Chapter 10

Auto Insurance in the United States

Overview

If you hit a pedestrian, another car, a large animal or bird, or another object while driving your car,
damage is likely to result. You could injure or kill someone and damage his or her property. You could
also injure yourself and your passengers and damage your own vehicle. Fortunately, automobile insurance
is available to cover these losses. Like homeowners insurance, automobile insurance is a package policy
designed to provide coverage for several types of losses. In this chapter we examine the provisions of the
Personal Auto Policy (PAP). The PAP provides coverage for bodily injury and property damage liability,
physical damage protection, medical payments coverage, uninsured motorists protection, and a number of
other coverages.

Learning Objectives

After studying this chapter, you should be able to:

Identify the parties that are insured for liability coverage under the Personal Auto Policy (PAP).
Describe the liability coverage in the PAP.
Explain the medical payments coverage in the PAP.
Describe the uninsured motorists coverage in the PAP.
Explain the coverage for damage to your auto in the PAP.
Explain the duties imposed on the insured after an accident or loss.
Define the following:
Nonowned auto
Appraisal provision
Nonrenewal
Betterment
Other-than-collision loss
Cancellation
Personal Auto Policy (PAP)
Collision
Single limit
Coverage for damage to your auto
Split limits
Diminution of value
Supplementary payments
Extended nonowned coverage endorsement
Temporary substitute vehicle
Gap insurance
Underinsured motorists coverage
Liability coverage
Uninsured motorists coverage
Medical payments coverage
Your covered auto
Miscellaneous-type vehicle endorsement

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Outline
I. Overview of the Personal Auto Policy
A. Eligible Vehicles
B. Your Covered Auto
C. Summary of PAP Coverages

II. Part A: Liability Coverage

A. Insuring Agreement
B. Insured Persons
C. Supplementary Payments
D. Exclusions
E. Limit of Liability
F.

Out-of-State Coverage

G. Other Insurance
III. Part B: Medical Payments Coverage
A. Insuring Agreement
B. Insured Persons
C. Exclusions
D. Other Insurance
IV. Part C: Uninsured Motorists Coverage
A. Insuring Agreement
B. Insured Persons
C. Uninsured Vehicles
D. Exclusions
E. Other Insurance
F.

Underinsured Motorists Coverage

V. Part D: Coverage for Damage to Your Auto

A. Insuring Agreement
B. Transportation Expenses
C. Exclusions
D. Limit of Liability
E. Payment of Loss
F.

Other Sources of Recovery

G. Appraisal Provision
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VI. Part E: Duties after an Accident or Loss

VII. Part F: General Provisions
A. Policy Period and Territory
B. Termination
VIII. Insuring Motorcycles and Other Vehicles

Short Answer Questions

1. What four classes of autos are considered covered autos under the PAP?

2. In addition to a declarations page and a definitions page, what are the six parts of the Personal Auto
Policy (PAP)?

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3. Who is insured under the liability coverage of the PAP?

4. What exclusions apply to the liability coverage under the PAP?

5. What persons are insured for medical payments under the PAP?

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6. What important points must be recognized with respect to the insuring agreement of Part C of the
PAP, Uninsured Motorists Coverage?

7. What vehicles are considered uninsured under the PAP?

8. What is the difference between a collision loss and an other-than-collision loss under the PAP?

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9. What duties are required of an insured under the PAP after an accident or loss has occurred?

10. What is the difference between cancellation of the PAP, nonrenewal of the PAP, and automatic
termination of the PAP?

11. What is the purpose of the miscellaneous-type vehicle endorsement that can be added to the PAP?

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Multiple Choice Questions

Circle the letter that corresponds to the BEST answer.

1. All of the following are covered vehicles under the liability coverage of an unendorsed PAP
EXCEPT:
(a) newly acquired vehicles
(b) a trailer owned by the insured
(c) a motorcycle owned by the insured
(d) all vehicles listed in the declarations
2. Bruce carries automobile liability limits of 25/50/10. He was just involved in an accident in which he
was negligent. The two occupants of the other vehicle incurred $7500 and $32,000, respectively, in
bodily injury expenses. The damage to the other car, a Mercedes, was $16,000. How much will
Bruces insurer pay under the liability coverage?
(a) $42,500
(b) $60,000
(c) $39,500
(d) $55,500
3. Which statement(s) is(are) true with regard to Part D of the PAP, coverage for damage to your auto?
I. If you hit a tree with your car, the resulting damage is a collision loss.
II. If you hit a deer with your car, the resulting damage is an other-than-collision loss.
(a)
(b)
(c)
(d)

