BODILY INJURY LIABILITY
INTRODUCTION TO THE BODILY INJURY LIABILITY COURSE
Welcome to the Bodily Injury Liability course. The purpose of this course is to arm you, the insurance adjuster and insurance agent, with the relevant and adequate knowledge on matters pertaining to Bodily Injury Liability. At the end of this Bodily Injury Liability course, you should be capable of understanding the basics of Bodily Injury Liability.
Kindly note that this course should be read together with the Bodily Injury Liability Insurance Coverage Limits course, and Property Damage Liability course since the two are significantly inter-related. This will assist you in gain the best understanding of the two courses.
Please be guided that the contents of this course should only serve as guidance and an overview of the course. All the materials covering Bodily Injury Liability cannot be exhaustively covered under the course due to its dynamic nature. You are therefore encouraged to use supplementary materials on the topic to equip yourself further.
The content of the course shall be as hereunder:
- Introduction to the Insurance Services Office (ISO) Personal Auto Policy (PAP) form
- The Declarations Page
- The Insuring Agreement
Introduction to the Insurance Services Office (ISO) Personal Auto Policy (PAP) form
We will use theInsurance Services Office (ISO) Personal Auto Policy (PAP) form as our case study and most of the references will be drawn from it. Therefore, let us briefly look at the contents of the form. The primary categories of auto insurance policies are commercial use and personal use. The Insurance Services Office (ISO) has produced standard forms for each of these categories. Personal automobile insurance, like other examples of insurance, is continuously changing due to the fact that the events to which the policy must respond are continually changing as well. A basic auto insurance product, the Personal Auto Policy, or PAP, has been available to insurers for many years through the Insurance Services Office (ISO). Following up on ISO’s 1998 edition of the Personal Auto Policy, the 2005 edition of the Personal Auto Policy, which replaces it, carries on the attempt to meet the needs of customers, insurers, regulators, and lawmakers. This is accomplished by the constant updating of the basic policy as well as the provision of both revised and new endorsements, as needed.
Individual firms continue to satisfy the demands of vehicle insurance customers in a variety of ways. Companies may use the ISO program in its totality, opt to alter the program or use a program that is totally independent of the ISO program since all policies must provide protection against a variety of vehicle risks, but it is likely that a company’s forms will be based on the PAP or its predecessors. Variations are caused by competition, which encourages insurers to try to differentiate their products from one another. The most significant differences are in the types of risks covered, people insured, exclusions and definitions, and the inclusion of personal injury protection (PIP) coverage or no-fault provisions, which are obligatory in some states.
The Personal Auto Policy provides liability and physical damage coverage for individuals and automobiles who meet the policy’s eligibility requirements. The PAP includes a declarations page, a general insuring agreement, and a list of significant definitions at the beginning of the document, and in that particular order. These are followed by the six primary sections of the policy:
Part A – Liability coverage;
Part B – Medical Payments Coverage;
Part C – Uninsured Motorists Coverage; and
Part D-Coverage for Damage to Your Auto
Part E—Duties after an accident or loss
Part F—General provisions
Each of the first four parts contains its own insuring agreement, exclusions, and other insurance rules, however the majority of the conditions are found in parts E and F of the document. In a way, each of the first four sections is nearly a separate policy, and the PAP is a comprehensive bundle that pulls them all together. Each part is rendered effective by noting in the declarations that the premium for that specific part has been paid and that the coverage is in force. Parts E and F are applicable to the full policy.
In order to further ISO’s goal of continuously clarifying the coverage intent of its policy forms, this format was developed. An extended policy is in this situation a necessary evil because older policy designs in which essential provisions applied to several coverage areas grew increasingly subject to misinterpretation as time progressed. The 2005 edition of the PAP clarifies the language of certain exclusions and definitions in order to improve understanding. Changes have been made, in particular, to the exclusions for coverage of sound reproducing equipment as well as the definition of newly acquired autos.
ISO however filed 30 amendments to its Personal Auto Program (PAP), which took effect on September 1, 2018, with the exception of Hawaii, North Carolina, and Puerto Rico. Nine of the revisions were made to the base PAP form itself, and 21 endorsements have been amended, withdrawn, or added as a result of the adjustments. Currently included in the base PAP are exclusions previously requiring the attachment of three endorsements. We will address the form amendments separately in the Property Damage Liability course.
Part A is about liability coverage that pays for damages that the insured is legally responsible for because of an accident. This could be for bodily injury or damage to property. After paying for bodily injury and property damage, the policy also pays for prejudgment interest and defense costs. This section also covers things like the cost of bail bonds, the loss of income, and other reasonable costs. Part A doesn’t cover intentional acts, damage to property owned or controlled by the insured, or bodily injuries that happen while the person is at work and various other situations. Part B: Medical Payment Coverage pays for reasonable costs that must be paid for needed medical treatment and/or funeral services because of someone’s bodily injury. The bodily injury should involve an insured and be due to a covered accident. A different meaning of “insured” is used in this part. Coverage is given to a qualified insured as either a vehicle occupant or a pedestrian.
