Tag: Auto Insurance

Personal Umbrella Insurance Policy: The “Business Pursuits” Exclusion

When it comes to personal insurance, some people are content with their standard automobile and homeowners’ (or renters’) insurance policies. Others, however, believe additional insurance is necessary to adequately protect their interests. Whether these people are naturally more risk averse, or they understand that an auto policy with $10,000/20,000 limits will likely fail to fully cover all but the slightest of occurrences, the solution they seek can be found in a personal umbrella liability insurance policy.

A personal umbrella insurance policy, or an excess liability insurance policy, provides coverage that goes beyond the limits of an insured’s primary home or automobile insurance policies. Such coverage is often described as second-tier or second-layer insurance because the coverage comes into play only after the primary or underlying coverage is exhausted. Depending on the precise policy form, an umbrella policy may simply operate to increase the limits of coverage beyond those of the primary policies, or it may provide broader coverage beyond those of the underlying policies. Either way, a personal umbrella insurance policy creates an additional layer of security against the loss of one’s personal assets and wealth.

To maximize the protection afforded by a personal umbrella policy, it is necessary to understand what the policy covers. Or, more importantly, what the policy excludes from coverage. While every insurance policy contains exclusions, some warrant additional discussion. In the context of personal umbrella insurance policies, one such exclusion is the “business pursuits” exclusion.

Although the precise language of the “business pursuits” exclusion varies among different policies, it typically provides that the personal umbrella policy will not cover bodily injury or property damage arising out of business pursuits of the insured. The underlying purpose of this exclusion is to deny coverage for losses arising out of a business endeavor. Since most of those who purchase personal umbrella insurance policies undertake some form of business endeavor throughout their day, it is important to understand the precise scope of the exclusion.

The first place to start is the policy itself. Unfortunately, the word business is not always defined in the policy. The policies that do provide a definition usually do so by providing a list of synonyms, such as trade, profession, or occupation. As a result, there is little guidance to be found in the policy.

Another way to understand the exclusion is to look at judicial opinions that have considered its meaning. However, working with little more than the sparse policy language, courts have struggled to provide a universal interpretation of the exclusion. Nevertheless, these opinions do provide some general guidance as to the scope of the “business pursuits” exclusion.

According to these judicial decisions, the exclusion applies to conduct that is primarily taken in furtherance of a business interest or that is inextricably entwined with employment. Although many courts refused to define the outer limits of the exclusion, one court rejected the notion that the exclusion automatically applies merely because the conduct occurred in the workplace. According to this court, the applicability of the exclusion must be assessed in light of the relationship of the alleged conduct to the business activity. And, while the applicability of the exclusion may depend on the existence of a profit motive, the alleged act must ordinarily be one that the insured would not normally perform but for the business and must be solely referable to the conduct of the business.

Despite this guidance, insureds are still left without a universal interpretation of the exclusion. And, while it may be easy to predict the applicability of the exclusion in some clear-cut cases, those instances falling somewhere in the middle may defy accurate prediction. Consequently, as is often the case, it is very difficult to state whether coverage will be excluded in a hypothetical situation. Actual facts are needed to make a determination.

However, any difficulty encountered in predicting the applicability of the exclusion before the happening of an occurrence does not diminish the importance of incorporating a personal umbrella policy into a comprehensive insurance portfolio. Knowing about, and understanding, the “business pursuits” exclusion allows insureds to identify potential gaps in their personal insurance coverage and adjust their behavior accordingly.

If you would like to learn more about obtaining a personal umbrella insurance policy, please contact us.

Credit History and Auto Insurance Premiums: What’s the Connection?

Increasingly, consumers are asking why their credit rating affects the rates they pay for automobile insurance. Yet using an individual’s credit rating as a criterion for determining an auto insurance premium is a fairly common practice in the insurance industry. Why? Statistics compiled by the Insurance Information Institute indicate that drivers with low credit scores are more likely to file insurance claims. As a result, the lower a person’s credit score, the more likely it is that the individual will pay higher auto insurance premiums; conversely, the higher the credit score, the lower the insurance rates.

