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Does Car Insurance Follow the Car or the Driver?

Does Personal Auto Policy (PAP) insurance follow the car or the driver? The answer is… it depends!

Let’s face it. This is can be a confusing topic. It’s no wonder there’s confusion – an online search of this simple question returns dramatically different opinions; some are correct, some partially correct, and some are incorrect.  But even the reasonably correct opinions may lack the deeper context needed for a full understanding. BTW, this is another example of the author’s long-standing caution to the well-informed:

Don’t trust the internet for your financial advice.

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Before we can dive into context, let’s establish just a few fundamentals. Although there are a number of different PAP coverages, we’ll concentrate on these two broad coverage types:

  • Liability to others, and
  • Damage to the insured’s property.

Liability to Others

Background

Why is liability coverage in your PAP so vitally important to your financial security? According to some reports, the citizens of the United States of America spend more on litigation than any other country in the history of humankind. Given that we’ve been called a “sue-happy” society, here are just a few of the reasons you want liability coverage in your PAP:

  • It’s a legal requirement in virtually all of the states.1 You cannot legally operate an automobile without this coverage in those states. If you have assets of more than $10,000  in some states,2 be aware that the minimum required legal coverage will not protect all of your assets.
  • The legal defense costs of proving you’re not “at fault” can easily reach tens of thousands of dollars or more. Your PAP generally provides for your legal defense.
  • If you’re found at fault, your entire net worth or more could be at risk. PAP liability insurance pays your legal liabilities, but only up to the policy’s limits.

Liability Bottom Line

Under-managed liability risk is like rolling the dice with your entire net worth and, potentially, future earnings as well. Financial prudence demands an appropriate level of liability coverage in your PAP. For those with significant net worth, it may be wise to add even more liability coverage with an umbrella liability policy (more on umbrellas in a future blog post). Consult your insurance professional to determine appropriate levels of liability insurance in your PAP.

PAP Liability Coverage Defined

Exactly what is liability insurance within a PAP?  It’s generally a group of coverages including: 

Liability to others for personal injury (up to and including death)

  • According to the National Association of Insurance Commissioners (NAIC),this coverage “…does not protect you or your car directly. If you cause an accident in which other people are injured due to your negligence [roughly translated as “at fault”], this insurance protects you against their claims for damages, such as medical expenses, lost wages, and pain and suffering.”
  • This coverage is generally required by state law. 

Liability to others for property damage

  • According to the NAIC, “Property damage liability insurance pays for any damage you cause to the property of others, such as damage to another vehicle, fence, or tree caused by a collision.”
  • Noteworthy – this coverage does not protect you for damage to your property.
  • This coverage is generally required by state law.

Uninsured and Underinsured Motorist

  • Quoting once again from NAIC, “Uninsured motorist coverage protects you directly. This coverage pays if you are injured by a hit-and-run driver or a driver who does not have auto liability insurance… Underinsured motorist coverage applies when the other driver is at fault4 and whose limits of liability are lower than the damages you sustained… Uninsured and underinsured coverages may provide coverage for both [your] bodily injury and [your] property damage losses combined…”
  • This coverage may be optional, i.e., not legally required, under your state’s laws.

Damage to the Insured’s Property

This coverage type differs from liability insurance in these ways:

  • Your PAP liability coverage will not generally repair damage to your property.5
  • Coverage for damage to your property is NOT generally required by state law.

What are the key coverages available?

  • Collision coverage will pay to repair or replace your auto as a result of damages to your auto caused by a collision. “Collision” means the collision of your auto with an object such as another car, an animal, or a tree.
  • Comprehensive coverage pays for damage to your auto arising from incidents other than collisions. Logically enough, comprehensive may also be referred to as “other than collision” coverage.
    • Here’s a quick way to distinguish between collision and comprehensive.
      • If your auto is moving and collides with a tree, collision coverage applies.
      • If your auto is parked and a tree limb falls on it, comprehensive applies.
    • Also generally included is coverage for theft of your auto, acts of God (think hail, fire, flood, etc.) or even a falling asteroid.

Now that we’ve covered the fundamentals, let’s illustrate how the coverages apply if you allow a friend to use your car and your friend has an accident while driving.

Example

Your friend Marie is vising from another state. She has a valid driver’s license and her own PAP coverage. You gave Marie permission to drive your car; she is, therefore, a “permissive user.” She  is not a member of your household and is not named as a driver in your PAP.  Whether or not Marie is at fault will determine the PAP coverage that applies.

  • At Fault – if she is at fault for the accident, PAP follows the auto.
    • Your PAP is primarily liable for injuries and property damage4 according to the Insurance Information Institute (III). You must pay the policy’s deductible before coverage begins. The accident may increase your PAP insurance rates.
    • Marie’s PAP is secondarily liable according to the III. What does that mean?  If there was $100,000 in damages from the accident and your PAP only had $75,000 in coverage, Marie’s PAP may be responsible for the remaining $25,000 in damages.
  • Not At Fault – if she is NOT at-fault for the accident:
    • PAP coverage follows the at-fault driver.
    • You will file a claim for damages with the at-fault driver’s insurance company.
    • You are not subject to a deductible. There may be no impact to your PAP insurance rates.

As we conclude this article, here is your takeaway:

Does Car Insurance Follow the Car or the Driver?

General Rule
PAP insurance follows the auto 

Exceptions – PAP insurance follows the driver when: 

The driver of the other auto (not yours) was at-fault in the accident. 

The driver of your auto is a permissive user and he or she was at fault in the accident. PAP property damage follows the driver to the extent that your PAP coverage is not enough to pay for the damage to others’ property. Your PAP liability coverage and the permissive user’s PAP liability coverage may apply.

Disclaimer: An individual’s personal auto policy may have different characteristics than the general concepts covered in this article. For example, coverage requirements may vary by state. Our purpose here is to raise awareness. The content in this blog is not intended and should not be used as legal, financial or risk management advice.  Contact your risk management professional for specific questions about your individual personal auto policy.

1 8 Auto Insurance Myths. Retrieved from https://www.iii.org/article/8-auto-insurance-myths

2Understanding Minimum Car Insurance Requirements. Retrieved from https://www.thebalance.com/understanding-minimum-car-insurance-requirements-2645473

3 AUTO INSURANCE COVERAGE. Retrieved from https://www.naic.org/documents/consumer_alert_understanding_auto.htm

4 This assumes state law follows the “at fault” approach to liability. About one-fourth of the states have no fault laws and this article will not generally apply to those states. Contact your insurance professional for guidance if you live in a no fault state.

5  As an exception, if the other driver was uninsured/underinsured or committed a hit-and-run, then your uninsured/underinsured liability coverage may pay for damage to your property.