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New Auto Insurance

One of the most common instances of non-insurance occurs at the time of purchase of a new car and in the weeks that follow. The reason for this is that many auto insurance policyholders assume that their existing policy provides them with automatic coverage for a 30 day period for any new vehicle they buy, and that coverage applies to any car purchased by any person insured under the policy. Both of these assumptions are incorrect.

To assume that one has automatic coverage without checking the provisions of the policy can be financially perilous. By way of example, let’s say you make that assumption when you buy an additional (not a replacement) car and you intend to notify your insurer of the purchase ‘within 30 days.’ Three weeks pass, and while driving home one day you fail to give way at an intersection and sideswipe another car, causing it to crash. The driver of that car (a well-paid marketing manager) is badly injured and has eight months in rehab. She files a lawsuit against you for $1.5 million, fully expecting your insurance to pay. But your insurance doesn’t pay. You made an incorrect assumption, and now the only one left to pay is you.

The Fine Print

You must always go back the terms of the policy to determine what your actual coverage is. The template which is used by auto insurance companies today for their policy wordings is a document produced by the Insurance Services Office (ISO). That document is a 2005 revision1 of the ISO’s Personal Auto Policy (PAP) wording, and with materially minor variations it has been adopted by insurers in all states. That policy wording is all-important when it comes to ascertaining the coverage you have (or don’t have) when you purchase (or lease) a new car, irrespective of whether you advise your insurer of the purchase (or lease), or otherwise.

The PAP wording includes a definition of the term “your covered auto,” and that definition specifies which cars are covered under the policy. The definition stipulates that, as well as the vehicles which are listed in the policy Declarations, “your covered auto” includes a “newly acquired auto,” a term which is itself defined in the policy.

Eligibility

Importantly, the definition of “newly acquired auto” restricts coverage to vehicles for which “you” become the owner of during the policy period. “You” (which is also a defined term) means the named insured in the policy, together with that person’s spouse, but only if:

  1. The spouse is a resident of the same household as the named insured; or
  2. The spouse ceased to be a resident:
    • within the previous 90 days; and
    • the spouse has not become a named insured on another policy; and
    • the policy period has not ended.

Consequently, if a spouse is not a named insured in the policy and no longer lives in the same household as the named insured, then the spouse does not have coverage under the policy for “newly acquired autos” (and in fact does not have coverage under the policy at all), except for the limited period prescribed in (ii) above.

Moreover, coverage for a “newly acquired auto” does not apply to any vehicle which is purchased by, and titled in the name of, any family member who is not a named insured or the (resident) spouse of a named insured, even if they are insured under the policy by being resident in the same household. This means, for example, that if your son or daughter (living at home) purchases a new car, they do not have any automatic coverage for that car. Coverage for a “newly acquired auto” only applies if the car is purchased by “you” as defined in the policy.

Furthermore, coverage for a “newly acquired auto” is restricted to:

  1. Private passenger cars; and
  2. Pickups or vans which are not covered under any other insurance policy, and then only if:
    • they have a gross vehicle weight rating of 10,000 lbs. or less; and
    • they are not used for transporting goods and materials unless that use is incidental to a business of installing, maintaining or repairing furnishings or equipment, or for farming or ranching.

Consequently, eligibility for automatic insurance on a new auto is restricted to vehicles purchased or leased by certain persons insured under the existing auto insurance policy, and to certain types of vehicles. If these eligibility criteria are not met then no coverage applies.

Coverage

If the eligibility criteria specified above are met, then new auto insurance is provided under the existing auto insurance policy, but the type, amount and period of coverage depends on whether the new car replaces one which is specified in the policy Declarations, or is additional to it. It also depends on whether any existing car listed in the Declarations has any collision or comprehensive coverage. A summary of the relevant provisions is contained in Table 1 below.

Table 1: Summary of Coverage Provisions for Newly Acquired Autos
Coverage Type If New Car is Replacement If New Car is Additional

Part A – Personal Liability

Part B – Medical Payments

Part C – Uninsured Motorist

Coverage commences on the date on which ownership of the car commences.

Coverage is the broadest coverage provided for any car specified in the Declarations.

Coverage is not conditional on requesting the insurer to insure the car.

Coverage commences on the date on which ownership of the car commences.

Coverage is the broadest coverage provided for any car specified in the Declarations.

Coverage is conditional on requesting the insurer to insure the car within 14 days of commencement of ownership.

Part D – Collision

Coverage commences on the date on which ownership of the car commences (and the coverage provisions are materially the same as comprehensive below).

If collision coverage applies to at least one car specified in the Declarations, then coverage is the broadest coverage provided for any car specified in the Declarations. However, coverage is conditional on requesting the insurer to insure the car within 14 days of commencement of ownership.

If collision coverage does not apply to any car specified in the Declarations, then coverage still applies. However, coverage is conditional on requesting the insurer to insure the car within four days of commencement of ownership. If that request is made within that period and a loss occurs before that request is made, then a collision deductible of $500 applies.

Part D – Comprehensive

Coverage commences on the date on which ownership of the car commences (and the coverage provisions are materially the same as collision above).