When using credit scores to set automobile insurance premiums, insurance companies consider a number of elements in an individual’s credit history. The two most important factors are an individual’s payment history and the amount of debt the individual owes. Insurers want to know whether an individual has made late payments or has missed payments, as well as whether he or she is paying down or accumulating debt. Other criteria are the length of an individual’s credit history, the number of accounts in an individual’s credit report, and the amount of new account activity in the report.

Many consumers feel that the practice of using credit history and not solely an individual’s driving record in determining auto insurance premiums is unfair. They argue that it’s wrong to charge higher rates to individuals who have not had any tickets or accidents for many years but who have lower credit scores. Yet drivers with multiple tickets or at-fault claims pay lower auto insurance premiums merely because they have excellent credit ratings. Insurance companies claim that using credit history is a proven tool that helps them measure their risk of loss and set their rates accordingly.

Given the current economic climate, with high unemployment and a record number of mortgage foreclosures, even individuals who once had good credit history may find themselves facing double trouble: mounting debt and higher auto insurance premiums. That’s why now more than ever, consumers need to work with insurance professionals committed to getting them the best automobile coverage at the best price.

For more information, contact us.

Uninsured Motorists: Their Cars May Be Stacked Against You

Did you know that by 2010, approximately one in six drivers across the United States may be driving without insurance? According to a recent study from the Insurance Research Council, the current recession is expected to trigger a sharp rise in the rate of uninsured motorists. Currently in Florida, 23 percent of all drivers are uninsured, ranking Florida among the top five states with the highest percentage of uninsured motorists, along with New Mexico, Mississippi, Alabama, and Oklahoma.

An additional concern in Florida is that drivers are not required to carry Bodily Injury liability coverage, which would pay for personal injuries, including medical bills, lost wages, and pain and suffering costs, caused to others in an automobile accident. If the injuries sustained in an accident are minor, it is possible that Personal Injury Protection (PIP) benefits will provide adequate coverage. However, many drivers sustain injuries that far exceed PIP benefit limits. That’s where Uninsured and Underinsured Motorist (collectively referred to as UM) coverage comes in – it protects a policyholder and other eligible persons from personal injury damages suffered as a result of the negligence of another motorist who either has no Bodily Injury insurance coverage or coverage that is insufficient to compensate injured persons for their damages. UM coverage also applies when injuries are caused by drivers who “hit and run” and remain unidentified.

UM insurance can be either “stacked” or “non-stacked.” When you purchase UM coverage, you are entitled to “stack” or add together the combined UM coverages of all the automobiles covered by your policy to determine the total amount available. For example, if a policy covers three automobiles, each with $25,000 per person/$50,000 per accident UM limits, the policyholder will have $75,000 per person/$150,000 per accident available in the event of an accident. By contrast, if that same policyholder has non-stacked coverage, then the UM coverage limits of only the vehicle involved in the accident apply.

It is definitely a wise decision, then, especially in Florida where Bodily Injury liability coverage is not required by law, to also obtain UM coverage. It is generally inexpensive but can prove quite valuable, especially after an experience as traumatic as an automobile accident. To learn more about UM coverage or to inquire about your current limits, please contact us.

Minimizing Risk Created by Delivery Drivers: More Than Just Food in Less than Thirty Minutes

Many food service establishments offer delivery services to their customers. Although this convenience provides the opportunity to increase revenues, it may also be accompanied by the unwanted consequence of increasing liability exposure. By placing delivery drivers on the road to advance a specific business interest, food service establishments move beyond the typical, hospitality-based liability exposures, and move into the realm of exposures ordinarily found in fleet-based industries.

When analyzing potential liabilities that may surface during the operation of a specific business or industry, proprietors routinely focus on what must be done to protect or safeguard their patrons. After all, those are the individuals who are paying for the goods or services being provided.

