AUTO INSURANCE AND SPLIT HOUSEHOLDS

DECEMBER 2013 INDEX

AUTO INSURANCE AND SPLIT HOUSEHOLDS

BY ALAN PLAFKER, PRESIDENT & CEO
MEMBER BROKERAGE SERVICE LLC
A MELROSE CREDIT UNION SERVICE ORGANIZATION

I am frequently asked what liability a parent has, and what protection a parent can expect, for a vehicle owned and insured (or uninsured) independently by a resident relative like a son or daughter. Will the disparity in limits between a parent's policy and a child's policy be a factor. Inadequate protection can result when a parent retains ownership of a vehicle insured by a resident relative if the limits are not what the owner is accustomed to.

For this discussion, we are going to assume ownership of the auto lies with a resident relative, usually a son or a daughter. We now ask whether liability for its use becomes a liability exposure for the parent? The answer is—possibly.

Exposure - It is obvious that any damages claimed resulting from an auto's use, caused by the negligence of the parent, would be an exposure. Most likely, it would be the parent's operation of an auto that would create such liability as in the case of a parent who borrows a child's auto. However, the parent could also cause an accident as a passenger (e.g., distracting the driver). And how about fathers who make repairs on their children's cars? The negligent repairing of brakes might result in an accident for which the parent could be held liable.

Less obvious are some other events that can create liability for a parent. While it is well established in New York that a parent is not responsible for torts (a wrongful act leading to legal liability) committed by a child, a parent could be held liable “where the parent’s negligence consists entirely of his or her failure to reasonably restrain the child from conduct that might endanger others when the parent has knowledge of the child’s propensity toward such conduct.” As you can see, the proof threshold is quite high in an action for negligent entrustment or lack of supervision.

A parent also could be held liable if the parent furnished alcohol to a minor child. In addition, the parent could be liable for a child who is in the service of the parent; for example, when running a business errand on behalf of the parent.

Without the existence of some valid legal basis, a parent is not liable for a child's actions just because the parent/child relationship exists. Some states, however, do have statutes which hold a parent liable for a child's intentional torts (wrongful acts). New York's statute applies to children ages 11 to 17 who cause intentional damage to property up to $5,000.

Nevertheless, enough legal precedence exists to hold a parent vicariously (liable for the acts of another, in this case a child) liable for a child's use of an auto in addition to the parent's own negligence. This offers sufficient reason to be concerned about maintaining insurance protection.

Coverage

First, a liability exclusion in the personal auto policy (PAP) eliminates coverage for a vehicle of a "family member" who is not scheduled on the named insured's policy.
Second, by exception, the named insured and resident spouse are covered for such auto's maintenance or “use.” Consequently, legal liability resulting from the exclusion just discussed would be covered by the parent's policy because they are all involved in the vehicle's maintenance or use.

The PAP (Personal Auto Policy) which insures the scheduled vehicle of a "family member" would be primary. A parent, then, receives automatic protection as an insured under the first section of the definition of "insured" in the child's PAP because the parent is a "family member" of the named insured child. Unfortunately, the limits available to the parent would be shared with all other insureds and, more importantly, a child frequently insures his auto with lower limits than the parent. The good news is the parent's personal policy would respond as excess for the liability exposures involving the vehicle's use by the parent.

Potential gap - The exception to exclusion applies only to the vehicle's use or “occupancy” (contrasted with “use”) by the named insured or resident spouse. Missing from coverage would be a parent's negligent act other than as an occupant of the vehicle, as well as vicarious liability. Thus, the disparity of limits between split household policies can be an issue for policyholders covered by this edition of the PAP.

The gap can only be filled by writing the child's vehicle on the parent's policy or by writing the child's policy with limits equivalent to what the parents have on theirs. Also, it is possible an umbrella policy will fill the gap depending on the coverage terms of that particular insurer.

Child's protection - Likewise, a child will have no protection under the parent's policy when operating the child's own separately insured (or uninsured) vehicle, because of liability exclusion of the PAP. There will, of course, be coverage for the child under the parent's policy while operating the parent's vehicle with the child's policy insuring as excess. And when a child operates a borrowed or rented auto, then both the parent's policy and the child's policy will respond as excess resulting in a pro rata share of the loss by the amount of limits written on each policy.

If you want the parent's umbrella liability policy to cover the child it must include the child as an insured. Then you must ask for what vehicles is the child an insured? And even if covered for the child's operation of his own vehicle, there will likely be a gap between the limits on that vehicle and the underlying limits required by the umbrella. So, if you want the child to be protected by the umbrella, you might just as well title the vehicle in the parent's name and insure it under the parent's policy. However, most minors don't need such protection.