Coverage under Part B also extends to passengers in a covered auto. Coverage in Part B also extends to passengers in a covered auto. Losses that happen to vehicles with less than four wheels, vehicles that are used as homes, public or livery conveyance, and cars owned or available for the regular use of any insured are the exclusions to the policy. Losses that happen in the course of employment, when driving without permission, when the insured business is involved, and a couple of other ways are also not covered. The Limit of Liability section indicates that the limit provided in the policy declarations is not altered by the number of covered persons, claims made, cars or premiums shown in the declarations, or the number of vehicles involved in a particular accident. It also stipulates that payments will not be made in a duplicate manner under the same insurance policy. The duplication language is used in a number of different sections of the Personal Auto Policy.
Uninsured Motorists Coverage is covered under Part C. Under this section’s insuring agreement, there is a promise to pay for bodily injury suffered by an insured that is caused by the negligent party’s ownership, operation or maintenance of an uninsured motor vehicle. There are four conditions in which a vehicle is regarded to be uninsured, as defined in this coverage section. If the vehicle is owned by or frequently available to any insured, if it is run by a self-insurer, if it is owned by any government unit or agency, or if it is operated on rails or crawler treads, the vehicle is not considered a “uninsured motor vehicle” under the terms of the policy. In addition, an off-road vehicle involved in an accident while off the road, as well as a vehicle that is utilized as a residence, are not considered uninsured under the terms of the Personal Auto Policy.
The Part C exclusions exclude coverage for bodily injury incurred by an insured when occupying or if hit by a vehicle he or she owns (or has regular access to). Coverage is also denied for bodily harm where any insured makes an unauthorized settlement. Operators who use an insured vehicle without authorization are not covered, and coverage is also not available in cases where a worker’s compensation or a disability benefits statute is in effect. Last but not least, there is no coverage for punitive or exemplary damages under this policy. Part C has an arbitration section that details the procedure to be followed in the event that there is a disagreement among the parties as to whether any payment is required or the amount of the payment. The mechanics of the process are thoroughly discussed. If arbitration is unsuccessful in resolving the dispute, the section describes the next steps to be taken.
Damage to the insured’s Automobile is covered in Section D. This section of the insuring agreement specifies that coverage under this section applies to “collision” and “other than collision” damage to covered automobiles that are stated in the declarations. This section of the insuring agreement specifies that coverage under this section applies to “collision” and “other than collision” damage to covered automobiles that are stated in the declarations. The term “collision” refers to damage caused by a vehicle being disturbed (turned over, moved etc.) or by impact with another vehicle or object, according to the insurance policy. Among the types of damage classified as “other than collision” are damage caused by falling or flying objects, fire; theft; explosion, earthquake, windstorm, vandalism, riot, birds or animals, broken glass, hail, water, or flood.
Part D provides for coverage extension known as Transportation Expenses. Because of theft, breakdown, or destruction of a covered vehicle, it is extended to a non-owned vehicle or trailer that takes the place of the unusable covered vehicle. The replacement car is covered under the policy as a temporary replacement vehicle. The coverage covers for daily expenses of up to $20, up to a maximum of $600, incurred as a result of loss of use of a covered auto owing to a collision, other than a collision, or as a result of legal liability for loss of use expenses to the owner of a non-owned vehicle.
When a theft loss occurs, the expense coverage becomes available after 48 hours, and when any other eligible cause of loss occurs, the expense coverage becomes available after 24 hours. In any scenario, coverage stops when the covered vehicle is accessible for use or when a settlement has been received. On the exclusions, there is no coverage for automobiles that are used to transport people for compensation or items for sale, or for damage caused by wear and tear, freezing, breakdown, or road damage to the tires of the vehicle.
Radiation, or nuclear mishaps, war, civil unrest, and loss to electronic entertainment equipment are among the other types of losses that are not covered by insurance. Losses to owned camper bodies and trailers that are not specified on the declarations, non-owned automobiles that are used without permission, and awnings, radar/laser detectors, and custom furnishings/equipment for pickups or vans are all excluded from coverage. Liability is limited in that the maximum amount that will be paid for Damage to the insured’s Auto is the minimum amount that is necessary to fully compensate the insured under the circumstances. Trailers that are non-owned are subject to a sub-limit of $1,500. The insurer has the choice of making a cash settlement or repairing or replacing the covered vehicle. For equipment that is solely capable of reproducing sound but is installed in a location other than the region of the vehicle intended by the vehicle manufacturer, the PAP provides a sub-limit of $1,000. Part D contains provisions pertaining to bailees, additional sources of payment, and appraisals.
Part E covers responsibilities following an accident or loss. In a nutshell, an insured must notify the company of any accident or loss and cooperate with the firm throughout the process, including any legal action. Another requirement is that the insured should be willing to submit to physical examinations, take oaths, grant authorization to obtain medical and other pertinent documents, provide proof of loss and police reports, secure and preserve property, and submit property for inspections and appraisals. The wording of this section was somewhat revised in the 2005 edition in order to be consistent with a number of court decisions. The provision now specifies that an insured may jeopardize his or her PAP coverage if he or she fails to perform a post-loss duty in a manner that adversely affects the insurer’s interests. As a result, a technicality alone will not be sufficient justification to trigger a penalty under this provision. ‘General Provisions’ is the title of Part F. These sections clarify how various events will have an impact on the policy’s coverage. There may be a lack of impact (as in personal bankruptcy), changes in terms, coverage, or premiums (as in the changes section), and whether coverage is applicable (as with the territory, termination and nonrenewal sections).