However, in the context of delivery services, the protection of a new class of individuals must be considered: members of the public who are sharing the road with delivery drivers. Once a delivery driver leaves the establishment to make a delivery, the number of individuals who may suffer harm, and consequently create a liability, increases significantly beyond those who walk in the door to order a meal or have a drink.

Despite the fact that these individuals may not have a business relationship with a specific food service establishment, they may nevertheless be negatively impacted by an establishment’s decision to offer delivery services. The most likely scenario in which a food service establishment’s duty to protect those sharing the road with their delivery drivers will be tested is when the delivery driver causes an automobile accident resulting in bodily injury or property damage to a third party.

In such a case, the food service establishment employing the delivery driver will most likely be viewed as a source, if not the source, from which the injured driver will seek compensation. It is not uncommon for all parties linked to an incident to be sued, and since the food service establishment will likely be viewed as the “deep pocket,” its inclusion in any resulting litigation is virtually guaranteed.

Aside from being held vicariously, or indirectly, liable for the damage or injury caused by a delivery driver by virtue of the relationship between the food service establishment and the delivery driver, a food service establishment may be held responsible under two additional theories of liability: negligent hiring and negligent retention.

These two causes of action are closely related in that they both hold an employer liable for failing to take appropriate steps to protect third parties from injury caused by the employer’s employees. The rationale underlying these causes of action is the belief that businesses dealing with the public are bound to use reasonable care to select employees competent and fit for the work assigned to them, and to refrain from retaining the services of an unfit employee.

Subject to jurisdictional variations in common law, negligent hiring typically occurs when, prior to the time the employee is actually hired, the employer knew or should have known of the employee’s unfitness for a particular job function. Negligent retention, on the other hand, typically occurs when, during the course of employment, the employer becomes aware or should have become aware of problems with an employee that indicate his or her unfitness for continued performance of a particular job function.

The main difference between the two causes of action is the point at which an employer is required to take a course of action designed to protect those who may come into contact with the employee. In the negligent hiring context, the employer commits the actionable conduct by hiring the person in the first instance. In the negligent retention context, the employer’s breach of duty takes the form of failing to appropriately adjust the employee’s job functions, such as termination or job reassignment.

Thus, these causes of action typically have two fundamental requirements. The first involves the knowledge of the employer that the employee is dangerous or otherwise unfit for the assigned task. Liability will attach in cases where the employer knew or had reason to know of the particular unfitness, incompetence, or dangerous attributes of the employee, and thus could reasonably have foreseen that such attributes created a risk of harm to other persons.

The second requirement is that through the negligence of the employer in hiring or retaining the employee, the employee’s unfitness, incompetence, or dangerous attributes proximately cause injury to another person.

Consider a situation in which a food service establishment discovers that one of its delivery drivers was ticketed for reckless driving while off-duty. Upon learning of the ticket, the food service establishment reviews the employee’s driving record and discovers six speeding and reckless driving citations issued against the delivery driver within the past year. Is this food service establishment at risk of being held liable for negligent hiring or negligent retention?

Yes. Under these facts, the food service establishment may actually be held liable under both theories of liability if the employee injures someone while on a delivery. The employee’s driving record probably should have excluded him as a candidate for the position in the first instance. Additionally, although the food service establishment may be considered lucky that no such accident has occurred to date, having now learned of the employee’s driving record, the establishment should seriously consider either terminating the driver or transfer him to a non-delivery position; otherwise, a negligent retention claim is likely in the event of an injury caused by the delivery driver.

So how does a food service establishment take precautions against liability for negligent hiring or negligent retention? Although appropriate precautions vary depending on the job position at issue, in the context of delivery drivers, the most effective method of preventing such claims is to review all applicants’ driving records prior to their being hired. Those having multiple violations, or even a single serious violation, should probably be rejected. Routine follow-up reviews of driving records should also be performed on a regular basis to ensure the continued absence of traffic infractions.

Also, it is important to remember that a food service establishment will be judged not only by what it did know, but also by what it should have known. Thus, if something were to occur that would make a reasonable person question the continued qualification of a delivery driver, then the food service establishment must investigate the situation to make sure the driver remains qualified to perform in a delivery capacity.

