AUTOMOBILE INSURANCE

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The purpose of insurance is not to avoid or eliminate risk, but to transfer risk. So, a formal definition of insurance would be: A contract or device for transferring risk from a person, business or organization to an insurance company that agrees, in exchange for a premium, to pay for losses through an accumulation of premiums. Risk is the chance or uncertainty of loss.

The first automobile liability insurance policy was issued in 1897 to a Westfield, Massachusetts mechanic, Gilbert J. Loomis, who had built himself a one-cylinder car and founded the Speedwell Motor Car Co. in Dayton. He bought a $1,000 policy for $7.50, which, when compared with today’s premium for $1 million of auto liability and “umbrella” protection, was astronomically expensive. A year or so later, a doctor in Buffalo purchased a public liability and property damage contract to apply to an electric car that he sometimes used to make his rounds.

These early policies for automobiles or horseless carriages were modeled on “teams” insurance - insurance that protected the owner of horsedrawn carriages against liability for injuries to his driver and to the public caused by the horses or the carriage. Since those early days, automobile insurance, like the vehicle itself, has come a long way. It now includes seven major coverages as well as some minor ones such as towing and labor costs. In the process of expanding coverage, automobile insurance has become much more complex. And the need to deal with every possible eventuality in unambiguous language has resulted in intimidating lists of what is covered and what is excluded and definitions of what is meant by certain terms.

Even after reading the policy from cover to cover, the average policyholder may still be confused as to which part of the policy will respond in a particular set of circumstances. If a car is damaged in a multiple car accident, for example, will the policyholder’s own insurance company or the company of the other drivers deemed at fault pay for the damage? When does the other driver’s liability policy apply? If a person is injured in an auto accident, determining the sources of compensation may be even more complicated. Depending on state law, the circumstances of the accident and whether the person is covered for medical care by other insurance policies, the cost of medical treatment may be paid by the no-fault portion of a policy, uninsured motorist coverage, the medical payments section (in a state with a traditional tort liability system for auto insurance), a group health policy, workers’ compensation insurance or Medicare. With so many complexities to master, no wonder many people know more about the inner workings of their automobile than the insurance policy that covers it!

There are two major automobile exposures for which individuals seek protection. First, people want to be protected against their liability in case they injure someone or damage someone else’s property through the use of their automobile. Second, people want protection for damage to their own automobile in case the auto is damaged in an accident or suffers others types of damage, such as fire or theft.

The personal Automobile policy consists of a Declarations page and a policy form. The policy form contains four separate coverages, each with its own insuring agreement, exclusions and conditions. They are:

* Part A---Liability Coverage

* Part B---Medical Payments Coverage

* Part C---Uninsured Motorists Coverage

* Part D---Coverage For Damage To Your Auto (Physical Damage).

Unlike most other items of exposure, the value of a single automobile tends to fall within fairly narrow limits. Also, certain forms of physical damage are subject to a relatively high frequency of loss. As a result, the automobile exposure must be considered in relation to other values at risk. For example, to most families the value of the automobile is second only to the value of the home as an asset. On the other hand, an automobile of similar value owned by a large business firm would be relatively less important. Another consideration is the fact that automobiles, especially in the early years, depreciate at a fairly high rate with the result that the total value is decreasing but the cost of repairing partial losses remains nearly constant (1).

Automobile physical damage insurance recognizes a division between high- and low-loss frequency exposures. Perils that have low frequency such as fire and flood are usually written on a full coverage basis. Collision and upset, which occur more frequently and cause many small losses, are nearly always written using a deductible. In this way, the inevitable nicks, scrapes, and scratches are regarded as a maintenance cost.

Automobile insurance is usually a package made up of several kinds of coverage. One standard package includes six basic types of coverage: bodily injury liability, property damage liability, medical payments insurance, uninsured and underinsured motorist coverage, collision and comprehensive coverage. Liability laws require a driver to pay for injured caused to other people or their property by the negligent operation of a vehicle. Liability insurance covers the costs of such injuries and damage up to the limits specified in the insurance policy.

