Class 7 Insurance and Risk Management

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Class 7Insurance and RiskManagement

• George D. Krempley
• Bus. Fin. 640
• Winter Quarter 2007

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Other Insurance Provisions

• Typically present in P L and Health Insurance
  policies
• Apply when more than one contract covers the same
  loss.
• Purpose To prevent profiting from insurance and
  violation of the principle indemnity

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Types of Other Insurance Provisions

• Pro Rata Liability
• Contribution by Equal Shares
• Primary and Excess Insurance

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Pro Rata Liability

• Applies when two or more policies of the same
  type cover the same insurable risk in property.
• Each insurers share of the loss is based on the
  proportion that its insurance amount bears to the
  total amount of insurance

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Contribution by Equal Shares

• Frequently found in Liability Insurance Contracts
• Each Insurer shares equally in the loss until the
  lowest limit of liability is paid.
• The remaining Insurers continue to share equally
  in the remaining amount of the loss until
• Each insurer had paid its policy limit in full,
  or
• The full amount of the loss is paid.

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Primary and Excess Insurance

• Primary Insurer pays first
• Excess Insurer pays only after the policy limits
  under the primary policy are exhausted
• Examples
• Personal Auto Policy
• Coordination of benefits in Group Health Insurance

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Primary and Excess Insurance Personal Auto Example

• Bob borrows Jills car
• Limits of liability
• Bob 100,000 per person for BI
• Jill 50,000 per person for BI
• Normal rule Liability insurance on borrowed
  vehicle is primary any other insurance is
  considered excess
• Court judgment of 75,000
• Jills policy is primary pays 50,000
• Bobs policy is excess pays 25,000

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Primary and Excess Insurance Group Health

• Applies if a person is insured under more than
  one group health plan
• Purpose To prevent over-insurance and
  duplication of benefits
• Coverage as an employee is primary to coverage as
  a dependent.

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EXHIBIT 6.3 Pro Rata Liability Example
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EXHIBIT 6.4 Contribution by Equal Shares
(Example 1)
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EXHIBIT 6.5 Contribution by Equal Shares
(Example 2)
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Basic Parts of Personal Auto Policy

• Part A Liability Coverage
• Part B Medical Payments Coverage
• Part C Uninsured Motorists Coverage
• Part D Coverage for Damage to Your Auto
• Part E Duties After an Accident or Loss
• Part F General Provisions

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Part ALiability Insuring Agreement

• Insurer promises to pay damages bodily injury or
  property damages for which an insured becomes
  legally responsible because of an auto accident.
• Damages include any prejudgment interest awarded
  against the insured
• To defend the insured
• To pay the costs of defense.

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Part ALiability Limits

• The current PAP is usually written with split
  limits.
• Less common, the PAP can also be written with a
  combined single limit as well.

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Split Limits

• Separate amount of insurance is stated for bodily
  injury and property damage.
• Bodily injury is given both a per person and a
  per occurrence limit

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Combined Single Limit

• A single limit applies to both bodily injury and
  property damage.
• The total limit applies to the entire accident.
• There is no separate limit for each person.

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Split Limit Example

• 250,000/500,000/100,000
• 250,000 each person
• 500,000 each accident
• 100,000 for property damage
• Practioners frequently write 250/500/100

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Combined Single Limit Example

• 500,000 CSL
• Single limit of liability applies to both bodily
  injury and property damage.

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Covered Autos

• Coverage applies to include
• Any vehicle listed in the declarations
• Newly acquired vehicles
• Trailers owned by the insured
• Temporary substitute autos

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Definition of You

• The Named Insured shown in Declarations
• The Spouse of Named Insured if a resident of the
  same household

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Definition of Insured Part A

• You or any resident family member for the
  ownership, maintenance and use of any auto or
  trailer
• Any person using the named insureds covered auto
  
• Any person or organization, but only for
  liability arising out of an insured persons use
  of a covered auto on behalf of that person or
  organization.
• Any person or organization legally responsible
  for the named insureds or family members use of
  any auto or trailer (other than a covered auto or
  one owned by that person or organization)

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Supplementary Payments

• Paymentsin addition to the policy limits
• Bail bond up to 250
• Premiums on appeal and release of attachment
  bonds
• Interest on the judgment
• Loss of earnings up to 200 daily when the
  insured must attend a hearing or trial
• Other reasonable expenses incurred at the
  insurers request.