Although minimum safe-driver requirements may vary among establishments for a variety of reasons, it is unlikely that a food service establishment will be able to claim it made an adequate inquiry into a delivery driver’s background if it failed to make any inquiry whatsoever. Reviewing all delivery drivers’ driving records should be a mandatory step in the hiring process and throughout employment.

Given the frequency of automobile accidents, as well as the potential for significant and severe damage or injury, a food service establishment’s potential liability to those sharing the roadways with delivery drivers cannot be overlooked. From a risk management standpoint, these two theories of liability demand vigilance when deciding who to hire and who to keep. A failure in this respect can quickly eat up any revenues generated by delivery services.

Preventing “Unavoidable” Accidents: More Help for Organizations Seeking to Minimize Losses and Keep Auto Insurance Rates Down

Let’s start by recalling what we mean by “preventable” accidents – those accidents that can be avoided in spite of any adverse driving conditions and in spite of any unsafe practices on the part of the driver who caused the accident. The key to preventing such accidents is a driver’s consistent adherence to the National Safety Council’s techniques for driving defensively, skills that should serve as the foundation for all employers’ driver training programs.

Previously, we explained how accidents can be prevented by crossing intersections correctly, passing vehicles safely, and maintaining a proper driving distance from other vehicles. Now we’ll look at similarly challenging situations and explain how drivers can keep themselves and their vehicles safe.

“The Vehicle Came at Me from Nowhere!”

Typically, an accident in which a driver is struck head-on by an oncoming vehicle that seems to “come from nowhere” is thought of as unavoidable. But accident investigators, after determining the exact locations of the vehicles before and at impact, can usually tell if it was possible for the vehicle that was struck to have avoided the collision.

Say, for example, a vehicle strikes another, head-on, as a result of a foolhardy passing attempt on a two-lane road. Investigators will try to determine if the driver who was struck could have prevented the accident by:

  • Moving to the right;
  • Slowing down or stopping;
  • Flashing headlights; or
  • Sounding the horn.

While fault may be readily assigned to the vehicle attempting the reckless pass, such a determination does not mean the other driver could not have taken action to prevent the accident.

Pedestrians: Do They Always Have Right of Way?

Accident review findings generally uphold the assessment of fault to a driver who strikes a pedestrian. But what about when the pedestrian “jaywalks” by dashing out from between parked cars? Or recklessly crosses a busy street? Are accidents caused by heedless pedestrians preventable?

Yes. School zones, residential streets, and other areas with regular pedestrian traffic must be traveled at speeds appropriate to the situation, and that usually means below the posted limits. Similar logic applies with regard to bicycles, scooters, and other slower-moving modes of transportation; since these vehicles are often driven by young, less experienced drivers, operators of cars and trucks must reduce their speed when such vehicles are within sight distance.

Ultimately, the failure to take necessary driving precautions when the presence of pedestrians calls for reduced driving speeds may result in preventable accidents.

Turn, Turn, Turn

It’s no surprise that, along with passing maneuvers, executing turns generally requires the most care on the part of drivers. Since the driver making the turn is in control of both the vehicle and the situation, the turning driver is also expected to prevent accidents by:

  • Never squeezing out other vehicles, scooters, bicycles, or pedestrians;
  • Signaling all turns;
  • Positioning the vehicle properly when turning;
  • Never making illegal or unsafe U-turns;
  • Checking pedestrian and bike lanes before turning; and
  • Taking any defensive actions required by the situation.

Other Preventable Accidents

Beyond the obvious challenges inherent in crossing intersections, passing, and turning, there are other driving situations in which accidents are also likely to be judged preventable, such as when drivers fail to:

  • Adjust to adverse weather conditions, including rain, snow, fog, ice, etc., or avoid such conditions entirely;
  • Issue or heed warning signals when encountering traffic near alleys, driveways, and other specialized intersections;
  • Properly judge clearances of fixed objects (unfamiliarity with the area or the driving conditions is not, by itself, a valid excuse);
  • Safely park a vehicle by leaving it in the wrong gear (possibly resulting in a roll-away), double-parking the vehicle, leaving the wheels turned in the wrong direction, leaving it unlocked and accessible, etc.; and
  • Obtain needed repairs to a vehicle with detectable problems, resulting in mechanical failures, breakdowns, and unsafe operation.