I only
II only
both I and II
neither I nor II

4. If there is a dispute between the insurer and the policyowner over the value of a physical damage
loss, which policy provision explains how the dispute will be settled?
(a) stated amount endorsement
(b) supplementary payments
(c) miscellaneous-type vehicle endorsement
(d) appraisal clause
5. All of the following are considered uninsured vehicles under the PAP EXCEPT:
(a) a motor vehicle not covered by bodily injury liability insurance at the time of an accident
(b) a vehicle covered by bodily injury liability insurance at the time of an accident, but the insurer
writing the coverage is insolvent
(c) a hit-and-run vehicle
(d) a vehicle covered by bodily injury liability up to the state required minimum, but this amount is
less than the injured persons bodily injury claim

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6. Mike borrowed Susans car with her permission. While driving Susans car, Mike negligently injured
another driver. Both Mike and Susan have purchased PAPs. How will this loss be settled?
(a) Neither policy will respond as borrowed autos are excluded.
(b) Susans coverage is primary, Mikes coverage is excess.
(c) Susans and Mikes insurers will each pay their pro rata share of the loss.
(d) Mikes coverage is primary, Susans coverage is excess.
7. Which statement(s) is(are) true with regard to collision coverage under the PAP?
I. If you are at fault in the accident, your insurer will not pay for damage to your auto.
II. If a negligent driver hits your car, you can collect from the negligent driver or from your own
insurer.
(a)
(b)
(c)
(d)

I only
II only
both I and II
neither I nor II

8. Which of the following losses would be covered under Part D of the PAP?
(a) Bills car was stolen on Thursday morning. His cab fare to work Monday morning was $15.
(b) Thieves broke into Jennifers car and stole her portable CD player.
(c) Geraldines radar detector was stolen from her car.
(d) Harolds right front tire blew out after only 800 miles of use.
9. All of the following are exclusions under the liability coverage of the PAP EXCEPT:
(a) intentional losses
(b) use of a vehicle without reasonable belief permission would have been granted to use the vehicle
(c) losses for which the insured is liable
(d) liability resulting from an accident that occurred while the vehicle was being used as a taxi
10. Gina carelessly injured another motorist while driving her own car and must pay damages of $50,000
as a result of the accident. If Gina has two PAPs that will respond to the loss, how will the claim be
settled?
(a) Neither policy will respond as duplication voids coverage.
(b) One policy will be primary and the other policy excess.
(c) Contribution by equal shares will be used to settle the loss.
(d) Each policy will respond on a pro rata basis.
11. A car damaged in an auto accident may lose market value or resale value. This reduction in value,
for which some insureds have sought recovery, is called:
(a) gap insurance
(b) diminution of value
(c) underinsured motorists coverage
(d) collision damage waiver

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True/False

Circle the T if the statement is true, the F if the statement is false. Explain to yourself why a statement is
false.
T

1. The PAP is a package policy.

2. The most important coverages you can purchase under a PAP are physical damage coverages.

3. If you cross the center line and hit a car, bodily injuries suffered by the driver of the other car
are covered under your medical payments coverage.

4. If you are driving in a state that has a financial responsibility requirement with higher liability
limits than the limits of your policy, the PAP automatically provides these higher limits.

5. Underinsured motorists coverage duplicates coverage under uninsured motorists coverage.

6. Under the PAP, collision losses are settled based on replacement cost.

7. Your PAP covers you while you are driving in Mexico.

8. If you borrow a friends car and are involved in an accident, any physical damage insurance
on the borrowed car is primary and your physical damage coverage is excess.

9. The miscellaneous-type vehicle endorsement can be added to the PAP to insure motorcycles,
mopeds, and golf carts.

F 10. Although the insurer may be required to pay up to the limit of liability under the PAP, the
insurer will not cover legal defense costs.

F 11. Under PAPs supplementary payments, the insurer will reimburse up to $200 daily for loss of
earnings and cover other reasonable expenses.

F 12. Coverage for towing and labor costs can be added to the PAP by endorsement.

F 13. The purpose of the collision damage waiver is to relieve someone who rents an auto from
financial responsibility if the auto is damaged or stolen.

Case Applications

Case 1
Kirk owns a 1985 Honda that has been driven 175,000 miles. Kirk purchased a PAP. He carries the
minimum liability insurance limits required by his state. He does not carry uninsured motorists coverage
or medical payments coverage. He purchased collision and other-than-collision coverage, both with a
$100 deductible. Critique Kirks auto insurance coverages.

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Case 2
Carolyn owns a 2008 Toyota Camry. She insured the car under a PAP and purchased the following
coverages: bodily injury and property damage liability, medical payments coverage, collision and otherthan-collision loss coverage, uninsured motorists, and towing and labor costs. Are the following losses
covered under Carolyns PAP? If the loss is covered, which PAP coverage would respond?
a.

While driving the Camry, Carolyn slid off an icy road and hit a tree. Her car was damaged and the
passenger riding with her sustained a broken nose and a severe laceration on her forehead.

b.