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Exclusions

• Intentional injury - Road rage
• Property owned or transported
• E. g., suitcase or camera belonging to a friend
  may be damaged in an auto accident
• The damage would not be covered
• Property rented or in the insureds care
• E. g, Skis rented by the Insured
• Exclusion does not apply to property damage to
• Rental house
• Rental garage

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Exclusions (cont.)

• Bodily injury to an employee - Workers
  compensation claims
• Does not apply to domestic employee not covered
  by W. C.
• Using the vehicle as a public or livery
  conveyance
• Vehicles used in the auto business
• For example, you take your car to the car
• The mechanic test drives the car
• PAP does not pick up his liability

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Exclusions (cont.)

• Other business vehicles
• Intention is to exclude coverage for commercial
  vehicles and trucks
• For example, city bus or cement truck
• Does not apply to owned or non-owned PPA, pick-up
  or van
• Thus, you are covered if you drive your car on
  business
• Using a vehicle without a reasonable belief of
  permission

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Exclusions (cont.)

• Nuclear energy exclusion.
• Using vehicles with fewer than four wheels.
• Vehicles furnished or available for the insureds
  regular use or that of a family member.
• Vehicles inside a racing facility and used for
  racing purposes

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Out of State Coverage

• PAP policy automatically adjusts to comply with
• Financial responsibility law, or
• No-fault law
• Of another state.

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Other Insurance Part A

• If two auto policies cover a loss to an owned
  automobile, each company pays its pro rata share
  of the loss.
• If the insured is driving someone elses car and
  has an accident, the insureds policy is excess
  and the insurance on the borrowed car is primary.

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EXHIBIT 10.1 Primary and Excess Insurance
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Part B Medical Payments Coverage

• Benefits are paid without regard to fault.
• Limits typically range from 1,000 to 10,000 per
  person.
• All reasonable medical and funeral expenses
  incurred within three years of the date of the
  accident are paid.

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Med Pay Insured Persons

• Named insured and family members while occupying
  a motor vehicle or when struck by a motor vehicle
  while walking.
• Other persons while occupying a covered auto.

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Med Pay Exclusions

• Injuries sustained while occupying a vehicle with
  fewer than four wheels.
• Using the vehicle as a public or livery
  conveyance.
• Using the vehicle as a residence.
• Work injuries covered by workers compensation.

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Med Pay Exclusions (cont.)

• Vehicles furnished or made available for the
  named insured or family members regular use
• Using a vehicle without a reasonable belief of
  permission
• Racing vehicles.
• Injury by snowmobile, tractor or bulldozer
• Because these vehicles are not designed for use
  mainly on public roads

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Med Pay Other Insurance

• If other med pay insurance applies to an owned
  vehicle, the insurer pays its pro rata share,
  based on the proportion of limits method.
• Med pay is excess with respect to non-owned
  vehicles.

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Example Med Pay Other Insurance

• Insured takes friend to lunch
• Car accident occurs, friend is injured
• Friends medical bills total 6,000
• Insureds med pay limit 2,000
• Friends med pay limit 5,000
• Insureds med pay applies first
• Insured carrier pays 2,000
• Friends carrier pays 4,000

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Part C Uninsured Motorists Coverage

• Pays for bodily injury (and property damage in
  some states) caused by
• An uninsured motorist
• Hit and run driver
• Negligent driver whose insurance company is
  insolvent
• Negligent driver who has insurance, but the
  amount is less than required by the states
  financial responsibility law

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Background

• According to the Insurance Research Council, an
  estimated 14 of US drivers are uninsured.
• Wide variation
• 32 Colorado
• 4 Maine

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Uninsured Motorists Insuring Agreement

• Coverage applies only when the other person is at
  fault and has no liability insurance.
• Pays for compensatory damages that an insured is
  legally entitled to receive from an owner or
  operator of an uninsured motor vehicle because of
  bodily injury caused by an accident.