The Declarations Page
The below sections, are the general divisions found in insurance contracts:
- Insuring agreement
- Miscellaneous provisions
Despite the fact that not all insurance contracts have all six sections in the sequence listed above, such a classification provides a straightforward and handy framework for examining the vast majority of insurance contracts. We will begin our review with the declarations page. The declarations page can be thought of as a condensed version of the auto insurance coverage, it will not go into comprehensive detail. It is also referred to as the “dec page”. Name and address information on the declarations are used to identify the insured. The vehicle insurance declarations page will include a list of all of the parties who are covered by the policy. For instance, these will be:
- The person who is insured. Typically, this is the person who is purchasing the insurance policy. Additionally, anyone else who drives the automobile, such as the policyholder’s children or spouse, may be covered under the policy. Each person who is covered by the policy will have their names, ages, and corresponding addresses recorded on the policy. In some cases, the dec sheet may also include a list of drivers who are not permitted to use the vehicle.
- A dec sheet may include the names of any drivers in the insured’s family who have been specifically excluded from coverage by the insurance company.
- If relevant, the name and telephone number of a representative from the insured’s automobile insurance provider.
- The address of the insurance company, as well as a phone number to contact them, should be included on the policy declarations page.
- The person who holds a lien should be provided where the insured has an entity that holds their lease, or they made the purchase through a car loan. This will most likely be a bank or credit firm, and their address may be included on the dec sheet.
The lender will be listed as a “loss payee” on the declarations page if one received a loan to acquire a car and there is still an outstanding debt owed to the lender on that loan. The loss payee for physical damage to the automobile is provided in order to protect the lender who has financed the automobile’s purchase, and the address of the garaging facility is also listed. The latter is a crucial aspect in the underwriting. The frequency and severity of losses differ from one area (referred to as a territory by ratemakers) to another. For example, losses are typically bigger in urban areas than they are in rural ones. Despite the fact that many people drive all over the country, the vast majority of driving is done within a small distance of the location where the automobile is usually garaged. As a result, the location of the garage has an impact on the insurance cost.
The declarations page will also feature information about each and every car that is covered by
the insurance policy as well. This translates to: the name, year in which the car was built, date of purchase, make, and model are important (for example, Dodge Avenger, Kia Soul, Tesla Model 3, and so on), and the Vehicle Identification Number (VIN). The Declarations Page will also provide for any specific types of coverage that have been added to or removed from a standard policy. These are referred to as endorsements. In most cases, however, the insured’s policy will provide further information about the endorsements. Conditions and exclusions are also included in endorsements. Since endorsements reverse exclusions and conditions, the double-negative language may be difficult to grasp in certain situations.
The declarations also contain information on the insurance policy number, policy’s term, premiums charged, deductibles, coverages given, and liability limits for the coverages. The policy number can be found at the top of the declaration page, and this number will need to be referenced when filing an insurance claim. Some declaration pages will also include a listing of the insured’s former policy number because one may be required to obtain a new policy every six months to a year, this number may change frequently.
The Declarations Page offers a great deal of precise information pertaining to the term of a policy. A policy is in effect from the time of its implementation to the time of its expiration. When coverage under a policy comes to an end, the policy is considered to have expired, as a result, the day on which coverage comes to an end is referred to as the expiration date. The time of day that appears, with the effective date and expiration date, are all important considerations to make as they specify the exact time at which coverage begins and finishes (For example, if an insured’s policy begins at midnight and the insured is involved in an accident at 11:55 p.m., the insured will not be covered).
The declarations page will contain information on premiums as well as the methods through which one will be required to pay them (monthly, bi-annually, annually). Several factors influence the insurance premium, including the insured’s personal characteristics (age, gender, and location), driving history (including whether or not they have a DWI/DUI or accumulated other traffic offenses), and the sort of vehicle drive by the insured and how often they use it. When filing an auto insurance claim, the deductible is the amount of money the insured must pay out of pocket before the insurance company covers the rest of the costs.
A deductible will be shown on the insured’s dec page next to the applicable car insurance coverage types, but the insured will not be required to fulfill a deductible for every component of car insurance coverage that they choose. Typical deductibles range between $100 and $1,000. Once the insurance company has paid out up to the extent of its obligation, the insured will be responsible for any remaining expenses that are not covered by the policy. If the insured has more than one vehicle, each one will be shown separately, with the amount of coverage for each vehicle mentioned separately. It is possible to purchase less coverage for one covered car while purchasing more coverage for another.
