Chapter 10 Auto Insurance pg.

229 Application Questions

Q3.Janet has a PAP with the following coverages:

Liability coverage: $100,000/$300,000/$50,000
Medical payments coverage: $5000 each person
Uninsured motorists coverage: $250,000 each person
Collision loss: $250 deductible
Other-than-collision loss: $100 deductible
Towing and labor cost coverage: $75 each person
To what extent, if any, is each of the following losses covered under Janet’s PAP? Treat each
event separately.

a. Janet rents a car while on vacation. She is involved in an accident with another motorist when
she is awarded In an accident with another motorist when she fails to yield the right of way. The
injured motorist is awarded a judgment of $100,000. The rental agency carries only liability limits
of $30,000 on the rental car. The rental agency carries no collision insurance on its cars and is
seeking $15,000 from Janet for repairs to the rental car.

Answer. The loss is covered. However, the liability insurance on the rental car is primary, and
Janet’s insurance is excess. The insurance on the rental car pays $30,000 and Janet’s insurance
pays the remaining $70,000. The rental agency does not carry collision insurance on the rental
car. Thus Janet’s collision insurance is primary and will pay $14,750.

b. Janet borrows her friend’s car with permission. Janet is in an accident with another motorist in
which she is at fault. The cost of repairing the friend’s car is $5000. The friend’s auto policy has a
$500 deductible for collision losses and $100 for other-than-collision losses.

Answer: The collision insurance applies to a borrowed vehicle on an excess basis. However, the
insurance on the friend’s car is primary. The friend’s collision insurance, therefore, pays $4500
for the physical damage loss to the car. The remaining $500 is submitted to Janet’s insurer.
However, since she has a $250 deductible, her insurer pays only $250.

c. Janet is employed as a salesperson and is furnished a company car. She is involved in an

accident with another motorist while driving the company car during business hours. The injured
motorists claims Janet is at fault and sues her for $100,000. Damage to the company car amounts
to $5000.

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Answer: The loss is not covered. The loss is excluded since a company car is furnished and made
available for Janet’s use on a regular basis. Adding the extended nonowned coverage
endorsement to her policy can cover the company car.

d. Janet’s car will not start because of a defective battery. A wrecker tows the car to a service
station where the battery is replaced. Towing charges are $60. The cost of replacing the battery is
$100.

Answer: The towing charges of $60 are covered. The cost of replacing the battery is not covered.
Only labor performed at the scene of the breakdown is covered.

Q4.Michael was driving a neighbor’s pickup truck to get a load of firewood. A child darted out
between two parked cars and ran into the street in front of the truck .In an unsuccessful attempt to
avoid hitting the child, Michael lost control of the vehicle and hit a telephone pole. The child was
critically injured, the pickup truck was badly damaged, and the telephone pole collapsed. Michael
has liability coverage and collision coverage under his PAP. The neighbor also has a PAP with
liability coverage and collision coverage on the pickup.

a. If Michael is found guilty of negligence, which insurer will pay first for the bodily injuries to
the child and the property damage to the telephone pole? Explain.

b. Which insurer will pay for the physical damage to the neighbor’s pickup? Explain.

Answer:

a. The normal rule with respect to liability insurance is that liability insurance on the borrowed
vehicle is primary, and any other insurance is excess insurance. Thus the neighbor’s policy will
pay first as primary coverage, and Michael’s policy will be excess insurance.

b. In this case, the neighbor ‘s collision insurance is primary and pays for the physical damage
loss to the pickup less any deductible . Michael‘s collision coverage applies as excess insurance.

Q7:Patrick has a PAP with liability limits of $50,000/$100,000/ $25,000. Patrick failed to stop at
a red light and hit a van. The van sustained damages of $15,000. Three passengers in the van were
injured and incurred the following bodily injuries:

Passenger A, $15,000

Passenger B, $60,000

Passenger C, $10,000 Patrick was also injured and incurred medical bills of $10,000. His car
sustained of $10,000. Because of his injury, Patrick was unable to work and lost $5,000 in wages.

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How much will Patrick’s insurer pay under the liability coverage (Part A) section of his PAP?
Explain your answer.

Answer:

Patrick ran a red light and is legally liable for the property damage to the van and bodily injuries
to the passengers. The liability coverage (Part A) pays a maximum of $90,000 as illustrated by
the following:

Property damage to the van $15,000

Bodily injury to Passenger A $15,000
Bodily injury to Passenger B $50,000 (limit per person under the
policy) Bodily injury to Passenger C $10,000

The liability coverage under Patrick’s policy will not cover his medical bills or lost earnings.

CASE STUDY
Carolyn owns a 2008 Toyota Camry. She insured the car under a PAP and purchased the
following coverages: bodily injury and property damage liability, medical payments coverage,
collision and other- than-collision loss coverage, uninsured motorists, and towing and labor
costs. Are the following losses covered under Carolyn’s PAP? If the loss is covered, which
PAP coverage would respond?

a.While driving the Camry, Carolyn slid off an icy road and hit a tree. Her car was damaged
and the passenger riding with her sustained a broken nose and a severe laceration on her
forehead.

Although Carolyn has had some bad luck driving, fortunately all of the claims are covered.
Answer .The physical damage caused by hitting a tree is covered under the collision coverage of
the PAP.
The medical treatment required by the passenger would be covered under the medical
payments coverage

b.Carolyn’s car was hit by a car that ran a stop sign. The driver did not have insurance.
Although Carolyn’s car was not damaged, Carolyn suffered whiplash and required medical
care as a result of the accident.

Answer. As the other driver is legally liable and did not have liability insurance, Carolyn’s
uninsured motorists coverage would respond.

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c.Carolyn’s car broke down while she was driving on a busy freeway. She called a tow truck
and had the car towed to a local service station.

Answer: As Carolyn added the endorsement for towing and labor costs, the towing charge is
covered.

d.While driving late at night, Carolyn fell asleep and her car crossed the center line. She hit an
approaching car. The driver of the other car sustained $20,000 in bodily injuries and the
passenger in the other car sustained $10,000 in bodily injuries. The other car was a total loss,
and Carolyn’s car sustained $2500 in damage. Carolyn broke her arm and leg in the accident.

Answer. The bodily injury claims and property damage to the other car are covered under
Carolyn’s liability coverage. Damage to Carolyn’s car is covered under her collision coverage.
Carolyn can also recover the cost of her medical care under the medical payments coverage.
Collision losses and medical payments are paid regardless of fault.

e.Carolyn was involved in a carjacking. She was not injured, but her stolen car was never
recovered.

Answer. Theft of an insured auto is covered under the other-than-collision loss coverage of the
PAP.