The Personal Auto Insurance Policy: Part 2- Liability

Published on by james

The Personal Auto Policy encompasses the coverage for liability. Liability is a third party benefit. The function of liability is to pay on behalf of the insured for financial damages for which the insured becomes legally liable to others. The liability coverage associated with the auto policy includes two components; Bodily Injury (BI) and Property Damage (PD).

Auto liability is highly important coverage concept and should not be taken lightly. To best explain auto liability coverage, let’s review what the State of Florida requires.

The State of Florida describes the minimal amount of insurance required to respond to the damages for liability on account of crashes arising out of the use of a motor vehicle as “Proof of Financial Responsibility” (F.S. 324.021). Proof of financial responsibility is met when the owner or operator of a motor vehicle is able to provide proof of insurance where:

  • At a minimum the policy provides $10,000 because of bodily injury or death of one person in any one crash.
  • At a minimum the policy provides $20,000 because of bodily injury or death to two or more persons in any one crash.
  • At a minimum the policy provides $10,000 because of damage or destruction to property of others in any one crash.

When looking at your auto policy, all of the coverage provided and the limits associated with your coverage will be shown on the declarations page. Generally, auto policies are “split limit policies” which means there are three numbers used to express the amount of coverage available for liability. For example, a policy with the State minimum requirements for liability is a ten, twenty, ten (10/20/10) policy where each number is represented in thousands. With a split limit policy, the bodily injury per person limit is the first number followed by the maximum bodily injury limit per occurrence. These first two numbers specify the maximum amount the policy will pay for Bodily Injury (BI). Meaning the maximum the policy will pay to any one person is represented by the first number and the second number represents the maximum the policy will pay when there is more than one person injured where no one person can collect more than the first number. The amount for Property Damage is the third number. There is also a Combined Single Limit policy (CSL) where the bodily injury (BI) and property damage (PD) limits are combined into one maximum value. I will primarily focus on the split limit type of coverage since this is the most common.

OK, that was a lot of technical jargon. Let’s break this down for the sake of clarity. The State of Florida requires the minimum auto liability limits of 10/20/10. Liability pays on your behalf when you become legally liable to someone else. Liability on a Personal Auto Policy has two parts. Bodily Injury (BI) and Property Damage (PD). The concept of Property Damage (PD) is relatively straight forward. If you are negligent and you damage someone else’s property with your vehicle, your policy will provide financial compensation up to the policy limits to either repair or replace the damaged property. Examples of types of property might be another vehicle, a mailbox or a building. Bodily injury (BI) pays on your behalf, up to your policy limits, when you are negligent in an auto accident where another person is injured.

What happens when there is a Bodily Injury (BI) claim? A BI claim is settled by the insurance company when a financial value is determined based on the nature of the injury(s) and is agreed upon between the insurance company and the injured party(s). Often the term “pain and suffering” is used to describe an injury claim. The severity of the injury primarily determines the financial value of the claim. There are however; other considerations which can be included when determining the value of an injury claim. In some cases, inconvenience may be a factor in an injury valuation. Some BI claims may consider diminution or a diminished lifestyle as a result of the injury. Other BI claims might involve mental anguish or psychological concerns to the injured party associated with the accident. So a BI claim settlement can include financial compensation beyond the injury itself.

Ok, let’s use a simple example to see if I can illustrate how this works. **Note** I do not mention compensation for the medical bills associated with the injuries in following examples. See my blog “The Personal Auto Insurance Policy: Part 1- Personal Injury Protection” for a more detailed explanation of how medical bills are handled.

Example 1:

Jack has a Florida Personal Auto Policy with liability limits of 10/20/10.

Jane is stopped at a red light. Jack does not see Jane’s car stopped in front of him. Jack’s car crashes into Jane’s car. Jack is at fault for the damage to Jane’s car and Jane has an injured neck because of the accident. It will take several months for Jane to be able to turn her head without discomfort. Jane is an avid bird watcher and pays membership dues to take part in her club. Because of the nature of Jane’s injury, she is unable to participate in her bird watching club for the remainder of the season.