When an insured is purchasing a car insurance policy, the coverages are what they are getting, and the declarations page will identify all of the coverage categories that are included in their auto policy. In addition to listing each form of insurance coverage purchased, the dec sheet will also display the amount of insurance coverage paid for each type of coverage. This is referred to as the limits of liability, and it refers to the extent of the vehicle insurance company’s responsibility to the insured. If the insured has $100,000 in coverage for one type of coverage, it is the highest amount, the limit that their automobile insurance provider is obligated to pay out in the event of an accident. The policy limitations will be described on the insured’s declaration sheet in terms of per person limits and per accident limits, occasionally both for the same coverage type. For instance, $100,000 per person and $300,00 per accident. Examples of automobile insurance coverages are: Liability insurance, Personal injury protection (PIP), Collision coverage, Comprehensive coverage, Underinsured/uninsured motorist coverage, and Gap insurance.
Information submitted by the insured in the declaration page should be true to the best of their knowledge to avoid among others, having the policy being declared voidable or void abinitio, which will affect coverage as evidenced by the case laws below:
It was recently determined by the Michigan Court of Appeals that a vehicle insurance policy, when read as a whole and in conjunction with associated documents such as the corresponding declaration page, was sufficient to refuse a claim based on the excluded driver provision. After being engaged in an automobile accident while driving a motor vehicle insured under a personal auto policy issued to his wife, a Michigan motorist suffered Injury and got medical treatment. He delegated his right to seek payment of Michigan Personal Protection Insurance (PIP) no-fault payments to the medical provider. The medical provider, on the other hand, attempted to recover payment for PIP benefits under the assignment, but was denied by the vehicle insurance provider. The medical provider filed a lawsuit, claiming that the wounded motorist had a statutory right to obtain PIP benefits.
The motor insurer filed a motion for summary disposition, contending that the injured motorist was an excluded operator under the policy and, as a result, was unable to receive personal injury protection coverage. The plaintiff medical provider argued that the “Named Driver Exclusion Endorsement” did not expressly say that PIP benefits would not be available if the husband was the driver of the car. The Michigan Court of Appeals, although recognizing that PIP benefits are statutorily directed benefits, held that the no-fault act (MCL 500.3113(d)) offers, in relevant part, that a “person is not entitled to be paid personal protection insurance benefits for accidental bodily injury if at the time of the accident, the person was operating a motor vehicle as to which he or she was named as an excluded operator as allowed under section 3009(2).” [Bronson Health Care Group, Inc v State Auto Prop & Cas Ins Co, No. 345332, 2019 WL 5849013 (Mich Ct App, November 7, 2019)]
The court said. “a validly-excluded-driver’s ‘act of driving the insured vehicle at the time of the accident render[s] the vehicle uninsured[.]” The appellate court decided that when viewed as a whole, the auto insurance and supporting documentation, including the declarations page, listed the injured motorist as an excluded operator and complied with MCL 500.3009. (2) clearly and unambiguously. Hence, while a policy’s declarations page might grant benefits, it can also revoke them.
The term “material misrepresentation” refers to a false statement made by an insured in an insurance contract that: 1) is material to the acceptance of the risk; and 2) would have changed the rate at which insurance would have been provided or the insurer’s decision to issue the contract. A material misstatement is grounds for the insurer to rescind a policy when it has been discovered by him. When an insurer may exercise this rescission remedy is controlled by different state rules, which have been tested in litigation in various state and federal courts over the years.
In Golden Rule Insurance Company v. R.S., the insureds had applied for multiple health insurance policies from different insurance companies, paying premiums for each policy and filing multiple claims for the same expenses as they arose. One insurer objected to this activity on the grounds of significant misrepresentation, citing the fact that different insurance companies were given different mailing addresses. The insureds argued that they maintained dual residences by frequently staying at a friend’s property in a different state, and that this did not qualify as a misrepresentation under the policy terms and conditions. On appeal, the judges agreed with the insureds’ position, and the insurer was found not to be in violation of the law on these grounds.
In Mountain City Ford, LLC v. Owners Insurance Company, an employee who did not have a driver’s license was responsible for an accident in which the injured parties were awarded more than $1 million in damages. Although the at-fault employee was not named as a driver on the application, the premiums were calculated on the basis of the payroll of drivers, and the compensation for this particular employee was included in the total. As a result, the insured contended that the insurer had taken a premium in exchange for covering this driver. The insurance responded by stating that their policies did not enable them to cover an unlicensed driver, and that if they had known, they would not have issued the coverage in the first instance. The lawsuit was ruled in favor of the insurer at the trial court level.
Some insurers, inorder to negate among others, false statements, include policy language that states: “This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance, whether before or after a loss.” This is especially so following the court’s decision in State Farm Fire & Casualty Insurance Co. v. Miceli, that held that a policy that stated “This policy is void if any insured has intentionally concealed or misrepresented any material fact or circumstances relating to the insurance.” was ambiguous as to innocent co-insureds. This meant that only the insured who was at fault for the loss was precluded from recovering under the insurance.
It is important to define common terminology, reduce their definitions, and eliminate ambiguity because ambiguity could be used against the insurer in a court of law. In a certain insurance policy, common words may have just a limited set of definitions. As a reminder, defined phrases are listed throughout the policy with special formatting such as italics, boldface type, and quotations, to indicate that they have specific definitions. In general, words that are not specified are open to interpretation, but words that are defined should be carefully scrutinized for coverage inclusions and exclusions.