Accident ‘Unpreventability’

After educating your organization’s drivers on standards of accident preventability, you might be asked the question:

“So is an accident ever not preventable?”

The best, and perhaps the only, answer to this question is to remind drivers that while it is impossible to list every way that accidents can be avoided, the following standards will always be applied when their driving is evaluated:

Defensive drivers:

  • Make allowances for other drivers’ lack of skill and improper driving habits;
  • Adjust their driving to the current weather, road, and traffic conditions;
  • Compensate for the unsafe actions of pedestrians;
  • Remain alert to accident-producing situations and take every precaution to avoid accidents; and
  • Know when they must yield right of way, slow down, or stop to avoid being involved in accidents.

Only by maintaining and enforcing high standards for your drivers will you be able to maintain low commercial auto insurance rates.

When Are Accidents Preventable? A Guide for Organizations Seeking to Minimize Losses and Keep Auto Insurance Rates Reasonable

Every organization’s risk manager dreads a phone call like this from one of the company’s drivers:

“I’ve been in an accident. I’m okay, and so is the other driver, but my vehicle is totaled. It wasn’t my fault, though – the other car just came from nowhere!”

Of course, you’re relieved no one was hurt, but you can’t help thinking with chagrin, “This could cost us a lot of money.”

And you have good reason to be concerned. Aside from the cost of replacing the vehicle and the likely disruption in business operations, you’re worried that another claim against your commercial auto policy could result in a substantial increase in your premium.

That’s why the time to act is before you send your drivers out on the road, and that means having in place a robust loss control and safety program that includes training drivers in accident avoidance. And since the objective of all safe driving courses is to teach drivers to prevent accidents from happening in the first place, drivers must be taught the concept of preventability.

Preventability is the basis for determining whether an accident could have been avoided in spite of any adverse driving conditions and in spite of any unsafe practices on the part of the driver who caused the accident. In other words, even if a driver is not ticketed for or charged with causing an accident, that doesn’t necessarily mean that the accident was not, from the driver’s perspective, preventable.

It should be made clear that preventability is not, in this context, a legal concept used to determine fault or establish negligence. Instead, preventability is a determination based on the belief that driving safely and minimizing the risk of accidents requires consistent adherence to defensive driving principles and techniques endorsed by the National Safety Council.

Of course, given the many factors involved in auto accidents, establishing specific criteria for determining when an accident should be deemed preventable is difficult. Nonetheless, managers must have in place standards for preventability that they explain clearly to drivers and that they apply consistently and impartially when assessing drivers’ performance.

Negotiating Intersections

It’s well known that many accidents occur at intersections, and while you might assume that even safe drivers are powerless against drivers who run red lights or stop signs, that’s not the case. A basic principle of defensive driving is that drivers should approach, enter, and cross intersections in a manner that compensates for other drivers’ failure to obey traffic signs or conform to traffic laws.

Here’s a perfect example: After the light at an intersection turns green, a driver immediately accelerates and is then struck by another vehicle, coming from the opposite direction, that has run a red light.

The driver whose vehicle was struck will not be charged with the accident, as it is clear that it was the other driver who broke the law. But the accident might still have been prevented if the driver not at fault had paused, looked to the left, to the right, and then to the left again before proceeding. In other words, that driver could have prevented the accident by allowing for the other’s recklessness.

That’s why defensive drivers, when they encounter the complex traffic flow, blind spots, and illegal maneuvers of other drivers that are all too common at busy intersections, can prevent accidents by proceeding with caution.

When Cars Collide

The key to preventing front-end collisions rests largely on whether drivers observe the proper following distance at all times. In ideal road conditions, a driver should maintain a two- to three-second following distance between his or her vehicle and the one immediately ahead; in bad conditions, an even greater following distance is recommended.