Jane is claiming $7,000 for damages to her car. Jane is also claiming $2,000 for her pain and suffering because of her neck injury and $1,000 for her diminished lifestyle due to the loss of the non-refundable annual bird watching membership.

In this scenario Jack has two liability exposures;

  • $7,000 for Property Damage (PD) to Jane’s car.
  • $3,000 for Jane’s Bodily Injury (BI) claim. $2,000 for her pain and suffering and $1,000 for her diminished lifestyle.

How does Jack’s liability respond?

Jack’s auto policy will pay up to his maximum PD limits of $10,000. In this example, his policy has adequate limits to pay the full $7,000 to repair Jane’s car. Jack’s auto policy will also pay a maximum of $10,000 per person for a BI claim. In this example, Jack’s auto policy also has adequate limits to compensate Jane for her $3,000 BI claim based on her pain and suffering and diminished lifestyle.

That was fairly straight forward. Jack’s PD paid $7,000 for the damages to Jane’s car and Jack’s BI paid $3,000 for Jane’s “inconvenience” and her injury resulting from the accident.

In the next example, let’s see what happens when we mix things up a bit by adding a passenger in Jane’s car.

Example 2:

Jack has a Florida Personal Auto Policy with liability limits of 10/20/10.

Jane is stopped at a red light. Jane’s friend Jill is a passenger in Jane’s car. Jack does not see Jane’s car stopped in front of him. Jack’s car crashes into Jane’s car. Jack is at fault for the damage to Jane’s car. Both Jane and Jill have an injured neck because of the accident. It will take several months for Jane and Jill to be able to turn their heads without discomfort. Jane and Jill are avid bird watchers and pay membership dues to take part in their club. Because of the nature of their injury, Jane and Jill are unable to participate in their bird watching club for the remainder of the season.

Jane is claiming $7,000 for damages to her car. Jane and Jill are each claiming $2,000 for their pain and suffering because of their neck injuries and $1,000 for their diminished lifestyle due to the loss of their non-refundable annual bird watching memberships.

In this scenario Jack has three liability exposures;

  • $7,000 for Property Damage (PD) to Jane’s car.
  • $3,000 for Jane’s Bodily Injury (BI) claim. $2,000 for her pain and suffering and $1,000 for her diminished lifestyle.
  • $3,000 for Jill’s Bodily Injury (BI) claim. $2,000 for her Pain and suffering and $1,000 for her diminished lifestyle.

How does Jack’s liability respond?

Jack’s auto policy will pay up to his maximum PD limits of $10,000. In this example, his policy has adequate limits to pay the full $7,000 to repair Jane’s car. Jack’s auto policy will also pay a maximum of $10,000 per person but not more than $20,000 per accident (occurrence) for BI. In this example, Jack’s auto policy also has adequate limits to compensate Jane and Jill each for their $3,000 BI claims based on their pain and suffering and diminished lifestyles.

Like example 1, this was pretty straight forward. Jack’s PD paid $7,000 for the damages to Jane’s car. Jack’s BI paid $3,000 for Jane’s “inconvenience” and $3,000 for Jill’s “inconvenience” caused by their injuries resulting from the accident. Both Jane and Jill were fully compensated for their individual BI claims because their individual claims did not exceeded $10,000 and the total of the combined BI claims did not exceed $20,000.

In example 3 we will complicate things a bit more. Let’s look at multiple vehicles and drivers to see how Jack’s policy will respond.

Example 3:

Jack has a Florida Personal Auto Policy with liability limits of 10/20/10.

Jane is driving her Toyota Camry and is stopped behind Jill who is driving her Ford Mustang and is stopped at a red light. Jack does not see Jane stopped in front of him. Jack’s car crashes into Jane’s car and pushes Jane’s car into Jill’s car. Jack is at fault for the damages to both Jane and Jill’s cars. Both Jane and Jill are injured. Jane is transported to the emergency room with serious injuries. Jill’s injuries are minor but serious enough that she has to seek medical treatment for a period of time.