Definitions describe exactly what is covered by a contract. Since the meaning of a term may influence whether or not people have coverage in a specific situation, definitions are critical components of insurance policies. Some words are defined in the definitions part, and others are defined in the individual coverage sections of this document. When looking for fundamental information, the next place to look is the definitions part of the standard policy.
We will address the Definition section in more detail in the Property Damage Liability course. However, a few examples include:
- “Bodily injury” means bodily harm, sickness or disease, including death that results.
- “Family member” means a person related to the insured by blood, marriage, civil union, domestic partnership or adoption who is a resident of the insured’s household. This includes a ward or foster child who is a resident of the insured’s household.
- The term “loss” in the context of an insurance policy does not always refer to misplacement. In the context of insurance, a loss refers to a direct financial loss of value as a result of events covered by the policy.
- A collision does not necessarily have to involve slamming into something; damage produced by the upheaval or overturn of a covered vehicle is classified as collision damage under this definition. Even if the insured impacts something other than a car (a bridge, tree, or mailbox), the incident is still considered a collision. Hitting an animal or bird however does not constitute a collision, and the damage would only be covered if additional collision (OTC, also known as comprehensive) coverage had been acquired.
The Insuring Agreement
The insuring agreement is typically contained in a coverage form, which is then used to generate a policy. This is the main part of the policy. The declaration and the insuring agreement will appear on the first page of the contract in the standard fire policy, and they will be grouped together. Policies that cover more than one subject matter, such as auto insurance policies, contain an insuring agreement for each subject matter covered by the policy. The insuring agreement is a summary of the most important promises made by the insurance provider, as well as a description of what is covered in exchange for premium payments e.g a covered car accident could result in the insurer covering the costs of personal injury, property damage, and legal defense costs up to the policy limit. As a result of the Insuring Agreement, an insurance company promises to perform particular actions, such as paying losses for covered dangers, providing certain services, or committing to defend the insured in the event of a liability litigation.
There are two major types of insurance agreements:
- Named–perils coverage, in which only the perils that are specifically mentioned in the policy are covered. If a risk is not named, it is not covered by the insurance policy.
- All–risk coverage, where all losses are covered, with the exception of those that are specifically excluded from coverage. If a loss is not excluded, then it is covered by the policy. Life insurance policies are normally designed to cover all risks.
An insuring agreement is included in insurance contracts to specify exactly what is covered, because agreeing to cover all eventualities would be expensive. If an insurance company spends more money than it receives, the company may go out of business. As a result, companies must exercise caution when deciding what they will and will not cover. Most insurance firms publish their payment rates for the sake of openness and to ensure that consumers are aware of the current situation of the market. For example, if a large number of insurance companies in a certain area are forced to pay out a large number of claims, they may begin to restrict coverages and raise insurance premiums. This may occur after a catastrophic loss in specific locations — such as a fire that destroys entire cities. In order to recuperate the loss, insurance companies must tighten coverages, resulting in what is referred to as a “hard market,” in which it is difficult to obtain low-cost insurance protection. It is also possible to come across a “soft market,” in which corporations have the financial wherewithal to incorporate a wide range of coverages in their insurance agreements.
Insurance firms hire actuaries and actuarial consultants to determine what is and is not covered under their policies. These professionals analyze the likelihood of a loss occurring. These individuals have received extensive training (often over a period of 6–10 years) and employ sophisticated mathematical formulae to assess the likelihood that an insurance company will be required to make a settlement in the event of a loss. In cases where the cost of covering a specific loss is high and the likelihood of the loss occurring is high, the policy may not cover the loss in question. For example, some coastal neighborhoods may have a history of earthquakes or floods that have occurred in the area. Due to this, the actuaries will evaluate the likelihood of this happening again, and if the danger is too high, the insurance company will deny coverage for the entire area in order to protect their financial health. Despite the fact that the insuring agreement section is intended to make it clear what is covered, arguments continue to arise regarding the terms of the insuring agreement. These sometimes result in disputes in which each side asserts a different interpretation of the insuring agreement.
It’s possible that an Insuring Agreement will be referred to as “Policy Coverage” or another name that implies it is concerned with coverage. A broad overview of the scope of coverage is provided in the insuring agreements, followed by more specific exclusions and definitions sections. It is critical to read all three sections together in order to obtain a clearer idea of exactly what is and is not covered. The Exclusions portion of a policy is often found after the Insuring Agreements section, and it contains a list of things the policy does not cover. For example, damage from hazards such as floods and earthquakes is typically excluded from homeowners insurance coverage. Damage resulting from wear and tear may be excluded from auto insurance policy. Insurance policies may include a section for exceptions to exclusions in order to avoid listing every possible exclusion and coverage. Other exclusions may however exist anywhere in the insurance, despite the fact that there is most certainly a section titled “Exclusions” in the policy.
It is in this part, the conditions section, that you will find policy clauses that qualify or limit the insurance company’s pledge to pay or to perform its obligations. That implies that if one does not meet the requirements outlined, their claim may be denied by the insurer. One condition you could find in a homeowners insurance is that the insured must safeguard the property after a loss to prevent further damage. Another condition might be that that the insured must enable the insurer to inspect their property before they begin repairs on a fire damage claim. Subrogation rights, loss reporting and settlement, cancellation and non-renewal are some of the other conditions that may apply.