If comprehensive coverage applies to at least one car specified in the Declarations, then coverage is the broadest coverage provided for any car specified in the Declarations. However, coverage is conditional on requesting the insurer to insure the car within 14 days of commencement of ownership.

If comprehensive coverage does not apply to any car specified in the Declarations, then coverage still applies. However, coverage is conditional on requesting the insurer to insure the car within four days of commencement of ownership. If that request is made within that period and a loss occurs before that request is made, then a comprehensive deductible of $500 applies.

It can be seen from the above table that, if the vehicle is a replacement for one which is specified in the Declarations, then coverage for personal liability, medical payments and uninsured motorists will automatically apply until the end of the policy period without any requirement to request the insurer to provide coverage, or to even notify the insurer of the purchase. However, if the vehicle is additional to the car or cars listed in the Declarations, then coverage for personal liability, medical payments and uninsured motorists is conditional on requesting the insurer to insure the car within 14 days of the date on which ownership commenced. Failure to do this voids the coverage.

In respect of collision and comprehensive, new car insurance depends on whether any car specified in the Declarations has either of those types of coverage. If collision or comprehensive applies to at least one car listed in the Declarations, then that coverage (as applicable) applies to the new auto, but on the condition that the insurer is requested to provide that coverage within 14 days of the date on which ownership commenced. Failure to do this voids the coverage. If collision (or comprehensive) does not apply to any car listed in the Declarations, then that coverage (as applicable) still applies to the new auto, but on the condition that the insurer is requested to provide that coverage within four days of the date on which ownership commenced. In addition, a deductible of $500 applies. Failure to make the request within the requisite four day period will void the coverage.

Interestingly, collision and comprehensive coverage is extended to any newly acquired auto (albeit for just four days), even though no existing vehicle listed in the Declarations has that coverage. Interesting, too, that the commonly-misapprehended period of ‘30 days’ does not exist anywhere in the policy wording.

Rationale

Auto insurance policyholders can at times be puzzled by the lack of automatic insurance applying to a newly acquired car. They surmise that their existing policy provides coverage for any vehicle which they are authorized to drive, not just for vehicles they own, so why would insurance not apply to a car they have recently bought? Why would personal liability coverage, for example, apply when I drive my neighbor’s car and without reference to my insurer, but not apply when I drive an additional car I have recently bought, unless I request my insurer to provide that coverage?

The answer to this lies in the insurer’s right to charge a premium which is commensurate with the risks it carries on your behalf. It is easy to understand that an insurer would want to charge for any additional collision and comprehensive coverage which it provides for a new car, especially since that car may be much more valuable than any existing car you own. But it is not so difficult to understand that an insurer would want to be compensated for any additional liability risks which it carries, especially if your new car presents much greater risks than those represented by your existing vehicle. You could, for example, have just bought a supercharged V8 which can reach 100 mph in four seconds. In that case, the insurance company would want to know about it. Moreover, you are likely to spend much more time driving your own car (and therefore be exposed to potential liabilities on many more occasions) than driving a car you do not own.

Exclusions

The way in which the PAP wording denies coverage for new vehicles if the insurer is not specifically requested to provide coverage (and where the policy mandates that request), is in the exclusions section of each coverage type. In the liability coverage section, the PAP contains an explicit exclusion (B.2.) which states that “We do not provide Liability Coverage for the ownership, maintenance or use of any vehicle, other than ‘your covered auto,’ which is owned by you or furnished or available for your regular use.” As noted above, “your covered auto” includes any “newly acquired auto,” but coverage for a newly acquired auto is conditional on meeting the terms outlined in Table 1 above. If the applicable terms are not met, then coverage does not apply.

Similarly, the PAP wording contains an explicit exclusion for medical payments coverage “for any insured for bodily injury sustained while “occupying,” or when struck by, any vehicle (other than “your covered auto”) which is owned by you or furnished or available for your regular use.” A similar exclusion applies for uninsured motorist coverage.

A corresponding exclusion is not required for collision and comprehensive, as that section of the PAP wording, under the insuring agreement provisions (A), only provides coverage for “your covered auto” and any “non-owned auto” in the first place.

New Car, New Insurance

When considering new car insurance, it is important to review the amount of collision and comprehensive coverage for that new car, independently of any coverage which applies to any car listed in the Declarations. It is often the case that a replacement vehicle, for example, has significantly greater value than the vehicle it replaces, and the risk equation consequently changes to the extent of that difference. It is also important to separately evaluate the deductible which should be chosen for collision and comprehensive coverage.

A further consideration is the extent to which a new car has been financed. The reason for this is that the maximum liability of the insurer for collision and comprehensive, payable under a total loss claim, is the actual cash value of your car. If you have financed all or substantially the entire purchase price of your new car, then the depreciation which has occurred may well take the actual cash value below the outstanding balance owing to the finance company. In other words, an insurance payout following a total loss or unrecovered theft may still leave you with a residual financing debt. This difference can be covered through separate gap insurance.

So, as you may appreciate from the above, the issues you confront with new auto insurance differ markedly from those which ordinarily occur in maintaining your insurance program.

 
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