Coverage Corner

COVERAGE GAPS FOR NON-OWNED AUTOS

By Bill Wilson, CPCU, ARM, AIM, AAM

If a customer damages a rental car, does their personal auto policy (PAP) cover the damage? If you read consumer articles about this, the answer is almost always “Yes,” but the real answer is “Maybe” or, more accurately, “Yes and No.” Perhaps in an upcoming column we’ll talk about the coverage caveats when renting autos since insureds can often find themselves footing four-figure bills.

There are also situations where damage to other non-owned autos, for example, those owned and insured by other household family members, are not covered by the user’s PAP, at least without endorsing the coverage. This is another issue we might explore in a future column and that I referenced in the last column about kids at college. [Editor’s note: See https://issuu.com/ primary_agent/docs/august-2023.]

However, consider the following four actual claims involving two different non-owned auto situations where coverage was denied by the PAP insurer:

An insured was driving a loaner car while his Cadillac was being serviced at the dealer. Unfortunately, he had an at-fault accident that resulted in $37,000 in damage to the loaner vehicle. The dealer’s garage policy paid for the physical damage but then subrogated against the customer, and the claim was denied under the customer’s PAP.

In a similar situation, the insured was provided with a loaner car while his Acura was in the shop. The vehicle was damaged to the tune of $6,500 while parked and unoccupied. The dealer’s insurer filed a claim against the customer’s PAP insurer, and it was denied.

In a different non-owned auto situation, an insured was test driving a car from a used car dealer and hit a deer. The dealer’s insurer paid for the damage but subrogated against the customer whose PAP insurer denied the claim.

In a similar scenario, the insured was test driving a new car and had an at-fault accident. Again, the dealer’s insurer sought physical damage coverage from the customer’s PAP, and the claim was denied.

Before continuing, let me say that these types of claims are covered every day by many insurers under the physical damage coverage of the insured’s PAP. And, in some states or under some policies, coverage for non-owned autos is governed by the liability portion of the policy. But not in the four claims cited above.

In each of these four claims, the basis for denial by the insurer under “ISO standard” PAP language was the Other Insurance clause which said:

However, any insurance we provide with respect to a “non-owned auto” shall be excess over any other collectible source of recovery including, but not limited to:

1. Any coverage provided by the owner of the “non-owned auto”;

2. Any other applicable physical damage insurance;

3. Any other source of recovery applicable to the loss.

In all of the claims cited above, because the vehicle owner had a “collectible source of recovery,” the insurers would only pay for the deductibles on the dealers’ policies and the PAP insureds were on their own for the difference.

In the last claim, the insurer also cited proprietary policy language that said that the customer’s PAP, “… does not cover a non-owned car while being used or maintained in any auto business by anyone.” The ISO PAP also has an “auto business” exclusion, but it applies only to persons “engaged in the ‘business’ of” selling, repairing, servicing, storing, or parking of autos.

Again, you have probably had scores of claims like this paid by PAP insurers, but clearly this isn’t always the case. The best solution for this would be for commercial auto policies’ subrogation clauses to, like the ISO PAP, prohibit recovery from permissive users. However, given that the customer (and likely the dealer) has no control over this, this is probably impractical.

A contractual hold harmless between the dealer and customers is a possibility, as might be a legislative remedy as found in some states. In the meantime, have you surveyed your auto markets to see how they handle these and other non-owned auto situations?

Til next time!

Bill Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of seven books, including “When Words Collide…Resolving Insurance Coverage and Claims Disputes.” He can be reached at Bill@InsuranceCommentary.com.