Examples of insuring agreements include:
- “We will pay for direct and accidental loss to “your covered auto” or any “non-owned auto”, including their “equipment”, minus any applicable deductible shown in the Declarations. If loss to more than one “your covered auto” or “non-owned auto” results from the same “collision”, only the highest applicable deductible will apply. We will pay for loss to “your covered auto” caused by…”
- “In return for payment of the premium and subject to all the definitions, conditions, exclusions and other terms of this form we agree to provide the insurance described. This insurance applies only to personal injury or property damage that occurs during the coverage period shown in the Declarations.”
- The Insurer agrees to pay to or for each person who sustains “bodily injury” caused by accident all reasonable medical, surgical, x-ray, dental, ambulance, hospital, professional nursing and funeral services expense incurred within one year from the date of the accident on account of such “bodily injury”, provided such “bodily injury” …”
Let us review some of the ISO PAP form insuring agreements to give you an understanding of how policies are written and interpreted:
- “In return for payment of the premium and subject to all the terms of this policy, we agree with you as follows:”
To review the above insuring agreement, we will have to look at the essentials of a valid insurance contract. In the case of an insurance policy, the agent is selling a contract to the customer. A contract is an agreement that is legally enforceable. It is necessary for any such agreement to meet minimum standards in order to be legally enforceable:
- An offer and an acceptance
- The contract’s parties must be capable of performing their obligations (competent)
- Its objective must be permissible under law
- The contract should be in a legal form
The procedure by which two parties engage into a contract is known as offer and acceptance; an agreement is only formed when the contracting parties have exchanged offers and accepted each other’s offers. Once an offer has been made and accepted, the party to whom the offer was made may request that the terms of the offer be changed. In this case, a counteroffer is made, which relieves the first offerer from his or her commitments under the original terms. In the course of forming an insurance contract, the buyer often makes an offer to purchase, which the insurer either accepts or rejects. Whenever one contacts an insurance agent to obtain coverage for a newly purchased automobile and the agency agrees to provide coverage, there has been an offer to purchase, and the agent has accepted the offer on behalf of his or her company. This type of acceptance is referred to as a binder. The offer might be made verbally, as in this instance, or it can take the form of a written application, as in this case. When it comes to life insurance and health insurance, the approach is different.
A contract also necessitates the exchange of consideration between the parties. The consideration demanded by each party in exchange for agreeing to carry out his or her portion of the contract is referred to as the consideration. Due to this, the value of the consideration is usually insignificant, yet the absence of consideration will cause the contract to be treated as a gift and so unenforceable.
Frequently, insurance contracts indicate that the payment is received in the form of a premium as well as the fulfillment of specific requirements mentioned in the policy. Conditions such as maintaining a specific level of risk, providing prompt notice of a loss, and providing insurers with periodic reports of exposure values are examples of such requirements. Detailed explanations of the conditions will be. As a result, consideration may not always entail monetary compensation.
Another requirement for a contract is that the parties to the contract must be competent persons.
The majority of people are competent to enter into contracts, however there are certain exceptions. Persons who are mentally ill or drunk are not considered to be competent. Minors may engage into contracts, however such contracts may be voided if the minor is under the age of majority (or terminated). Upon reaching majority (eighteen years old in some states, twenty-one years old in others), the young person will have the option to accept or reject the contract. If the contract is ratified, it will have the same legal standing as if it had been originally entered upon by competent parties. A minor who enters into an insurance contract, on the other hand, has the right to void the contract during his or her infancy or when he or she reaches the age of majority. The ratification of a policy at the age of majority can be performed either via oral or written communication, or explicitly or implicitly by continuing the policy. Some states have legislation allowing kids as young as fourteen years old to engage into legally enforceable life insurance contracts on their own lives.
A contract must have a lawful purpose, which means that it cannot be used for the conduct of an action that is illegal. Enforcement of the contract would be against public policy if it did not meet these requirements. For example, an insurance contract to cover losses caused by the insured’s own arson would be unenforceable because it would be illegal and contrary to public policy, and hence unenforceable. Contracts can be made orally or in writing; nonetheless, they must adhere to a precise legal form or language that is appropriate for the situation. State-by-state variations in legal form are possible. As previously stated, some insurance contracts are verbal in nature, at least at the outset. The majority of states do not have legislation that specifically prohibits oral insurance contracts. It is required however that some contract forms (the written version of standardized insurance policy clauses and attachments) be approved by the state prior to being sold. The nature and overall content of some policies, in addition, are prescribed by legislation. Certain features in life and health insurance contracts are required by law in the majority of states. As a result, although certain contracts may be oral, insurance contracts must be in writing for the most part, and they must be in compliance with the laws of their respective states.
From the foregoing, we can deduce that the insuring agreement features a consideration to the contract, ie the insured’s consideration is payment of premiums and adherence to all the terms of the policy, and the insurer’s consideration is providing coverage to the insured. The payment of premiums and adherence to policy terms are therefore pivotal in addressing if coverage can be denied as demonstrated in various case laws.
