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Another Personal Auto Coverage Dilemma…Are You Up to the Task?

Author: VU Faculty
Question"This issue comes up every once in a while and causes a bit of confusion. Scenario one: PAP with husband and wife as named insureds and also two adult children as listed drivers on the policy. There are four vehicles covered on the policy. Three of the four vehicles are titled to the husband. The remaining vehicle is titled to one of the adult children, who is married and lives in a different household and has the vehicle in their possession. Is this vehicle covered by the insured's PAP? Scenario two: One of the remaining three vehicles (titled to the named insured husband) is in the possession of the other adult child who is also married and living at a different address. Is this vehicle covered by the insured's PAP?"
Answer?It is remarkable the number of variations we get in how vehicles are owned and insured. Search the VU for "auto coverage games" and it will bring up two articles and they link to several other articles. While we hate generalities, in general, the owner of a vehicle should insure it. Let’s see if we can recap this situation: 
An ISO PAP is issued to mom and dad for 4 autos, 3 owned by dad and 1 owned by an adult son. Mom and dad drive 2 of the autos. The adult son that owns one of the autos drives it and lives in a separate household. The 4th auto is owned by dad but driven by another adult son who lives in his own, separate household. Are there any coverage problems? 
Since we’re all told that auto insurance is a commodity, your friendly online lizard or box store clerk should be able to answer this question, right? When an uncovered fatality arises from an auto accident, how helpful do you think Jake at State Farm in his khakis is going to be? THIS is why so many people need an experienced, knowledgeable agent to counsel them. Are YOU such an experienced agent? When was the last time you studied the ISO PAP in depth enough to answer this question?
The following are some faculty comments regarding this specific scenario. Take some time and review the 2005 ISO PAP, reach a conclusion, then compare your answer to the comments below. Do you represent insurers that don’t use the ISO PAP? If so, how would their auto programs best handle this situation? THIS is what continuing education is all about, not spending 30 minutes getting 3 hours of CE on an online course that has little or nothing to do with what YOU do every day and which does little or nothing to prepare you to answer questions like this in order to properly insure your customers.
Faculty Response.... 
The vehicle owned by the adult child should be on a separate policy. The auto owned by dad can stay on his policy with the child listed as an operator and showing the garaging location. The autos are covered but the children have no coverage for non-owned autos, no immediate coverage for newly acquired autos, and no transportation expense coverage. I believe a policy should always be written in the name of the vehicle owner.
Faculty Response.... 
There’s definitely an underwriting problem. Most companies are not comfortable with the insured having vehicles living in another household. If the garaging addresses are shown properly on the policy, the company is more likely to be aware of the issue. Companies also require disclosure of all drivers and most will not allow vehicles owned by another person on an insured’s policy. Agents have a duty to disclose these things to the company. That said, there are some companies that may not have an underwriting concern as long as all drivers are disclosed.  
For autos owned by people living in other households there are several potential coverage problems. If the vehicle is in another state, the policy may not comply with that state's coverage requirements. Although most PAP’s grant liability coverage to permissive users, some now limit Liability coverage for them to financial responsibility limits. The adult children don’t get any coverage from their parents' policy for driving or getting hurt in borrowed and rented autos. Some companies will deny a physical damage claim for loss to an auto that’s not owned by the policyholder. There have even been cases where a company has denied coverage for an insured who fraudulently showed an incorrect garaging address to gain a rating advantage, as well as cases where the insured failed to disclose all operators on an application.
Faculty Response.... 
Whoever owns the vehicle should have a policy in their name insuring it. How family members and permissive users are covered is determined by the policy. Family members have far better coverage than permissive users so, unless a relative who has regular use of the auto lives in the household of the named insured, they have significant coverage gaps if relying on the named insured’s policy for coverage including, for example, a lack of coverage for most nonowned autos, newly acquired autos, and more. If you own an auto, get your own policy.
Faculty Response.... 
I’m confident I can answer with a firm “maybe” to both questions. As always, the answer depends on the particular forms used, and that means the basic coverage forms and all endorsements. It also may depend on what application information was provided to the insurer, and if the relevant facts have been portrayed accurately and completely. Sometimes, it appears that there is a game of hide-and-seek between insurers and insureds, with insureds failing to disclose little wrinkles in the situation that may have a material effect on the policy issuance, and the insurer slipping in innocuous looking endorsements that can wipe out major pieces of protection.
The safest approach is to write down an explanation of these situations on a document that also says, “We want to be covered for these exposures. Let us know it these situations cause any gaps in coverage,” and send that to the agent. The knowledge of the agent is imputed to the principal, which is the carrier. You should find out quickly what the carrier thinks about your family situation relating to auto use, and you will either be in good shape, or you will need to take other steps to get appropriate coverage.
