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What Happens to the Public When Consumers Buy Cheap Auto Policies

Author: Bill Wilson
On the morning of April 12 at 5:14 a.m., the driver of a car crashed into a brick pillar and privacy fence owned by a homeowners association. Estimated cost to repair was $2,500. The HOA’s insurance covers the damage but has a $1,000 deductible.
The auto insurer denied the claim because the named insured was not driving. The vehicle had been loaned to a friend who was driving at the time of the accident. This was not an ISO PAP. The ISO PAP includes within the definition of “insured” any permissive driver. However, the policy in question is from one of those low-cost auto insurers that you see advertising heavily on local TV. Indeed, their policy only covers individuals named on the policy.
In some states, statutory or case law requires a policy to extend at least the state’s minimum financial responsibility limits to permissive operators, but not in this case. There was no coverage.
We have been writing about this type of situation for some time. In our “Price Check” article we give examples of exclusions not found in the ISO PAP or other mainstream auto policies. In fact, we’ve devoted an entire section of the VU to the whole commoditization of insurance issue.
One might say, well if you buy one of those discount auto insurance policies featured in the heavy advertising the permeates the media, you get what you pay for. However, this claim illustrates that the issue goes far beyond the buyer of the insurance.
Auto liability insurance exists to protect the general public from negligent drivers. When, in order to compete solely on price, insurers strip down coverages to a bare minimum, the general public is placed in position of much greater risk of being injured or damaged by inadequately insured drivers.

What if the driver that damaged the HOA’s property had instead ran off the road and killed someone or several people? For a policy like this, unless you can make a case for vicarious liability of a named insured (e.g., negligent entrustment of a vehicle to someone with a poor driving record), the injured parties likely have little or no recourse.
There was a time when ISO policies represented industry standards that were more often than not minimum or middle of the road guidelines that insurers quite often exceeded in coverage and options. Sadly, today many ISO forms represent the Cadillacs of coverage, whether we’re talking about personal auto or CGL policies.
Like statutory minimum limits standards, should states consider minimum coverage standards to protect the general public? Isn’t this the primary responsibility of regulators? How are they serving consumers if they approve policy forms that provide very restrictive coverage? As outlined in a previous VU article, the continuing race to the lowest priced auto policy is only going to hurt the innocent.
Last Updated: July 6, 2015
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