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Automobile Liability Insurance

April 13, 2006

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A small business owner may need to purchase specialized liability insurance to cover gaps in a comprehensive general liability policy.

States generally mandate that drivers carry automobile liability insurance, subject to minimum policy limits, but this mandate does not extend to automobile property insurance covering damage to the insured's own vehicle. In short, states are concerned only about drivers having insurance to cover damages caused to other persons and their vehicles, and not coverage for their own personal and property damages resulting from an automobile accident.

Typically, the minimum policy limit is stated in terms of the liability for personal injuries caused to other persons, but the small business owner also should remember that separate limits in a liability policy will apply to property damage caused to another party. Usually, states impose a smaller minimum liability limit for property damage, although some states may have no minimum requirement at all for this type of liability coverage.

In particular, the small business owner should consider the following issues when purchasing an automobile liability policy:

Split-Limit v. Single-Limit Policy. Automobile liability coverage for personal injuries may be issued on either a split-limit or single-limit basis. The split-limit policy provides for two separate limits: one that applies to each individual injured and a second overall limit that applies to each accident. In contrast, a single-limit policy, as the term implies, has one limit per accident. The single limit may be recovered entirely by one individual or divided among all of the injured parties. Generally, a single-limit policy offers better protection.

For example, a $20,000/$40,000 split-limit policy would pay a maximum of $40,000 for personal injuries, per accident, with each injured individual entitled to collect a maximum of $20,000. A $40,000 single-limit policy would pay a maximum of $40,000 for that same accident, with any one individual entitled to collect the entire policy limit. Generally, a single-limit policy is superior to a split-limit policy, provided the single limit is equal to, or greater than, the maximum limit per occurrence in a split-limit policy. In this example, if there is a single-limit policy ($40,000) and an individual suffered $40,000 of damages, the policy would pay all of the damages. By contrast, if there is a split limit policy ($20,000/$40,000), the injured individual could collect only $20,000 of his damages from the policy, and the responsible driver (i.e., the insured party) would have to personally pay the remaining $20,000 of the damages.

State-Mandated Minimum Liability Coverage. Personal injury lawyers all agree: Minimum liability coverage, as mandated by state law, is woefully inadequate. While this may seem self-serving, virtually every defense lawyer would agree that state-mandated minimum liability coverage for automobile insurance is insufficient. Simply put, seemingly small cases can result in judgments of several hundred thousand dollars.

Generally, in negligence cases, the civil litigation system works against defendants, making it much more likely that a negligence lawsuit will be successful and that monetary damages will be significant.

As a rule, the small business owner should consider a single-limit policy with a minimum limit of $300,000. A split-limit policy should have a minimum limit of $300,000, per individual, and thus a higher overall limit.

Work Smart Remember, although you may be tempted, don't drive with only the state-mandated minimum amount of liability coverage for personal injuries caused to others. Get yourself a single limit policy with a minimum policy limit of $300,000.

Uninsured/Underinsured Motorist Coverage. Many other drivers are uninsured in violation of state law or underinsured (i.e., they carry liability insurance, but with an inadequate policy limit such as the state-mandated minimum).

Uninsured/underinsured motorist coverage allows the insured to make a claim for his own personal injuries, against his own policy, in the event that the responsible driver is uninsured or underinsured. Thus, this type of coverage is not concerned with liability to other parties. It also is limited to damages for personal injuries and thus is not concerned with liability for property damage.

The best time for the small business owner to consider the policy limits for uninsured/underinsured motorist coverage is when he is considering the limits for his liability coverage. After all, both liability coverage and uninsured/underinsured motorist coverage will pay for personal injuries. The question then really is the same: What is the dollar amount of damages for personal injuries that could result from an accident?

Thus, as a general rule, the small business owner should purchase uninsured/underinsured motorist coverage in the same amount as his liability coverage. Thus, a policy with a single limit of $300,000 should also contain uninsured/underinsured motorist coverage in the amount of $300,000.