Faculty Response.... 
The confusion is which policy are you referring to? ISO's or a company specific form. Impossible to comment without more information. Sorry.
Faculty Response.... 
Each vehicle owner group should have their own PAP that lists all of their vehicles to receive proper coverage for newly acquireds, substitutes, rental cars, med pay, UM, UIM etc. A PAP is designed for a family that lives together under one roof.
If these folks want to be insured under one policy and live in separate households then on the application and policy name every one of them as a Named Insured and schedule each of their vehicles with the correct garage address. If the underwriter will write it that way and they want to share limits with each other, then you will reduce coverage gaps though some still exist. Likely the underwriter will not do that and would recommend separate policies for each named insured grouping under each roof.
Faculty Response.... 
The NC PAP form is not standard ISO. However, in the first scenario the car would probably be a covered auto because it is listed on the Dec Page and the son and other related drivers would possibly be insureds as permissive users but would not meet the definition of “family members.” This would probably result in no excess coverage for borrowed or hired autos.
In the second scenario, coverage would be similar to that described above – covered auto and permissive users but not “family members.” NC does recognize the “family purpose doctrine.” If it could be applied in this instance, the father and mother could be vicariously liable for the use of the auto. So the parents could be exposed to liability for the negligence of one of the permissive users. While the permissive users would not be “family members” by policy definition, they may still be considered family members by common law.
Faculty Response.... 
Short version: Both scenarios present numerous coverage gaps. Now that agent is aware of this fact, a proper rewrite is strongly advised. Here are just a few comments on this situation, but not every coverage gap is analyzed - although it would make for a good 30-minute segment in a seminar.
Scenario #1: Auto titled to non-resident child #1, auto is declared on dad's PAP, and is in possession of non-resident child. 
  1. Listing drivers on the ISO PAP has no effect on coverage. This is for underwriting and rating purposes only. Some non-ISO PAPs have exclusions for unlisted resident drivers, but in this situation, that exclusion seems moot, since the adult child resides elsewhere.
  2. This adult child and his/her resident family members "probably" have coverage from the parents' PAP while occupying that specific auto, but have no other coverages from the parents' PAP, since they are not resident family members. The reason the coverage from the parents' PAP is probable is that the insurer will be none too happy that a non-owned auto is declared on the parents' PAP. However, since the premium has been paid on that auto, there might still be coverage, since it qualifies as a "your covered auto." But any claims could involve litigation against the insurer. In such case, if an adverse decision is made, the insurer might sue their agent for not informing the insurer of this arrangement. I think coverage for physical damage is highly unlikely, since the parents have no insurable interest in the auto titled to the non-resident child.
Scenario #2: Auto titled to dad, declared on dad's PAP, but in possession of non-resident child #2. 
  1. Coverage for permissive users and occupants of this auto are covered by the parents' PAP. In essence, parents have "loaned" one of their cars to one of their kids. However, since the kid and his family members are not residents of parents' household, they have no coverage for themselves once they are out of this auto.
  2. If there is a PAP in the adult kid's household (the spouse perhaps has his/her own PAP), that PAP will not provide coverage for a loss involving dad's auto, since it is "furnished or available for regular use."
  3. Since dad is the legal owner of the auto, he almost certainly has liability exposure for the use of that auto, by any permissive user. For example, if the auto is loaned by his kid to a neighbor, dad as owner is probably going to be named in the lawsuit if the neighbor has an at-fault accident. From an underwriting perspective, the insurer must be made aware of this arrangement. 
Faculty Response.... 
If someone is furnished an auto for their regular use but is not a resident of the household of the named insured on the policy, they need to cover that use under their own policy. That can be accomplished by transferring title to that person and having them get their own PAP or if they have an existing PAP (or buy a Named Nonowner policy) they might be able to get the Extended Nonowned Coverage for Named Individual endorsement (I’m going from memory here, so don’t hold me to this…just saying), but that still leaves coverage to be provided for the vehicle by the owner.
Just because the son’s auto is declared on the father’s policy doesn’t mean it’s covered, especially for physical damage. There was a TN court case some years ago under the ISO PAP in effect at that time where a husband and wife divorced and she moved out with the car she usually drove. Damage to the vehicle in a collision was denied by the insurer and upheld by the court on the basis that the policy covered “YOUR covered auto” and “your” refers to the named insured and RESIDENT spouse. In this case of a nonresident son, he is not a “you” or “your” under his father’s policy.
Faculty Response.... 
Why worry about the coverage gaps (too numerous to mention) when you can easily write this correctly:

Situation #1: The car that is titled to the adult child who resides elsewhere should be insured on a PAP by that child.

Situation #2: Title the vehicle driven by the child in the child’s name and have them insure it on a PAP.

Problem solved. E&O exposure probably greatly reduced.
Last Updated: June 19 2014
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