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Insuring Your Automobile Is Essential

Filed under Asset Protection Strategies. Fact checked on May 24, 2012.

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Automobile liability insurance is an absolute necessity for every business owner. Although many states require some level of liability insurance, it is critical that you carry enough coverage to protect your assets in the event of an accident.

Automobile liability insurance is a necessity for any one who drives an automobile. For the business owner, commercial vehicle insurance may be required if you use the vehicle (car, van, pick-up truck) primarily for business. Many personal insurance policies will not cover accidents if the vehicle is used primarily for business. If you have employees who use their cars for your business, then you will want to make sure your policy covers their cars as well with a "non-owned" provision.

States generally mandate that drivers carry automobile liability insurance, subject to minimum policy limits, but this mandate does not extend to automobile property insurance covering damage to the insured's own vehicle. In short, states are concerned only about drivers having insurance to cover damages caused to other persons and their vehicles, and not coverage for their own personal and property damages resulting from an automobile accident.

Typically, the minimum policy limit is stated in terms of the liability for personal injuries caused to other persons, but the small business owner also should remember that separate limits in a liability policy will apply to property damage caused to another party. Usually, states impose a smaller minimum liability limit for property damage, although some states may have no minimum requirement at all for this type of liability coverage.

Warning

Automobile insurance property coverage is issued on a named-peril basis. Thus, a failure to mention in the policy one form of coverage (e.g., comprehensive) acts as an automatic exclusion of this form of coverage.

Split-Limit v. Single-Limit Policy. Automobile liability coverage for personal injuries may be issued on either a split-limit or single-limit basis. The split-limit policy provides for two separate limits: one that applies to each individual injured and a second overall limit that applies to each accident. 

In contrast, a single-limit policy, as the term implies, has one limit per accident. The single limit may be recovered entirely by one individual or divided among all of the injured parties. Generally, a single-limit policy offers better protection.

Example

A $200,000/$400,000 split-limit policy would pay a maximum of $400,000 for personal injuries, per accident, with each injured individual entitled to collect a maximum of $200,000.

A $400,000 single-limit policy would pay a maximum of $400,000 for that same accident, with any one individual entitled to collect the entire policy limit.

Generally, a single-limit policy is superior to a split-limit policy, provided the single limit is equal to, or greater than, the maximum limit per occurrence in a split-limit policy. In this example, if there is a single-limit policy ($400,000) and an individual suffered $400,000 of damages, the policy would pay all of the damages.

By contrast, if there is a split limit policy ($200,000/$400,000), the injured individual could collect only $200,000 of his damages from the policy, and the responsible driver (i.e., the insured party) would have to personally pay the remaining $200,000 of the damages.

Who Does the Policy Cover

An automobile liability and property policy will cover the named insured and other drivers who do not drive the vehicle on a regular basis. Thus, you lend your car to a friend for one day, your friend would be driving under your policy. However, if someone will be driving the vehicle on a regular basis, you must add them to the policy as an insured party. If this is not done, insurance coverage will not apply. And remember--your personal auto insurance isn't going to cover vehicles used primarily for business!

Insurance coverage and liability for the accident are two different issues. Insurance coverage is controlled by the insurance contract. Personal liability is controlled by tort law, which has been developed by the courts and supplemented by state statutes. Generally, a business entity will be held liable for an accident caused by one of its employees, because the doctrine of respondeat superior will apply. In contrast, an insured party will not have liability for negligence committed by another driver, who is also insured to drive the same vehicle, if the responsible driver is not the employee or agent of that party.

If you lend your vehicle to friend, in an isolated instance, you will not be held liable for the friend's negligence because there is no employment or agency relation between the two parties. Thus, your insurance would cover the accident, but you would have no personal liability for the loss due to the absence of an employer-employee or agency relationship.

However, if you commit an act of negligence that was separate from the accident itself (e.g., allowing his friend to take the vehicle even though he was intoxicated or otherwise unqualified to drive the vehicle), you may be held liable for your negligence.