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Uninsured Motorists Insured Persons

• Named insured and family members
• Other persons while occupying a covered auto
  has to be while occupying a covered vehicle
• Anyone legally entitled to recover from the
  person or organization responsible for the
  accident.
• E.g., Spouse of deceased husband

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Definition Uninsured Vehicles

• Vehicles with no applicable bodily injury
  liability coverage or bond at the time of the
  accident
• Vehicles with coverage less than the amount of
  insurance required by the states financial
  responsibility or compulsory insurance law
• Hit-and-run vehicles
• Vehicles where the bonding or insurance company
  is insolvent.

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Uninsured Motorists Damages

• Medical bills
• Lost wages
• Compensation for disfigurement

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Uninsured Motorists Important Points

• Uninsured motorist must be legally liable for
  coverage to apply.
• Insurers maximum limit of liability for any
  single accident is the amount shown in the
  declarations.

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Uninsured Motorists Important Points (cont.)

• Insured cannot receive duplicate payments either
  under
• Part A, Liability Insurance
• Part B, Medical Payments Coverage
• Loss paid under Workers Compensation law or
  Disability Benefits law

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Uninsured Motorists Important Points (cont.)

• If the insured and insurer disagree over the
  amount of damages,
• The claim is subject to arbitration.

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Property Damage Uninsured Motorists

• UM Property Damage is only available in some
  states.
• Example
• An uninsured driver runs a stoplight and smashes
  into your car.
• The property damage would be covered under the
  uninsured motorist coverage.
• It would be subject to any deductible

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UM Property Damage Approaches

• In some states, PD is optional
• In other states, both BI and PD are mandatory
  under the states uninsured motorists law.
• In yet other states, the PD is included together
  with the BI.
• Insured may opt out by waiving the coverage if
  not desired
• Some states make PD subject to a deductible.

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Uninsured Motorists Exclusions

• No uninsured motorists coverage on the vehicle
• Settling a claim without the insurers consent
• Using the vehicle as a public or livery
  conveyance
• Using a vehicle without a reasonable belief
• No benefits to a workers compensation insurer or
  self-insurer
• No punitive damages.

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Uninsured Motorists Other Insurance

• The familiar pro rata approach is used for an
  owned vehicle.
• Coverage is excess if the coverage applies to a
  non-owned vehicle.

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Underinsured Motorists Coverage

• Applies when
• A negligent third party has auto liability
  coverage
• But, the limits carried are less than actual
  damages for bodily injury.

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Definition of Underinsured Vehicle

• A vehicle with a liability policy or bond at the
  time of loss, which has limits that are less than
  the limits provided by the insureds
  underinsurance limit.

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Underinsured Motorists Example 1

• Insured has Underinsured motorist coverage of
  100,000
• Negligent drivers liability limits are
  25,000/50,000
• Negligent drivers limits satisfy the states
  minimum required limits
• Insured incurs bodily injury damages of 100,000
• Insured would receive
• 25,000 from other drivers insurer
• 75,000 from her own insurer

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Underinsured Motorists Example 2

• Insureds BI damages are 125,000
• Insured would still collect only 100,000
• Insured would need to have limits of 125,000 to
  collect the full amount

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Part D Coverage for Damage to Your Auto

• Pays for direct or accidental loss to your
  covered auto or any non-owned auto, including
  their equipment, minus the applicable deductible.

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Part D Insuring Agreement

• Coverage has two parts
• Collision Loss as defined in the contract
• Other-than-Collision Loss for certain listed
  perils, including theft
• These are optional coverages
• Coverage is in force only if the declarations
  page indicates that the coverage is provided for
  in the policy

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Collision Definition

• The upset of your covered auto or non-owned auto
  or its impact with another vehicle or object.
• Examples
• Car overturns on an icy street
• Car hits another car, telephone pole, tree or a
  building
• Car is parked and you find the rear fender dented
  when you return
• You open your door in a parking lot and damage
  your door by hitting another cars door

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Collision Losses Paid Regardless of Fault

• If you cause the loss, your insurer will pay for
  the damage, less any deductible (typically 250)
• If the other driver is at fault, you can either
• Collect from the negligent driver or his insurer,
  or
• Submit the claim to your insurer who will pay the
  claim

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Collision Losses Paid Regardless of Fault
(cont.)

• If your insurer pays the loss, they will assume
  your subrogation rights.
• Your insurer will attempt to collect from the
  negligent party.
• If they collect the entire amount, they will
  refund your deductible.