Nighttime front-end collisions often occur when drivers “overdrive their headlights,” that is, they travel at a speed at which they cannot come to a complete stop within the distance illuminated by their vehicle’s headlights. Instructing drivers to stay within “the headlight zone” is key to preventing nighttime collisions.

When their vehicle is struck from behind in a classic “rear-ender,” drivers may automatically assume that the accident could not have been prevented, but experience suggests otherwise. The risk of rear-end collisions increases if the lead driver has not maintained a proper following distance with the car in front. So when a driver must stop suddenly to avoid hitting the car ahead of his or her own, and then gets rear-ended by another tailgating driver, that accident may legitimately be deemed “preventable.”

Similarly, other rear-end collisions that can be prevented include those that occur when the driver in front:

  • Allows the vehicle to roll backwards;
  • Stops too abruptly when a traffic signal changes (usually because the driver was speeding); and
  • Fails to use turn signals.

Backing accidents are almost always preventable, even when the driver reversing the vehicle is getting “help” with the maneuver. Simply put, the driver is the only person who can control the vehicle and therefore is entirely responsible for checking the vehicle’s clearance by using rear- and side-view mirrors properly and looking backward when necessary.

So what should defensive drivers do to prevent both front- and rear-end collisions? Slow down, pay attention, maintain a safe distance from other cars, and be sure to signal their intentions to other drivers.

Passing Fancies

Accidents that occur during passing maneuvers are preventable for the simple reason that the act of passing another vehicle is almost always voluntary; therefore, the passing driver is responsible for and capable of preventing accidents that could result from his or her driving decisions.

Let’s say that a driver is struck by the vehicle he or she is attempting to pass because that vehicle unexpectedly and improperly speeds up to avoid being overtaken. While the other driver has technically “caused” the accident by striking the passing vehicle, it is possible that the passing driver’s judgment will be deemed poor and the maneuver ill-considered. Such an accident is certainly preventable.

And what about when a vehicle is sideswept or cut off by another vehicle attempting to pass it? If the driver being passed has failed to yield to the other vehicle by slowing down or by safely moving to the right, then the resulting accident, though not the fault of the driver being passed, could have been prevented by defensive driving.

Safe Driving is No Accident

Of course, there are other situations in which driving defensively can prevent accidents often thought of as unavoidable, and we’ll discuss some of these in next month’s newsletter.

But it’s always a good idea to review the standards of defensive driving with those employees who operate a vehicle as part of their job.

Defensive drivers:

  • Make allowances for other drivers’ lack of skill and improper driving habits;
  • Adjust their driving to the current weather, road, and traffic conditions;
  • Compensate for the unsafe actions of pedestrians;
  • Remain alert to accident-producing situations and take every precaution to avoid accidents; and
  • Know when they must yield right of way, slow down, or stop to avoid being involved in accidents.

Adherence to these standards is in both your employees’ and your organization’s best interest.

Home Address Linked To Risk Of Auto Accidents: How Do You Rate?

A study released by Quality Planning Corp (QPC), a San Francisco-based analytics company that helps insurance companies price insurance, reveals that a person’s physical home address, not just ZIP code, can predict the likelihood of an auto accident. The research, which consisted of an analysis of 15 million policyholders and 2 million auto claims, shows that people who live within a mile of a church or other religious institution are much less likely to be involved in an auto accident, as opposed to those who live within a mile of a restaurant.

In fact, living within one mile of an eating establishment increases the risk of auto accident by about 30 percent, while living within a mile of a church decreases the risk by 10 percent.

Wondering what other neighborhood locations increase the risk of accident? Living near grocery stores, schools, and banks all weighed in as high risk areas. Conversely, living near a doctor’s office, airport, or community park showed the risk of accident to be substantially lower.

“It’s important to remember,” says Bob U’Ren, QPC vice president of marketing, “that these observations are indicative of the area and we would naturally expect higher accident rates in higher traffic areas.”