A jury found that an insurer properly denied an insured’s claim when the insured failed to demonstrate to the satisfaction of the jury that premium payments were made prior to the accident. The Court of Appeals of Texas affirmed the jury’s finding in Hartland v. Progressive County Mut. Ins. Co., 2009. The policy period ended at May 9 at 12:01 a.m., and the insured’s wife got into an accident at 8:00 a.m. on May 9. It was alleged by the insured that he sent the renewal payment on May 8, but the insurer provided evidence indicating the payment was postmarked May 11. The payment was received by the insurer on May 16, and the policy was renewed by the insurer on May 18, making the policy effective as of May 12.
The insured claimed that “the parties formed a contract under the original terms of the renewal policy when appellee retained payment on the forfeited policy” after the jury answered ‘No’ to the question of whether the insured mailed his renewal payment prior to May 9 at 12:01 a.m. he insured’s argument, which the insurer argued was an untimely waiver argument, was rejected by the Court of Appeals. “When the initial policy expired, the relationship between appellant and appellee had ended according to the terms of the initial policy…. In this case, there was no policy in existence. When appellant paid the renewal premium, appellee issued a new policy effective on the date of payment….appellant did not forfeit the right to an existing policy by not paying the premium and then resurrect it when appellee accepted the premium; the policy expired and a new policy did not begin until appellant paid the premium.”
A husband and wife were notified by mail that their automobile insurance policy would be cancelled on November 1 because they had failed to pay the premium that was due on October 9 in Zilka v. State Farm Mut. Auto. Ins. Co., 291 Ga. App. 665 (Ga. Ct. App. 2008). On November 6, the husband mailed the premium, and on November 7, the wife was involved in an accident. When the insurer received the premium on November 8, it was able to restore the policy, which coincided with the day on which the insureds notified their insurance agent of the accident. In its decision, the appellate court upheld the trial court’s finding that there was no coverage on the date of the accident, stating that “State Farm reinstated the policy upon its receipt of the premium payment on November 8, 2000, but nothing in the policy required that the reinstatement be retroactive to the date of cancellation, and the notice of cancellation specifically provided that there would be no coverage between the date of cancellation and the date of any reinstatement. Accordingly, State Farm and Rhinehart have demonstrated that there remains no issue of material fact as to whether the policy issued to Dina Zilka had been effectively cancelled when the loss occurred on November 7, 2000.”
The insureds also maintained that the insurer could not deny coverage since it had previously taken at least three prior past-due payments from the insureds. The court stated that the insureds had failed to provide evidence “that State Farm ever reinstated the policy after it had sent a notice of cancellation, as is this case here, or that any reinstatement following cancellation was without interruption of coverage. Thus, there is no evidence that the parties departed from the terms of the contract insofar as cancellation and reinstatement such that State Farm was required to give prior notice of its intent to adhere to the policy terms…. Furthermore, even if the parties had mutually departed from the terms of the policy, State Farm provided Dina Zilka advance written notice of its intent to expressly rely on the policy terms based upon her failure to timely pay the insurance premiums in this instance; specifically, that the policy would be cancelled effective November 1, 2000, and that any reinstatement would not provide coverage between the date of cancellation and the date of reinstatement.”
- “A. We will pay damages for “bodily injury” or “property damage” for which any “insured” becomes legally responsible because of an auto accident. Damages include prejudgment interest awarded against the “insured”. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgments or settlements. We have no duty to defend any suit or settle any claim for “bodily injury” or “property damage” not covered under this policy.”
This insuring agreement is found in PART A – LIABILITY COVERAGE.
The definition of “insured” in the liability section of the PAP, provided who qualify to be an insured:
“1. You or any “family member” for the ownership, maintenance or use of any auto or “trailer”.
2. Any person using “your covered auto”.
3. For “your covered auto”, any person or organization but only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this Part.
4. For any auto or “trailer”, other than “your covered auto”, any other person or organization but only with respect to legal responsibility for acts or omissions of you or any “family member” for whom coverage is afforded under this Part. This Provision (B.4.) applies only if the person or organization does not own or hire the auto or “trailer”.”
According to second definition, if the owner of the car lends someone the covered auto to transport children to a church picnic, that person will be considered a covered person under the policy. That person’s liability in the event of an accident on the way to the picnic will be covered by the insurance policy. It will also, according to the third definition, cover any liability that the church may incur as a result of the accident if any of the children are injured. However, where one borrows the other person’s car to take the children to the church picnic, they will be covered under the first definition, and the church’s responsibility for any accident they might have is covered by the forth definition. In both instances, the fact that the driver is a covered individual results in coverage for the organization. You should be aware that it makes no difference who is driving the insured vehicle; provided the driver has permission to drive the automobile, he or she will receive coverage under the policy. The car’s coverage is the first insurance company that pays for the accident. If the responsibility is greater than the insurance limits, the other driver’s policy will cover the remainder of the liability.
