Who is Covered?

You increase your limits of liability on your automobile and homeowners policies and you purchase a personal umbrella policy to protect your family and your future.  You should also determine just who is covered under the liability protection you have purchased?

As a general rule, most liability policies in personal lines cover the following people:

·         You and Your Spouse

The broadest coverage under a liability policy is provided for the named insured.  Both the husband and wife should be listed as named insureds under a liability policy in order to obtain that broad coverage

·         Resident Relatives

Most liability policies define this as someone who is related to you by blood, marriage, or adoption and is currently a resident of the household\

The named insured and resident relatives usually receive very broad coverage under personal lines policies.  In addition to being covered while driving vehicles that are listed on the policy, they also are covered for driving a vehicle they borrow or rent, in most cases.  Under the homeowners policy, they are the only individuals who receive coverage for their personal activities, both on and off the premises

·         Permissive Users

People who use your vehicles with your permission are usually covered under your auto insurance.  This would include a neighbor or a roommate who borrows your car.  But your auto policy only covers them when they are driving your vehicles, even if they are listed on the policy as a regular driver.  Beware – any claims they have with your vehicle will go on your claims history and can impact the rates you pay in the future

Some liability policies broaden coverage to include broad coverage for some additional individuals.  For example, many auto policies include broad liability coverage for a ward or foster child who is currently a resident of the household.  This is incidental coverage and varies from one company to another.  Your agent should be able to help you determine who is covered under your liability policies

So, You Have a Company Car...

Employees who are assigned a company car are able to avoid the substantial expense connected with owning and operating a vehicle.  The employee does not have to make the car payments, pay for repairs and maintenance, or fill it with fuel.  And, it is the employer who picks up the cost of insurance.  Unfortunately, there are limitations and exclusions with a business auto policy that may come into play at the time of an accident.

The Uncovered Claim

The employee’s use of a company car, insured under the employer’s corporate policy, may not be covered in the following circumstances:

·         The Coverage Has Lapsed

Whether through oversight or poor cash flow, when a premium is not paid on time, coverage lapses.  An accident during a lapse period will not be covered

·         Beyond Permitted Use

The employee signs an agreement that only he will be covered for use of the vehicle, but his wife is driving it at the time of the accident

·         Fellow Employee Exclusion

An employee hurt on business can collect for injuries under Workers Compensation.  But, if the injured employee sues another employee who was driving the company vehicle, the corporate auto policy may not defend the suit.  Most commercial auto policies contain this exclusion.

Covering the Exposure

Most Personal Auto Policies include coverage for a non-owned vehicle on an excess basis.  It provides coverage for certain people when they are driving a vehicle they do not own and the vehicle is uninsured, the limits are not adequate, or the accident is excluded.

If you have a Personal Auto Policy in the household, check to see if it will provide this coverage for you and others in your household who may be driving the company car.  If that policy contains an exclusion for a vehicle that is furnished or available for your regular use, you can add an inexpensive endorsement to remove that limitation.  Ask your agent for details.

If the company car is your only vehicle, you should consider obtaining a Named Non-Owned Personal Auto Policy.  It provides liability coverage only for driving a vehicle you do not own.  It will cover you in the situations just presented and also if you borrow a friend’s vehicle and then discover it is uninsured.  This policy also contains a furnished or available exclusion that can be removed by endorsement.

The Bottom Line

Use of a company vehicle is a significant employee benefit; however, the prudent employee would make certain that there is sufficient insurance on the vehicle.  Remember, proper automobile insurance protects both your current assets and your future earning ability.

Market Value or Replacement Cost?

“The value of my building is going down, but the limit on my insurance policy has increased!  How is that possible?”

The short answer is simple.  If you have a fire, your insurance company is not going to buy your building; they are going to repair or replace it.  That is something entirely different.

·         Market Value

There are many ways of valuing property.  Market Value is the amount your property would bring if you sold it today.  It is heavily influenced by such factors as location, condition, the state of the economy, and supply and demand in your area.  Market Value is used by the real estate broker and the banker; you may use Market Value in casual conversation or when figuring your net worth

·         Replacement Cost

Insurance policies are usually written on a Replacement Cost basis with “like kind and quality” materials and new for old.  If your building is totally destroyed by a covered cause of loss, the company will pay what it would cost to replace that building with new construction of similar size and quality.  If your building is damaged, the carrier will repair it using new materials of similar quality.  Although your shingled roof was ten years old the day the wind carried it away, the company will replace it with a new shingled roof.