* Bodily Injury Liability. Bodily injury liability insurance pays for claims against the policyholder resulting from injuries to pedestrians, persons riding in other cars or passengers in the policyholder’s car. If a policyholder should accidentally kill or injure someone, he or she can be held liable under the law for hospital and medical bills and many other items, such as the costs of rehabilitation and long-term nursing care, pain and suffering of the injured person, or the victim’s lost earnings or potential future earnings. If an injury is serious or fatal, these expenses can run into many thousands of dollars. Bodily injury liability coverage is designed to pay these expenses. It also pays legal expenses involved in defending the policyholder against a lawsuit. Coverage applies when the car is driven by the policyholder, resident family member or anyone driving with the policyholder’s consent. The policyholder and resident family member are also covered while driving someone else’s car with permission.

Liability law dictates that person A is responsible for paying the cost of injuries to the person or property of person B when A caused B’s injuries through negligence. If A runs a red light and his car crashes into B’s car, most people would agree that A is clearly at fault for B’s injuries and damage to B’s car. Let us suppose, however, that there are no witnesses to the accident, and A states that he believes the light was green. Or suppose that the light was out of order, or that there was no light at the intersection, or that A ran into B because he swerved to avoid a child who ran into the street. Suppose both A and B are injured and each says the other was at fault. Liability law and bodily injury liability insurance both require that fault be established. When neither party is willing to admit fault, which frequently happens, fault must be determined by the courts.

In many cases, the insurance companies of both A and B will hire lawyers and the case will be tried before a judge and jury who will decide who was at fault after hearing various testimony. Needless to say, this is a time-consuming and expensive process.

Because of the enormous legal expenses and delays in using the courts to establish fault in traffic accidents, a number of states have enacted some form of so-called “no-fault” law for bodily injury (but not property damage) liability. In general, these laws provide that for damages below a certain dollar amount (for example, injuries costing $1,000 or less to treat), or a certain degree of seriousness, each driver’s own insurance company will pay the cost regardless of who was at fault. This avoids the expense and hassle of going to court for relatively minor claims.

In every state, however, the fault system is in use for serious injuries or death, and drivers need bodily injury liability insurance to protect them from the cost of these claims and to defend them against allegations of negligence.

* Property Damage Liability. Property damage liability insurance pays for legal defense and claims against the policyholder resulting when the policy owner’s car damages the property of others. Often the property is another car, but coverage includes damage to such property as personal belongings, trees, buildings, lamp posts and telephone poles as well. The policyholder and resident family members are covered while driving their own car or someone else’s car with permission.

* Uninsured Motorist (UM) Coverage. Sometimes at-fault drivers who injure other people or property have no insurance to cover the damage they have done and also lack sufficient personal assets to cover the cost. In these situations and also in hit-and-run accidents, uninsured motorist coverage pays for bodily injuries and, in some states, for car damage. The coverage provides compensation not only for such out-of-pocket expenses as medical costs, but also for non-economic damages such as pain and suffering. In most states the coverage also pays when the driver at fault has auto insurance with an insurer that is insolvent (bankrupt). Coverage applies to the insured, to family members and to any non-paying passengers in his car.

* Underinsured Motorist (UIM) Coverage. The driver responsible for an accident might be insured but not have sufficient coverage to pay the full cost of the victim’s injuries. Underinsured motorist insurance is designed to make up the difference, subject to the limits of the insurance buyer’s policy. It pays the buyer’s medical and other expenses in excess of the bodily injury liability limits of the driver who causes the accident. Usually this coverage is optional. In some states, it is automatically included when uninsured motorist coverage is purchased.

* Medical Payments Insurance. Medical payments insurance covers medical expenses that the insurance buyer and any passengers incur as a result of a traffic accident. Coverage applies to the policyholder, resident family members and passengers in the policyholder’s car. It also covers injuries sustained by the policyholder or family members injured by a vehicle while walking or while riding in another car.

Purchase of medical payments insurance is generally voluntary - that is, not required by state law.