Makes sense. But while some of the results seem predictable, other results are surprising. For instance, churches and elementary schools are ubiquitous in most neighborhoods, yet their accident rates are at opposite ends of the spectrum.

U’Ren adds, “There are also comparatively fewer homes and apartments, and generally lower vehicle use, close to parks and forests. But who would have thought it is more dangerous to live by an elementary school than a liquor store?”

The study does not really contemplate why certain areas demonstrate increased risk, but undoubtedly research on the subject will continue now that QPC has been able to refine auto risk assessment from the ZIP code level down to the street level.

“It’s well known that auto insurers use a policyholder’s ZIP code to calculate the risk he or she represents,” comments Founder and CEO of QPC, Dr. Daniel Finnegan. “New technology enables us to be even more accurate in determining the level of risk associated with a policy by identifying the specific risk factors associated with that policyholder’s home address.

“In our research to develop a new predictive loss model for auto insurers, we have identified more than 500 variables that are highly correlated to auto accidents, many of which are specific to a policyholder’s home address. Among the more interesting variables we found are hail storms, crime rate, topography, traffic patterns, occupation, street width and chiropractors per capita.”

QPC’s new predictive loss model assists auto insurance companies in their efforts to minimize rating error. The ability to assess risk at the street level, and not just based on ZIP code, provides a better predictor of property/casualty insurance losses, enabling insurers to rate more accurately. More accurate rating can mean better financial stability for the companies.

But what does more accurate rating mean for you? Well, some analysts argue that more accurate rating could mean a decrease in auto premiums. While this may be true for some drivers in certain locations, the opposite could also be true. In other words, auto premiums could go up if you happen to live near, say, an elementary school. And chances are good that you do.

Before you start house hunting for a place in the middle of a forest within a mile of a church, know that insurers are not likely to use these partly ambiguous correlations just yet to adjust auto premiums. More research is needed to understand why these risk factors influence auto accidents, and what can be done to mitigate those risks.

GAP Coverage

There’s nothing more exciting or memorable for a vehicle owner than the day he or she acquires a brand new vehicle. Unfortunately, if the vehicle is in an accident and a total loss occurs, this great day can come to a screeching halt. Unexpected problems arise and there is often a lack of funds to cover this unforeseen loss. In addition, when the insurance claim is settled, vehicle owners are faced with the reality that they owe more on their auto loans than they were compensated by their insurance companies.

This article will shed some light on the importance of GAP Coverage and the exposures that vehicle owners and leasers can be left with if not protected properly.

An article published by the Wall Street Journal (October, 2002) pointed out that an automobile valued at approximately $19,440 (sticker price) and traded within two years will only retain a trade-in value of $8,302, which indicates a 57% depreciation. Statistics have shown that 40% of the time a consumer trades in a car they owe more than the car is worth. This results from the fact that the loan amount on most cars decreases only slightly in the first two years and is known as being “upside down”.

The solution to this problem is that coverage can be purchased under the Personal Auto Policy (PAP) or the Business Auto Policy (BAP). This coverage is called Guaranteed Auto Protection (GAP) and can be added to either the PAP or BAP for a reasonable amount. This coverage fills the gap between the amount owed on a loan and the actual cash value (ACV) settlement paid by the insurance company for a total loss situation. GAP is available for either financed or leased vehicles. Auto dealers often offer this coverage at the time of the lease or purchase, however comparing their price to the cost under the PAP, the dealer’s is usually significantly higher.

In the event that you had a total loss to “your covered auto” and you carried GAP coverage, this coverage would help to pay for:

  • Any overdue lease or loan payment(s) at the time of loss;
  • Financial penalties imposed under a lease for excessive use;
  • Abnormal wear and tear or high mileage;
  • Security deposits not refunded by a leaser;
  • Costs for extended warranties;
  • Credit life insurance;
  • Health, accident or disability insurance purchased with the loan or lease; and
  • Carry-over balances from previous loans or leases.

This will help eliminate the potential for significant out of pocket expenses especially for someone who has entered into a long-term auto lease situation.