Carolyns car was hit by a car that ran a stop sign. The driver did not have insurance. Although
Carolyns car was not damaged, Carolyn suffered whiplash and required medical care as a result of
the accident.

c.

Carolyns car broke down while she was driving on a busy freeway. She called a tow truck and had
the car towed to a local service station.

d.

While driving late at night, Carolyn fell asleep and her car crossed the center line. She hit an
approaching car. The driver of the other car sustained $20,000 in bodily injuries and the passenger in
the other car sustained $10,000 in bodily injuries. The other car was a total loss, and Carolyns car
sustained $2500 in damage. Carolyn broke her arm and leg in the accident.

e.

Carolyn was involved in a carjacking. She was not injured, but her stolen car was never recovered.

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Solutions to Chapter 10

Short Answer Questions

1. The four classes of vehicles considered to be covered autos under the PAP include: any vehicle listed
in the declarations, newly acquired vehicles, trailers owned by the named insured, and temporary
substitute vehicles.
2. The six parts of the PAP include:
Part ALiability Coverage
Part BMedical Payments Coverage
Part CUninsured Motorists Coverage
Part DCoverage for Damage to Your Auto
Part EDuties after an Accident or Loss
Part FGeneral Provisions
3. The following groups are insured under the liability section of the PAP: the named insured and family
members, persons using the named insureds covered auto, any person or organization legally
responsible for any insureds use of a covered auto on behalf of that person or organization, and
finally any person or organization legally responsible for the named insureds or a family members
use of any auto or trailer.
4. The exclusions are: intentional damage or injury, property owned or transported, property rented or
under the insureds care, bodily injury to an employee, use of auto as a public or livery conveyance,
vehicles used in the automobile business, business vehicles, use of a vehicle without a reasonable
belief of permission, nuclear energy exclusion, vehicles with fewer than four wheels, vehicles
furnished or made available for the named insureds regular use, a vehicle owned by, furnished, or
made available for the regular use of any family member, and racing vehicles.
5. Just two groups are eligible for medical payments coverage under the PAP. The first group is the
named insured and family members. The second group is other persons while they are occupying a
covered auto.
6. A number of important points must be recognized with respect to the uninsured motorists coverage
insuring agreement. This coverage applies only if the uninsured motorist is legally liable. The
maximum amount paid for any single accident is the amount shown in the declarations. The claim is
subject to arbitration if there is disagreement over the amount of damages or whether the insured is
entitled to damages. Finally, many states include coverage for property damage caused by an
uninsured motorist.
7. Four groups of vehicles are considered uninsured. First, motor vehicles and trailers that have no
liability insurance or applicable bond at the time of an accident. Second, a vehicle covered by liability
insurance, but less coverage than the amount required under the states financial responsibility law is
considered uninsured. Third, a hit-and-run vehicle is considered uninsured. Finally, a vehicle to
which bodily injury liability coverage applies, but the insurer denies coverage or is insolvent is
considered uninsured.

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8. A collision loss is defined as the upset of your covered auto or its impact with another vehicle or
object. Some examples include: hitting another car, running into a utility pole, and hitting the side of
a parking garage. Other forms of physical damage are not covered under collision, but are covered by
other-than-collision loss insurance, unless excluded. Some examples of other-than-collision losses
include: auto fires, hail damage, flood, theft, hitting a bird or animal, and vandalism.
9. In addition to requirements dictated by common sense and required by law, the PAP has a number of
added requirements. The insurer (or its agent) must be notified that a loss has occurred. You must
cooperate with the insurer in the investigation and settlement of the claim. The insurer should be
given copies of any legal papers or notices you receive in connection with the accident. You may be
required to take a physical exam if you are claiming medical expenses. You must also authorize the
insurer to obtain medical reports and records. Finally, you must submit proof of loss. If you are trying
to collect under uninsured motorists, you must notify the police of the accident and the other driver
must be found liable. If you are trying to collect for physical damage, you must protect the vehicle
from further harm and assist the insurer by making the vehicle available for inspection and obtaining
damage estimates.
10. Either the insurer or insured may cancel the PAP. The named insured need only give the insurer
notice of when he or she would like the coverage cancelled. The insurer must give 10 days notice if
cancellation is for nonpayment of premiums, and 20 days notice for other causes. Nonrenewal is an
option for the insurer when the policy comes up for renewal. The insurer may be unwilling to extend
coverage for another time period. The insurer must give 20 days notice before the end of the policy
period that the coverage will not be renewed. If the insurer decides to renew the PAP, an automatic
termination provision becomes effective. This means that if the insured does not accept the
companys offer to renew, the policy terminates at the end of the current policy period.
11. The PAP excludes some other types of vehicles. The insured, however, may need coverage for these
vehicles. Coverage can be obtained by adding a miscellaneous-type vehicle endorsement to the PAP.
This endorsement extends coverage to motorcycles, mopeds, motorscooters, golf carts, motor homes,
dune buggies, and similar vehicles.