States differ as to when and exactly how underinsured motorist coverage applies. Generally, the insured must first recover the entire policy limit from the responsible driver before he can make an underinsured motorist claim against his policy. Thus, if such an underinsured motorist claim were being considered, it would be a mistake to accept less than the full policy limit of the other driver's policy as a settlement.

In some states, the amount of the underinsured motorist coverage is the stated policy limit for this coverage, less the other driver's policy limit. Thus, a driver with $300,000 of uninsured/underinsured motorist coverage, really only has $280,000 of coverage when the responsible driver has a policy limit of $20,000. In other states, the limit for this type of coverage is the stated limit, without subtraction for the responsible driver's liability coverage.

Finally, in some states, it is possible to aggregate all uninsured/underinsured motorists coverage for all of your vehicles. Usually, where this feature is available, it requires the payment of an additional premium.

Work Smart Don't neglect uninsured/underinsured motorist coverage. Too many other drivers are either uninsured or carry only the minimum amount of liability coverage for personal injuries that is mandated by state law. A victim of a serious auto accident may legitimately suffer personal injuries that amount to hundreds of thousands of dollars of damages. Thus, at a minimum, the small business owner should carry uninsured/underinsured motorist coverage in an amount equal to his liability coverage. Again, this type of coverage is limited to personal injuries that the injured person sustains and does not apply to property damage. Note that generally, insurance companies will not raise a driver's rates for making an uninsured/ underinsured motorist claim, because the insured is not the party who is responsible for the accident.

Automobile Liability Coverage for Property Damage. As is the case with respect to liability policies in general, separate policy limits for property damage will apply in an automobile liability policy.

Too often, liability limits for property damage are not the product of careful deliberation because the primary attention is focused on liability coverage for personal injuries. The result usually will be inadequate liability coverage for property damage.

Consider that many vehicles today cost $30,000 to $50,000 (or more). In addition, as a result of an automobile accident, extensive and costly property damage may be caused to public and other forms of private property, including buildings, utility poles and lines, traffic lights, etc. Thus, the small business owner should purchase an automobile liability policy with a minimum limit of $50,000 for property damages.

Automobile insurance is an example of a single policy capable of providing both liability coverage (for personal injuries and property damages caused to other parties) and property coverage (for damages to the insured's own vehicles). The small business owner definitely should also protect his own vehicles against loss by obtaining property coverage in the form of collision and comprehensive protection. The business owner with no health insurance should also consider adding medical coverage for his own injuries.

Work Smart An automobile liability and property policy will cover the named insured and other drivers who do not drive the vehicle on a regular basis. Thus, if the owner of a vehicle (and the named insured under the policy) lends the vehicle to a friend in an isolated instance, the policy would continue to apply. In other words, the friend would be driving under the owner's policy. Where someone will be driving the vehicle on a regular basis, they will have to be added to the policy as an insured party. If this is not done, insurance coverage will not apply. Insurance coverage and liability for the accident are two different issues. Insurance coverage is controlled by the insurance contract. Personal liability is controlled by tort law, which has been developed by the courts and supplemented by state statutes. Generally, a business entity will be held liable for an accident caused by one of its employees, because the doctrine of respondeat superior will apply. In contrast, an insured party will not have liability for negligence committed by another driver, who is also insured to drive the same vehicle, if the responsible driver is not the employee or agent of that party. Thus, technically, a husband would have no personal liability for the negligence of his wife while she was driving a vehicle for which they share insurance (although, of course, the joint nature of their assets would present a problem). Similarly, an individual who lends his vehicle to friend, in an isolated instance, will not be held liable for the friend's negligence, as there is no employment or agency relation between the two parties. Thus, in this case the owner's insurance would cover the accident in accordance with the insurance contract, but the owner of the vehicle would have no personal liability for the loss due to the absence of an employer-employee or agency relationship. Finally, it must be noted that if the owner commits an act of negligence that was separate from the accident itself (e.g., allowing his friend to take the vehicle even though he was intoxicated or otherwise unqualified to drive the vehicle), the owner may be held liable for his own act of negligence.

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