* Personal Injury Protection. Personal injury protection (PIP) is a form of protection that is sold in all states with no-fault laws. Like medical payments insurance, it pays for medical costs that result from traffic accident injuries. Although both forms of protection pay medical expenses, there are two main differences between PIP and medical payments insurance. The first is that whereas purchase of medical payments insurance is generally voluntary, purchase of PIP is usually mandatory and the amount of total benefit’s the insurance buyers can receive is specified by state law. These benefits vary significantly from only a few thousand dollars to an unlimited amount. PIP also covers lost earnings and other specific expenses.

PIP, medical payments, and UM/UIM are often also called first-party insurance, because the insurance company (the second party to the contract; the policyholder is the first party) pays the injured person’s own expenses. This is in contrast to third-party liability insurance under which the injured person’s expenses are paid for by the insurer of the other, at-fault, driver in the accident.

* Compulsory Insurance, Financial Responsibility and Policy Limits. Every state requires that motorists be financially responsible for the damage they may cause to other persons or their property, and, as of June 1, 1988, 39 states plus the District of Columbia require people to purchase automobile liability insurance for this purpose. The states have different rules about the dollar limits of liability. Most drivers will have the option of purchasing greater amounts of coverage if they wish. For example, the limits in the state-mandated minimums for the District of Columbia is 25/50/10, for the state of Virginia is 25/50/10 and Maryland is 20/40/10. The first two figures refer to bodily injury liability limits and the third figure to property damage liability. For example, 10/20/5 (Florida) means coverage up to $20,000 for all persons injured in an accident, subject to a limit of $10,000 for one individual, and $5,000 coverage for property damage. (Source: American Insurance Association).

* Collision Insurance. Collision insurance pays for damage to the policyholder’s own car, regardless of who caused the accident. This coverage applies to damage to the policyholder’s car as the result of a collision with another vehicle or a stationary object, or as the result of turning over. If another driver was at fault, the insurance company may pay the policyholder, then seek reimbursement from the other driver’s insurer.

Coverage is limited in two ways. First, the amount the policyholder can collect is no more than the current market value of his or her car immediately before the accident. Second, the person buying collision insurance selects a deductible. The deductible is the amount of each loss that the policyholder pays before the insurance company makes any payment. So, for example, with a deductible of $200, the insurance buyer pays the first $200 of any collision claim, and the insurance company pays the rest. Generally, deductibles range from $50 to $1,000. The higher the deductible, the lower the premium for collision coverage.

* Comprehensive Coverage. Comprehensive coverage is an option covering losses due to most kinds of damage other than collision. It covers such risks as fire, theft, vandalism and malicious mischief, glass breakage, falling objects, collision with animals or birds, explosions, earthquakes, windstorms, floods, hail and the like. However, some kinds of objects and events are usually excluded; for example, most policies do not cover tape decks or CB radios.

Comprehensive insurance provides broad coverage. For instance, if a car is stolen, the insurance company reimburses the policyholder for the value of the car and even pays a reasonable amount for substitute transportation, such as a rental car, perhaps for as long as 30 days. Some policies extend coverage to include damage or theft of rented cars. And, although comprehensive is intended to pay for damages to the policyholder’s car rather than to property in the car, some policies provide limited coverage for personal effects in the car when the loss is caused by fire or lightning.

Traditionally, broken glass has been covered by comprehensive rather than collision insurance. However, insurers usually agree to pay for broken glass under the collision coverage if the breakage results from collision so that the policyholder is not subject to two deductible amounts.

The coverage is usually sold with a deductible of $50 to $500.

In practically every state in the union, you can’t drive unless you have some type of automobile insurance. As a matter of fact, driving without insurance is considered a crime in some states. If you are a driver, it’s obviously one of your most important insurance decisions. Essentially, there are no great differences in auto policies from company to company. There are, however, big differences in how much you pay for an auto insurance policy. The following factors determine the cost of premiums you pay for the policy you want:

* The type of car you drive * The age of the car * Your driving record * Where you live * How much coverage you want * The amount of deductible.