COVERAGE FOR THE ESTATE

Who gets custody of the auto and homeowners policy when the policyholder dies? Does anyone continue to be insured from that point on?

The assignment provision

First, insurance contracts are personal contracts and cannot be assigned to others. The insurance company relied upon very specific information about the named insured before deciding to issue the policy.
Second, the policy has an express prohibition against its assignment.

Each policy prohibits assignment without the written consent of the insurer. However, consent is very unlikely to be given because courts have generally deprived an insurer of defenses against the assignee insured that could have been used against the assignor insured. It is in the best interest of the insurer to get a new application with representations (insurance limitations), that could be challenged if necessary, at a later date.

If the policy cannot be assigned what happens to coverage when the named insured dies? Unless the promised service is personal (e.g., an artist's promise to paint a portrait), the law will assume that a contract is binding on the personal representatives of the deceased. Beyond that, the contract may incorporate more specific provisions that will apply upon the death of a contracting party. Both the homeowners and auto policies have such provisions:

Homeowners policy

Surviving named insured. When one named insured dies, the surviving named insured(s) continues to benefit from all coverages in the policy without limitation. There might be some complications in cashing the claim check from the insurer if the deceased's name is on it, though.

Temporary custody. When a homeowner dies someone usually steps up to take charge of the deceased's property until a legal representative assumes custody. The "Death" provision of the homeowners policy grants "insured" status to the person who takes temporary custody of the property.

Designation as an "insured" is important from the perspective of both property coverage and liability coverage. The person in custody will be covered for damage to all property belonging to the deceased and will be covered for all legal liability arising out of the deceased's property.

A person in custody will want the right to make a claim for property that is damaged while under his or her control.

Not only will the person in custody want to expedite repairs or replacement of the property in order to preserve the value of the estate, but such "insured" status is an effective shield against subrogation (to substitute, replace another person or group to the claim and transfer the rights to the claim to the substituted party) by the insurer. Should a covered loss occur without this protection, the temporary custodian could get sued for damages that were covered by the deceased's homeowners policy. Who wants to offer this alternative to one's heirs if this kind of liability is incurred?

When a person in custody performs routine maintenance on the home or uses the property for legitimate purposes, he or she will want assurance of protection against suits by third parties who claim injuries to themselves or damage to their property. For example, a temporary custodian could damage the neighbor's car while attempting to clear snow from the deceased's driveway. "Insured" status under the homeowners policy will provide the needed protection under these circumstances.

Legal representative - A legal representative could be an administrator appointed by the court or an executor named in a will. Once the legal representative assumes control of the property, the person having temporary custody ceases to be an "insured" and the legal representative becomes the "insured." However, this "insured" status applies only with respect to the premises and property of the deceased that were covered under the homeowners policy at the time of death.

Property acquired by the legal representative, other than that covered in the policy, after the named insured dies is not protected. As with the temporary custodian, coverage applies under both the property and liability sections of the homeowners policy. Keep in mind that the policy is not providing fiduciary liability coverage for the legal representative.

A legal representative also gets promoted to named insured status, but with qualifications on the type of vehicle that is covered and the purpose for which it is used.

First, the legal representative is covered only for "your covered auto," which includes all scheduled vehicles, a newly acquired vehicle, an owned trailer and a temporary substitute auto or trailer. However, a temporary substitute will not be covered under Part D—Coverage for Damage to Your Auto). Consequently, the legal representative is not an insured for nonowned vehicles that are not temporary substitutes.
Second, in order to be covered as an insured the legal representative must maintain or use "your covered auto" only with respect to his or her legal responsibilities. Personal use voids all coverage for the legal representative.

Permissive users - It could be argued that permissive users of "your covered auto" continue to be insured after the named insured dies because persons who have a reasonable belief that they are entitled to use the vehicle are covered under the terms of the policy. Nevertheless, once the policy is assigned to the legal representative, which may occur immediately when that person is the executor of a will, permissive use only extends to persons carrying out the duties of the representative’s administration of the estate.

Anyone using the vehicle for personal reasons must rely on his/her own insurance policy for liability coverage. If the vehicle is furnished or regularly available to someone, then that
person should endorse his or her personal auto policy with the Extended Nonowned Coverage for Named Individual (PP 03 06) endorsement. Unfortunately, there does not appear to be an easy solution to the lack of physical damage coverage on the deceased's auto when used outside the scope of the representative's legal duties.

Household member - An "insured" member of the named insured's household at the time the named insured dies continues to be an "insured" for property and liability coverages as long as he or she remains a resident of the premises. This household member is included when the policy states, "We cover personal property owned or used by an 'insured' while it is anywhere in the world."

