Last week, I received the following question from an agent in Tennessee:

“Whose insurance is primary when an individual test drives a car from a dealership, the customer’s personal auto policy or the dealership’s garage policy?”

Needless to say, you must review both the dealership’s policy and that of the customer to answer this question with any authority. In the case of the dealership, there is no longer any real industry standard “garage” policy. ISO has a dealer program, but I’m not sure how many insurers with an auto dealer appetite use the ISO program. Likewise, in recent years, the industry has moved far from the “ISO standard” personal auto policy and, frankly, there are many significantly deficient auto policies in the marketplace.

In addition, this is an example of a coverage/claim scenario where a statute might govern. Since this is a Tennessee question, the auto policies involved likely are written or endorsed to reflect statutory modifications of the general “insurance follows the car” primary/excess rule. I have not reviewed this issue in several years, but the last time I did, over 22 states had some sort of statutory modification of this “rule” for dealership or rental car situations.

That being said, for illustrative purposes, we’ll use ISO language as a model for an “educational” response to the question that, if anything, provides food for thought about this exposure, along with questions perhaps every agency should ask its auto insurers. Last year, I posted an article about this that goes into more policy language depth than this article. One of the additional points made in this article is that sometimes it’s not just policy language commonly found that governs coverage. To see what I mean, keep reading….

Normally it is the insurance on the vehicle that is primary, so the dealer’s policy would normally be presumed to be primary. However, even if the dealer policy is primary, if subrogation is not waived, the dealer’s insurer may subrogate against the customer. If that happens, under the ISO PAP, there is no liability coverage because of a CCC exclusion and the physical damage is excess over ANY other source of recovery for the damage.

I know of at least two claims (discussed in my original article linked above) where the PAP insurer would only pay the deductible on the dealer’s policy…in one case, the customer was initially stuck with an almost $37,000 uncovered claim for damaging a Cadillac provided as a loaner vehicle while his car was being serviced. Personally, I think the PAP Other Insurance requirement with regard to “other sources of recovery” should only apply to sources directly available to the PAP insured, but that interpretation is not shared by everyone.

The ISO PAP, unlike it’s commercial auto counterpart, prohibits subrogation against permissive users for physical damage claims. A solution to the test driving/loaner auto problem would be to include such a prohibition in the ISO BAP and cover the exposure as a business risk under the dealership’s auto.

All of that being said, if it’s still in force, Tennessee has (or had, the last time I checked) a law (56-7-1101) that makes a customer’s auto policy primary when driving a dealership auto and the dealer’s policy primary when driving a customer’s auto. It reverses the “insurance follows the car” rule so that insurance follows the driver in determining primary coverage. The ISO PAP has a mandatory state amendatory endorsement that incorporates the language of the law into the policy. ISO has a PAP amendatory endorsement for most states that incorporates state-specific statutes into the policy used in that state.

Incidentally, the Tennessee law making a customer’s auto policy primary for damage to a dealership auto was introduced, as I recall, by a state legislator who owned two car dealerships. Imagine a politician attempting to pass a law that personally benefits him…unheard of! But to get the law passed, the compromise was that the dealership’s auto policy is primary if a dealership employee is, for example, test driving a customer’s car. When you think about it, given that many, if not most, collision claims arise from operator negligence, it makes sense to make the driver’s policy primary rather than the policy on the auto.

If your personal lines customer is test driving an auto, has use of a loaner auto, or rents an auto, how does the PAP of that insurer respond to a claim for damage to the nonowned auto in your state? Is it excluded, primary, or excess coverage?

If your customer is the dealership, how does their policy treat damage to their autos being test driven or loaned to a (prospective) customer and how does their policy respond to damage to a customer’s car being test driven by, for example, a mechanic?

Only by identifying this exposure and whether and how it’s addressed by each of your auto carriers can you properly advise your customers, either personal or commercial lines.

Photo by JCT600

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Bill Wilson

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One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information