The damages to Jane’s Toyota Camry are $7,000. The damages to Jill’s Ford Mustang are $5,000. Jane’s injuries are substantial enough to warrant her to retain legal representation. Her lawyer values her injuries at $15,000 based on her pain and suffering associated with the accident. Jill is willing to accept $3,000 in financial compensation for her pain and suffering.

In this scenario Jack has four liability exposures;

  • $7,000 for Property Damage (PD) to Jane’s car.
  • $5,000 for Property Damage (PD) to Jill’s car.
  • $15,000 for Jane’s Bodily Injury (BI) claim for her Pain and Suffering.
  • $3,000 for Jill’s Bodily Injury (BI) claim for her Pain and Suffering.

How does Jack’s liability respond?

Jack’s auto policy will pay up to his maximum PD limits of $10,000 per any one accident. In this example, Jack’s total combined PD exposure from this accident is $12,000 ($7,000 for Jane’s car and $5,000 for Jill’s car). Jack’s PD limits on his auto policy are insufficient for the total PD liability exposure for both cars. Jack is therefore, underinsured for the PD exposure.

Jack’s auto policy will pay a maximum of $10,000 per person but not more than $20,000 per accident (occurrence) for BI. The total combined BI exposure to Jack is $18,000 ($15,000 for Jane and $3,000 for Jill). Jack’s per occurrence BI limits of $20,000 are adequate because the combined total of Jane and Jill’s BI claims equal $18,000. Jack’s per person limits of $10,000 are sufficient for Jill’s BI claim of $3,000 but his per person limits are not sufficient for Jane’s BI claim of $15,000. The maximum Jack’s policy will pay is $10,000 per person. Jack is underinsured for Jane’s BI claim.

How this claim is ultimately settled is unknown. When there are insufficient funds for the exposure to the policy holder, insurance companies typically attempt to negotiate the claim in order to settle within the policy limits but this does not always happen. It is likely that Jack’s insurance company will defer the property damage to both Jane and Jill’s vehicles to be paid for under their own policies because Jack does not have enough coverage to pay for both. Jack’s policy will eventually pay his maximum $10,000 PD limits through a process called subrogation where the remainder of the money owed will have to be paid by Jack personally. Jack’s BI limits are adequate to compensate Jill for her $3,000 BI claim but Jane will only be able to collect $10,000 of her $15,000 BI claim. The remainder of the $5,000 Jane’s lawyer is seeking will be handled between Jack and the attorney. It is possible that Jane’s lawyer will be satisfied with the $10,000 limits and not seek additional damages against Jack. But depending on the circumstances, Jane’s attorney might prepare to take civil action against Jack for the remaining $5,000. Jane’s attorney may also be looking at Jane’s Personal Auto Policy to see if she has Uninsured Motorist Coverage (UM) to compensate for the remaining $5,000. (I will delve into the concept of Uninsured Motorist Coverage (UM) in my next blog, “The Personal Auto Policy: Part 3- Uninsured Motorist Coverage”)

The auto accident examples I used are common “real life” scenarios. As you can see, the coverage limits you choose could quickly evaporate depending on the severity of the accident. Auto insurance companies offer multiple options and combinations for Liability limits. The range is typically anywhere between the minimum required by Florida (10/20/10) up to $500,000. When people are seeking a minimum limit policy, they are usually doing so to minimize the cost of their premium. While cost needs to be considered for budgetary purposes, it is possible to obtain a policy with limits higher than the minimum limits and still obtain an affordable premium. Owning and operating an automobile requires knowledge of the road rules, maintaining your vehicle for safety measures and being a responsible driver. Part of being a responsible driver is the understanding of your auto policy and the coverage limits you have selected.