Of all the hazards and perils of life that threaten your fortune and possessions, probably none is more constant nor greater than the chance of having an accident with your car. Motor vehicles maim, they kill, they destroy houses, wipe out families, and even disrupt businesses. Even the most innocent of trips can end in an accident that triggers hundreds of thousands of dollars in claims against you or your estate. Sometimes the results can be quite surprising - and staggering.

For instance, one motorist accidentally crowded a flat-bed truck off a highway. Although the truck wasn’t damaged, it was carrying an intricate milling machine, and the machine suffered several thousands of dollars worth of damage. But that was just the start. The company that owned the machine filed a claim against the motorist, alleging that the time the machine was out of service for repairs would cost it in lost business, and the company demanded $100,000.

Fortunately automobile accidents should not wipe us out, because we have automobile insurance. Unfortunately some of us don’t have as much as we should. For instance, that motorist who damaged the machine had only the required minimum coverage for property damage liability - $5,000.

(1)It will actually increase during periods of inflation.

COMMERCIAL AUTO INSURANCE

Commercial Auto Coverage Part

Businesses, like individuals, need both Liability and Physical Damage coverage for losses that arise out of autos owned by or used in the business.

The Commercial Auto policy can be written as a mono-line policy or included in the CPP (Commercial Package Policy). A Commercial Auto coverage part must contain:

* Common Policy Declarations

* Common Policy Conditions

* One of five separate coverage forms: Business Auto, Business Auto Physical Damage, Garage, Truckers, or Motor Carrier

* Appropriate Declarations for coverage form selected

The Business Auto Physical Damage form covers the insured’s owned or hired business autos for physical damage only.

The Business Auto coverage form is used to insure the private passenger and commercial auto exposures of all businesses other than garages, truckers and motor carriers. Because of the specialized nature of these businesses and their unique coverage needs, separate forms were designed to cover these risks.

The Business Auto coverage form includes:

* Liability coverage

* Physical Damage coverage (Comprehensive or Specified Causes Of Loss and Collision)

Uninsured Motorists, Medical Payments and Underinsured Motorists coverage can be added by endorsement.

Please note that the precise coverage afforded is subject to the terms, conditions, and exclusions of the policy as issued. This explanation is intended only as a guideline. This information is not intended to be considered investment, tax or legal advice. It is provided, for your education only. This is not an insurance contract. All terms and coverages are defined solely by your policy. Savings will vary based on individual driving characteristics.

Americans are in love with their cars, but they sure don’t love their automobile insurance. Unfortunately, the joys of owning a car are often diminished by the realities of automobile insurance. Or, to put it more graphically, auto insurance is to cars what buffalo chips are to bison.

As unpleasant as it may be to purchase auto insurance, it will be even more distasteful if you don’t fully understand the who’s, why’s, what’s, and how’s of your coverage. And since ignorance is never bliss when it comes to insurance, it pays to know your policy, from the declarations page to the fine print.

Life is full of uncertainty, but three things are constant: death, taxes, and insurance. Without insurance, we would not be able to purchase our homes, since no bank would give us the money. Without insurance, many people would not dare to drive a car because of the high financial risk should there be an accident. Without insurance, “Force” could not be with us, because the film Stars Wars would never have been made. Without insurance, life and commerce as we know it could not exist.

While we may be unable to prevent death or abolish taxes, we can control the cost of insurance and become empowered consumers simply by understanding how insurance works.

For more details, please call a PaulBalep representative toll-free 1-800-964-8614 to receive a free, no-obligation quote. Like so many satisfied clients, we think you’ll be happy you did. And to set up a meeting to discuss additional insurance and financial goals: Visit us online at www.paulbalep.com , or e-mail us at info@paulbalep.com

You will receive a no-obligation, customized proposal for your individual or group automobile insurance. We have the experience, knowledge, products and services to help you to reach your insurance and financial goals.

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<<Independence is number one>>. We are nonexclusive producers who represent an average of eight companies-not just one. PaulBalep can evaluate and compare the products of several fine companies to find you the right combination of coverage and value.