Most States Require Liability Coverage

Nearly every state requires insurance in order to legally operate a motor vehicle. However, minimum liability coverage, as mandated by state law, is woefully inadequate because seemingly small cases can result in judgments of several hundred thousand dollars. 

Generally, in negligence cases, the civil litigation system works against defendants, making it much more likely that a negligence lawsuit will be successful and that monetary damages will be significant.

As a rule, the small business owner should consider a single-limit policy with a minimum limit of $300,000. A split-limit policy should have a minimum limit of $300,000, per individual, and thus a higher overall limit.

Work Smart

Remember, although you may be tempted, don't drive with only the state-mandated minimum amount of liability coverage for personal injuries caused to others. Get yourself a single limit policy with a minimum policy limit of $300,000.

You Should Carry Uninsured Motorist Coverage

The best time for the small business owner to consider the policy limits for uninsured/underinsured motorist coverage is when he is considering the limits for his liability coverage. After all, both liability coverage and uninsured/underinsured motorist coverage will pay for personal injuries. The question then really is the same: What is the dollar amount of damages for personal injuries that could result from an accident?

As a general rule, the small business owner should purchase uninsured/underinsured motorist coverage in the same amount as his liability coverage. Thus, a policy with a single limit of $300,000 should also contain uninsured/underinsured motorist coverage in the amount of $300,000.

States differ as to when and exactly how underinsured motorist coverage applies. Generally, the insured must first recover the entire policy limit from the responsible driver before he can make an underinsured motorist claim against his policy. Thus, if such an underinsured motorist claim were being considered, it would be a mistake to accept less than the full policy limit of the other driver's policy as a settlement.

In some states, the amount of the underinsured motorist coverage is the stated policy limit for this coverage, less the other driver's policy limit. Thus, a driver with $300,000 of uninsured/underinsured motorist coverage, really only has $280,000 of coverage when the responsible driver has a policy limit of $20,000. In other states, the limit for this type of coverage is the stated limit, without subtraction for the responsible driver's liability coverage.

Finally, in some states, it is possible to aggregate all uninsured/underinsured motorists coverage for all of your vehicles. Usually, where this feature is available, it requires the payment of an additional premium.

Tip

Generally, insurance companies will not raise a driver's rates for making an uninsured/ underinsured motorist claim, because the insured is not the party who is responsible for the accident.

Separate Limits Apply for Property Damage 

As is the case with respect to liability policies in general, separate policy limits for property damage will apply in an automobile liability policy. Too often, liability limits for property damage are not the product of careful deliberation because the primary attention is focused on liability coverage for personal injuries. The result usually will be inadequate liability coverage for property damage.

Consider that many vehicles today cost $30,000 to $50,000 (or more). In addition, as a result of an automobile accident, extensive and costly property damage may be caused to public and other forms of private property, including buildings, utility poles and lines, traffic lights, etc. Thus, the small business owner should purchase an automobile liability policy with a minimum limit of $50,000 for property damages.

Automobile insurance is an example of a single policy capable of providing both liability coverage (for personal injuries and property damages caused to other parties) and property coverage (for damages to the insured's own vehicles). The small business owner definitely should also protect his own vehicles against loss by obtaining property coverage in the form of collision and comprehensive protection. The business owner with no health insurance should also consider adding medical coverage for his own injuries.

Collision and Comprehensive Insurance Covers Damage to Vehicle

Property coverage in an automobile policy is subdivided between two types of coverage: collision (which covers losses due to a collision, where the insured is at fault) and comprehensive (which covers losses from fire, and other acts of nature, theft and vandalism). 

Both forms of property coverage in an automobile policy (i.e., collision and comprehensive) will be subject to deductibles. One way to reduce premium costs is to raise the deductible on the policy. For example, many advisers recommend a $500 deductible for collision coverage. The savings in premium costs can be significant.

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