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Other Than Collision

• Losses from any of the following perils is
  considered to be other than collision
• Missiles or falling objects
• Fire
• Theft or larceny
• Explosion or earthquake
• Windstorm
• Hail, water or flood
• Malicious mischief or vandalism
• Riot or civil commotion
• Contact with a bird or animal
• Glass breakage

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Other Than Collision Key Points

• Theft includes theft of equipment permanently
  installed
• Hub caps
• Tires
• Stereo set
• Air bag
• Colliding with a bird or animal is an
  other-than-collision loss
• If gas breakage is caused by a collision, you can
  elect to have it covered as a collision loss.
• In this way, you avoid paying two deductibles

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Part D Covered Vehicles

• Any vehicle listed in the declarations
• Newly acquired vehicles provided coverage is
  requested within 14 days of acquisition.
• In addition, the Part D coverages apply to a
  non-owned auto and temporary substitute auto.

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Transportation Expenses

• Modest reimbursement for temporary transportation
  expenses because of loss to a covered auto.
• 20 a day, up to a maximum of 600, for
• Train
• Bus
• Taxi
• Rental car
• Loss of rental car income if the car is rented

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Coverage for Towing and Labor Costs

• Can be added by endorsement
• Pays towing and labor costs if a covered auto or
  non-owned auto breaks down.
• Optional amounts available 25, 50, 75
• Labor costs include only work done at the place
  of the breakdown

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Part D Exclusions

• Use of the vehicle as a public or livery
  conveyance
• Ordinary wear and tear
• Radioactive contamination or war
• Electronic equipment for the reproduction of
  sound unless permanently installed
• Tapes, records, and disks
• Government destruction or confiscation
• Loss to a trailer, camper body, or motor home not
  shown in the declarations

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Part D Exclusions

• Using a non-owned auto without a reasonable
  belief of permission
• Radar detection equipment
• Custom furnishings or equipment
• Non-owned auto used in the automobile business
• Using the vehicle in a racing facility
• Loss to a rental car if a state law or rental
  agreement precludes the rental company from
  recovering from the insured.

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Part D Limit of Liability/Payment of Loss

• Company will pay the lesser of
• Actual cash value, or
• The cost to repair or replace less any applicable
  deductible.
• Loss to a non-owned trailer is limited to 500
  (1500 under 2005 PAP).

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Part D Other Sources of Recovery

• For a covered auto Each company pays in
  proportion to what its limit of liability bears
  to the total of all applicable limits.
• For a non-owned auto, any physical damage
  insurance on the borrowed car is primary and your
  physical damage insurance is excess.

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Part E Duties After An Accident or Loss

• Notify the insurer promptly.
• Cooperate with your insurer in the investigation
  of the accident and defense of any claim that
  might arise from it.
• If sued, immediately forward copies of the legal
  papers to your company.

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Duties After An Accident or Loss (cont.)

• Release medical information to insurer to allow
  injuries to be evaluated
• Submit to a physical examination.

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Duties After An Accident or Loss (cont.)

• Under the UM coverage, notify the insurance
  company if a hit-and-run driver is involved.
• If you sue the other driver, you must send copies
  of the papers to your insurer.
• Take reasonable steps to prevent further damage
  to the car and allow the company to inspect the
  damage before it is repaired.

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Part F General Provisions Policy Period and
Territory

• PAP applies only to accidents and losses which
  occur
• During the policy period
• Within the policy territory

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Part F General Provisions Policy Territory

• The policy territory for PAP is
• The United States
• U.S. territories and possessions
• Puerto Rico, or
• Canada
• PAP policy also covers losses or accidents
  involving the covered auto while being
  transported between their ports
• .

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Part F General Provisions -Termination

• Insured may cancel at any time.

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Part F General Provisions Termination (cont.)

• The insurer also has the right of cancellation
  under certain conditions
• when the policy has been in force for less than
  60 days, the insurer must give 10 days notice of
  cancellation, and
• when the policy has been in force for more than
  60 days, the insurer may cancel only if
• the premium is not paid, or
• the insureds drivers license has been suspended
  or revoked, or
• the policy was obtained by a material
  misrepresentation.

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Part F General Provisions Non- Renewal

• If the insurer decides not to renew the policy,
  at least 20 days notice of non-renewal must be
  given.