accidental losses, they are not insurable.
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10. What situations are covered by the medical expense protection part of the
PAP? If an insured were struck by an auto while walking, would there be
coverage under this provision? The medical expense coverage of the PAP provides
compensation to the insured and each injured resident relative and to passengers of
11. Why do drivers need uninsured motorists insurance if they have
purchased liability and property damage insurance? Liability coverage
protects an insured if she/he damages or injures another person or his property.
12. Explain the difference between an uninsured and an underinsured
motorist. Uninsured motorist coverage generally provides an insured compensation
when she has the legal right to collect from a negligent party and the negligent party
13. What are the insured’s major duties after a loss? Depending on the type of
coverage, duties vary. To quote from the PAP “A. We must be notified promptly of how,
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14. Do insureds have a right to demand replacement of parts damaged in a
collision with parts from the original equipment manufacturer? The PAP
15. How does the legal doctrine of subrogation apply under the PAP?
Subrogation means the insurer receives the insured’s right (a substitution of rights) to
V. ANSWERS TO OBJECTIVE QUESTIONS
OBJECTIVE QUESTIONS
Assume that Herb Avoir, the vegetarian, owns the PAP discussed in this
chapter and reproduced as an Appendix to the text. His policy has the
following limits:
A = $100,000
B = $3,000
C = $100,000
D = $250 deductible—collision
$250 deductible—other than collision
Assume that each of the events described in the following situations occurs
separately. The actual cash value of Herb’s car is $14,500. You are to calculate
the amount Herb’s insurer will pay.
1. Herb negligently collides with a farm tractor. The tractor is on the highway
to get from one farm to another. Herb was at fault. The farmer successfully
sues for $80,000 in bodily injury and $21,000 in property damage to his
tractor. The lawyers charge $10,000 to defend Herb in court. The insurer
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2. Herb’s daughter, Peggy Sue, strikes their home and their second car while
learning how to drive. She is 16 years old and has a learner’s permit.
Damage to Herb’s home is $30,000 and damage to the second car is
3. Herb runs a stop sign and collides with a parked car causing $4,000 of
damage to each vehicle. As a property damage liability claim, $4,000 damage to
4. While using his car as a delivery vehicle for a local florist, Herb is struck
by an uninsured motorist. He has $15,000 in medical expenses and lost
wages. His car is destroyed (replacement value is $16,000). Herb will recover
5. Herb lends his auto to Emmy Lou. Emmy Lou has her own PAP with
coverage identical to Herb’s. Emmy Lou runs over and injures a famous
baseball player who recently signed a three-year $27 million contract.
Emmy Lou is sued for $32 million. (Answer with respect to Herb’s PAP,
since both PAPs are the same.) Herb’s PAP provides $100,000 coverage for
6. Herb borrows his neighbor’s car for a week while the neighbor is on
vacation. Unfortunately, Herb did $4,000 damage to the neighbor’s car
while he was driving it. Herb’s neighbor’s insurance should cover first. But if the
7. Herb hits a deer on Door County Highway A. His car is destroyed. The deer
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VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Teach the automobile contract by explaining its parts, coverage, exclusions, and
2. One handout found in the Homeowner’s insurance chapter is given to students to test
their knowledge of both the homeowner’s and automobile contracts. Test the students’
3. Review the local newspaper for an account of a recent automobile accident (most