Multiple Choice Questions

1. (c) Vehicles with fewer than four wheels are excluded from coverage. Motorcycles can be insured
through a miscellaneous-type vehicle endorsement added to the PAP.
2. (a) Unfortunately for Bruce, he purchased inadequate liability insurance. The first two numbers in
the split limits are for bodily injury liability$25,000 per person, subject to a maximum of
$50,000 per accident. The $7500 bodily injury claim is covered as it is less than $25,000. Only
$25,000 of the $32,000 bodily injury claim is covered. The third number in the split limits is for
property damage liability. Bruce has only $10,000 of coverage, so only $10,000 of the $16,000 is
covered. The total paid by the insurer is:
$7500 + $25,000 + $10,000 = $42,500
Bruce will have to pay the remaining portion of the claim out of his own pocket.
3. (c) Both statements are true. Collision coverage applies to impact with other vehicles or objects,
such as trees, poles, and buildings. Contact with birds and animals is covered under other-thancollision loss coverage.

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4. (d) The appraisal clause in the PAP specifies how disputes between the insurer and the insured with
respect to valuation will be resolved.
5. (d) A vehicle is not uninsured if it has coverage up to the state-required minimum liability limits.
The vehicle described in choice (d) is underinsured with respect to the described claim, however.
6. (b) Regarding nonowned autos, the insurance on the car is primary, the insurance on the driver is
excess. So Susans coverage applies first, and then Mikes coverage applies.
7. (b) Only the second statement is true. Collision losses are paid regardless of fault. If your car is
damaged by a negligent driver, you can collect from the negligent driver or collect from your
own insurer. If you collect from own insurer, your insurer will attempt to recoup this payment
from the other driver through subrogation.
8. (a) Part D provides transportation expenses as a supplementary payment. If a covered auto is stolen,
after a 48-hour period, the insurer pays up to $20 a day for transportation expenses.
9. (c) The reason liability insurance is purchased is to have coverage for losses for which the insured is
legally responsible. Such claims are the reason for purchasing the coverage.
10. (d) In the case of other insurance on an owned auto, each insurer is required to pay its pro rata
share of the loss.
11. (b) The loss described is the diminution of value of the vehicle.

True/False
1. T
2. F Physical damage losses are capped at the value of the property damaged. The most you could lose
if your $25,000 car is totally destroyed is $25,000. If you injure someone while operating your
vehicle, however, the resulting liability claim may make $25,000 look like a pittance. Liability
coverage (bodily injury and property damage) is the most important coverage.
3. F Medical payments coverage applies to the people in your car (named insured, family members,
and your passengers). Bodily injuries suffered by the driver of the other car would be covered under
your liability coverage as you were at fault.
4. T
5. F The coverages address different situations. You can collect under one or the other, but not both.
Underinsured motorists coverage applies if the negligent driver satisfies the state required minimum
liability limit, but the amount of coverage in force is not enough to cover the liability claim. The
undersinsured motorists coverage would pay the difference.
6. F The amount paid for a physical damage loss to a covered auto is the lesser of the actual cash value
of the damaged or stolen property or the amount necessary to repair or replace the property.
7. F The PAP applies only when you are in the United States, its territories or possessions, Puerto Rico,
and Canada.

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8. T
9. T
10. F In addition to paying up to the limit of liability, the insurer agrees to defend you and pay legal
defense costs.
11. T
12. T
13. T

Case Applications
Case 1
Kirk is not spending his auto insurance premium dollars wisely. He needs additional liability insurance as
state minimum limits are generally far too low. He also needs to add uninsured motorists coverage and
medical payments coverage. Finally, Kirk should consider dropping the physical damage coverage.
Recalling the physical damage settlement rules, Kirks old car is a prime candidate to be totaled if there
is a physical damage claim. Carrying both physical damage coverages with such a low deductible on an
old car is not a wise use of premium dollars.
Case 2
Although Carolyn has had some bad luck driving, fortunately all of the claims are covered.
a.

The physical damage caused by hitting a tree is covered under the collision coverage of the PAP.
The medical treatment required by the passenger would be covered under the medical payments
coverage.

b.

As the other driver is legally liable and did not have liability insurance, Carolyns uninsured motorists
coverage would respond.

c.

As Carolyn added the endorsement for towing and labor costs, the towing charge is covered.

d.

The bodily injury claims and property damage to the other car are covered under Carolyns liability
coverage. Damage to Carolyns car is covered under her collision coverage. Carolyn can also recover
the cost of her medical care under the medical payments coverage. Collision losses and medical
payments are paid regardless of fault.

e.

Theft of an insured auto is covered under the other-than-collision loss coverage of the PAP.

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