The use of standard construction criteria is required in order to determine who is covered by the insurance policy under consideration. Insurance companies have the authority to define who is and is not an insured under a policy, and the parties to the insurance contract make this determination during their contract talks. The policy’s coverage will only extend to those entities that have been specified or defined as insured parties by the policy’s terms and conditions. Since the insurance company crafts the policy, it is responsible for explicitly identifying who is covered and who is not covered under the policy terms. Where there is ambiguity in the policy, the policy is usually interpreted against the maker ie the insurance company, therefore, an insurer must be prudent in communicating who will or will not be covered.
As long as there is no evidence of fraud, an insured may be insured under any name. The onus of demonstrating that he or she is covered by the policy rests with the individual requesting coverage. If the individual seeking coverage is not identified, described, or otherwise identifiable, no coverage will be provided to that person. A major error (i.e., one that is more than a simple typo) may need contract reformation before a coverage lawsuit can be filed in connection with the coverage issue.
In the case of Omni Insurance Group v. Poage, two parents shared joint custody of their kid, who lived in two places at the same time. The son was named as an insured on the father’s motor insurance policy, but he was not named as an insured on the mother’s policy. An accident occurred while the boy was behind the wheel of his mother’s vehicle. The mother had indicated that there were no inhabitants of the family who were not disclosed. It’s important to note that the mother’s policy did not provide coverage for any residents who were not included on the policy’s declaration page. The claim was denied by the insurer because of the misrepresentation. On the basis of summary judgment, the district court found in favor of the insured. The insurer appealed, according to the appeals court, summary judgment was not appropriate in this instance since there were important facts in dispute. The appeals court remanded the case for trial. It appeared that there was a genuine dispute as to whether the boy could be deemed a resident of the mother; if this was the case, the rescission remedy might be suitable and permissible. If not, since the son was driving the automobile with the mother’s permission, it would be reasonable to believe that the insurance policy would cover the incident.
An umbrella policy in the case of Hingham v. Mercurio required the family to include all motor vehicle operators on the application. The application did not include a son who was the owner of a separately insured automobile. The cost of the coverage would have risen by $25 if he had been included. A serious car accident occurred as a result, with the son at the wheel of a friend’s vehicle at the time. Misrepresentation was cited as the reason for the insurer’s decision to cancel the coverage. It was suggested by the plaintiffs that they were confused whether or not to list their son because he had his own underlying auto policy, and that they relied on the agent’s advice in not listing him as such. “Household members and all operators of vehicles as required by the company” was the language used in the application. The previous portion of the policy called for information on household vehicles. The court determined that there was ambiguity in the contract regarding whether it was calling for operators of home cars or whether it was asking for operators of any vehicle. Furthermore, the court held that the contract’s “as required by company” phrase provided little explanation, but it did add relevance to the testimony that the family spoke with the agent on how to respond. As a result, the court ruled in favor of the insured and ordered the insurer to pay the claimant. Following an appeal, the judgement in favor of the insured was upheld.
In the liability coverage Section described above, it is stated that the cost of legal defense is not included in the limitations of liability coverage. In many cases, defense expenses are significant, making this a substantial advantage of having liability insurance. If one is found to be liable, the insurer pays the plaintiff(s) on their behalf up to the limit(s) of liability set forth in the policy. When that limit is reached, that is, it is paid in award or settlement to third-party claimants, the insurer’s obligation to defend the insured is terminated. If the insurer determines that it is more efficient to settle claims without the insured’s approval, the insurer may do so. Many instances are avoided in court as a result of this move, which also reduces insurance claim expenses. It can, however, result in discontent if the insured did not anticipate having to settle the claim. Liability coverage for open risks is provided by the terms of this insuring agreement. As a result, unless specifically excluded, all occurrences that result in automobile liability are covered. Some exclusions relate to unprotected individuals, while others apply to cars that are not covered by the policy.
As explained in Southern General Ins. Co. v. Holt, 416 S.E.2d 274 (Ga. 1992), the Supreme Court of Georgia held that where an insurer has full knowledge of an insured’s liability and damages in excess of policy limits, the insurer may be liable for bad faith damages if the insurer’s failure to settle within policy limits results in the insured being subject to a judgment in excess of policy limits. In addition, the Court in Holt stated that while choosing whether or not to settle a claim within policy limitations, the insurer must give equal attention to the interests of both the insured. A recent decision by the Supreme Court of Georgia clarified that an insurer’s responsibility to settle arises only when an aggrieved party makes a valid offer to settle within the insured’s policy limits.
In Rova Farms Resort v. Investors Insurance Company of America, 323 A.2d 495 (N.J. 1974), The Supreme Court of New Jersey ruled in that case that an insurer’s bad-faith failure to settle a claim within policy limitations might result in the carrier being liable for the whole judgment, including monies in excess of the policy limits. A Rova Farms demand letter is a letter submitted to the insurance company by the claimants or the insured, requesting that the claim be settled within the policy limits.
It is essential to determine if an insurer has used good-faith business judgment in selecting whether or not to go to trial in a given case in order to determine whether or not it has potential excess exposure. A good-faith evaluation, according to the Rova Farms Court, should include “consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.”
N.B On exclusions, and as a continuation to this class, we will review the insuring agreement found in PART A – LIABILITY COVERAGE under “EXCLUSIONS” in our Property Damage Liability course:
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