Also, Coverage D—Loss of Use, Additional Living Expense, applies to expenses incurred so the "household" (not just the named insured) can maintain its normal standard of living during the time it takes to make repairs or permanently relocate following a covered loss to the premises.

Coverage termination. Unlike the auto policy, the homeowners policy does not insert a time limit on the coverage afforded those "insureds" extended coverage upon the death of a named insured. Therefore, the insurer will need to take action to terminate coverage.

In New York, the fact that an insured is not occupying a residence [e.g., due to death] does not, standing alone, constitute grounds for cancellation of a homeowners' policy under Insurance Law. The insurer must consider the totality of the circumstances.”

Nevertheless, some states permit nonrenewal of the policy. In New Jersey, the reason must be in the written guideline and New York requires completion of the "required policy period."

Interpreting the Personal Auto Policy regular use/furnished car exclusion

Dad owns two cars that are insured with a liability limit of $500,000. Son, a resident in Dad's household, owns a car that is insured with a liability limit of $100,000. While Dad is driving Son's car, he has an accident that is determined to be his fault. Damages are $250,000 and Son's policy pays its limit of $100,000. The judgment balance of $150,000 is submitted to Dad's insurer and coverage is denied. The reason given for denying coverage is that Son's car is "furnished or regularly available" to Dad and, therefore, excluded.

Dad's insurer has denied coverage based upon exclusion B.2 in Part A– which excludes coverage for "any vehicle, other than 'your covered auto,' which is: (a) owned by you; or (b) furnished or available for your regular use." In order to overcome this denial of coverage, it will be necessary to convince a court that one of two possible arguments invalidates the exclusion. The first argument relies on a question of fact and the second argument relies on policy interpretation.

If Dad's use of Son's car is not "regular use," then the B.2 exclusion does not apply and coverage would be afforded. The question is—what does "regular use" mean in this context?

Four factors to be considered in determining "regular use" but not necessarily limited to these four factors:

the general availability of the vehicle;
the frequency of the use, that is, habitual, frequent or principal use as opposed to temporary, casual or occasional use;
the restrictions, if any, placed upon the vehicle's use; and
the nature of the use, that is, whether the vehicle was used for a single occasion or limited purpose.

Obviously, we don't have enough facts to back up the decision by Dad's insurer to deny coverage. However, based upon the definition of "regular use" given by various courts, Dad would need to use Son's car with such frequency that it would be reasonable for the insurer to charge a premium for an additional car. Dad would need to be a customary operator as opposed to using the car occasionally, incidentally, or for a special purpose. Just because Dad has the parental authority to expropriate Son's car at any given time that alone does not make it available for "regular use." Rarely would Dad's use of Son's car approach the level of use needed to trigger application of the B.2 exclusion.

The next argument for overcoming Dad's denial of coverage examines the interpretation of B.3 exclusion. The B.3 exclusion applies to "any vehicle, other than 'your covered auto,' which is: (a) owned by a 'family member'; or (b) furnished or available for the regular use of any 'family member.' " However, the exclusion goes on to say that you the parent, that is, the named insured and resident spouse, are covered while maintaining or occupying the excluded (B.3) family member vehicle.

What this means is that Son's vehicle is not covered on Dad's policy while Son or anyone else is driving it unless the driver is Mom or Dad. The exception to exclusion B.3 clearly gives Dad coverage while driving Son's vehicle. Unfortunately, Dad's insurer has decided that, while Dad is covered under the B.3 exception, the B.2 exclusion for a vehicle furnished for Dad's regular use will be invoked to deny coverage instead of questioning whether Dad's use of Son's vehicle approaches the level of use needed to trigger the B.2 exclusion.

Conclusion:

Poor Dad. Although his insurer furnished the coverage, it was not available because the insurer believed the vehicle Dad was driving was either furnished or available (regular use). Hopefully, due to the information I have furnished, insurers will be convinced that coverage is available despite the exclusion for vehicles furnished or available. It is very important to understand the exclusions and exceptions of a policy in order to be covered for all possible events.

Your Professional Insurance Agent …
We want you to know about the insurance you’re buying.

Alan Plafker

President of Member Brokerage Service LLC, A Melrose Credit Union Service Organization
Licensed Insurance Broker
President and Member of the Board of Directors, PIANY, Professional Insurance Agents Association of New York
Active Member of CIBGNY, Council of Insurance Brokers of Greater New York
Treasurer, New York Independent Livery Driver Benefit Fund Board of Directors

His agency insures thousands of policies for Taxi Limousine Commission insurance as well as many policies for all types of personal and commercial insurance. He can be reached in his Briarwood, Queens office at 718-523-1300 X1082, or www.MemberBrokerage.com.