Replacement cost coverage is the best option for most property owners.  The alternative is to insure on an Actual Cash Value basis; in that case, the insurance company takes a deduction for depreciation on every claim.  If the average life expectancy of your roof is 20 years and your current roof is 10 years old at the time of loss, the insurance company will pay for half of the cost of a new roof and you will pay the balance

·         Qualifying for Coverage

To qualify for Replacement Cost coverage, a property owner must insure for the Replacement Cost of the building.  The insurance industry uses a rough estimating system to determine approximately what it would cost to rebuild a structure similar to yours.  With a Homeowners policy, the underwriter will usually not insure your building on a Replacement Cost basis if you insist on insuring for less.  Under a commercial policy, underinsurance can lead to a coinsurance penalty on a partial loss or running out of limits on a total loss.

Your agent can usually show you the rough estimating system used by the insurance company to develop the approximate insurance limit.  However, you should remember that there is no guarantee that the limit will be enough to rebuild your property.  Review the limit your agent gives you very carefully; if you do not think it is enough, ask if it can be increased so that you would be able to rebuild what you have at the time of disaster.

Setting Liability Limits

How much liability coverage is enough?

Only a psychic would know.

A person only needs liability coverage if they are sued.  The limits only need to equal the claimant’s demands.  A psychic, with a clear vision of the future, is the only person qualified to recommend liability limits.

The Issues to Consider

Client, uncertain when picking liability limits, often want their agent to tell them how much is enough.  It is easier for them if someone else makes the decision.  An agent who falls into this can be held responsible if the limits they recommend are not adequate.

Instead, an agent should discuss the issues involved and leave the ultimate decision to the insured.  In choosing liability limits, there are four issues to consider:

·         Assets

·         Exposures

·         Cost

·         Aversion to Risk

Let us look at these issues individually.

Assets

The questions to ask is “What do you have to lose?”

·         With the 50+ clients ask “How would you feel about turning your retirement savings to a stranger?”

·         With the 30 something parents ask “What if you were never able to put another dollar for your children’s education?”

·         With the young professional, facing a promising future, ask “How would you feel supporting someone else’s family for the next 20 years?”

An uncovered liability exposure can mean scalin down a life-style or mortgaging a future insured must ask “What do I have to lose?” and then consider both current assets and future assets.

Exposures

The question to ask here is “How likely is it to happen to you?”  Some people have many exposures to loss.  Exposures can include all of the following:

·         Tangible Exposures

Swimming pool, saddle horse, rental property, etc.  For many families, teenagers are the greatest liability exposure.

·         Activity Level

The suburban wife, with a hectic social calendar and extensive volunteer work, has greater exposure than her next door neighbor who spends her time reading romances and raising geraniums.

·         Positional Exposures

The professional, the person with a high profile in the community, and the celebrity have increased exposure simply because of their relative position in the community

·         Court climate

The individual living and working in California has a greater exposure than his those in a Midwestern state with a conservative court climate.

When considering exposures, the question to consider is “How likely is it to happen to me considering my unique set of circumstances?”

Cost

Cost is always a factor in the purchase of insurance.  For most people, the cost of increased liability limits is affordable and price should not be the primary focus in the decision.  Those who repeatedly get cost as an objection, should reevaluate how the benefits of it are being explained.

Aversion to Risk

How a person feels about risk greatly influences the amount of liability that is purchased.  In this society, we all live with the risk of being sued.  In choosing liability limits, an individual picks how much of this risk is to be transferred to the insurance industry.  It is an individual who is greatly influenced by how the individual feels about living with risk.

Mr. Big is an entrepreneur who has started three companies from scratch; the first one sold for $11 million and he will never work again.  He possess extensive assets and faces significant exposures, and cost is not a factor.  Unfortunately, Mr. Big feels increased limits are simply another incentive for the attorneys to sue for more.  He purchases $500,000 in limits on his primary policies and absolutely rejects the thought of a Personal Umbrella Policy.  “Let them take it all; I will just go out and earn it all again.”  He feels comfortable living with a high level of risk.

The thirty-five year old engineer is married with three children and a wife does not work outside the home.  After reading a magazine article about umbrella liability, he calls his agent:  “I realize we do not have significant assets; it has not been priority with us.  We have no exotic exposures and probably never will have.  Cost is a consideration; we will have to work the increased expense into an already tight budget.  However, when I think of the disruption it would cause in our family if we were sued for more than our liability limits, it is worth the additional expense.  Could you please order an umbrella liability for my family?  It will really put me at ease.”

When an individual or family is selecting liability limits, all four factors – assets, exposure, cost, and risk aversion – should be considered.

The Agent’s Responsibility

The agent who writes the insurance for Mr. Big approaches him every year, recommending increased liability limits.  The agent insuring the thirty-five year old engineer never mentioned the concept.

Many agents selectively discuss increased limits and offer umbrella coverage only to people with visible assets and exotic exposures.  Other agents feel they have a moral responsibility to inform all clients of the existence of increased limits, discussing the increase and then letting the individual client decide if they would like to apply for the increased coverage.