Consider these four claim scenarios:
- A personal lines customer puts his Cadillac in the shop for servicing and gets a loaner Caddy from the dealer which he totals to the tune of a $37,000 physical damage loss. The dealer’s insurer covers the damage above a $500 deductible but wants its money back from the negligent customer.
- A personal lines customer placed his Acura in the shop for maintenance and was provided with a loaner car which was struck while parked and unoccupied. The damage was $6,500 and the dealer’s insurer expected the customer’s auto insurance to pay.
- A personal lines customer is test driving a car from a used car dealer and hits a deer. The dealer’s insurer pays to repair the damage but subrogates against the driver.
- A personal lines customer is test driving a new car and has an at-fault accident resulting in damage to another vehicle and to the dealer’s auto being driven.
Each of these is an actual claim where the customer turned the claim in to his personal auto policy (PAP) insurer and the claim was denied. In the first three cases, the Other Insurance clause was cited so that only excess coverage was provided. Using the current ISO PAP as the model, this clause says:
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.
The PAP insurers relied on this language making their coverage excess and would only pay for the deductibles on the dealers’ policies. The insureds were on the hook for outstanding amount. In the case of the $37K Cadillac claim, the agent was able to use their influence to get the PAP carrier to respond to the claim but, to my knowledge, the other PAP carriers did not, resulting in the agencies’ personal lines customers incurring out of pocket expenses of several thousand dollars.
In the last claim, the very large national carrier cited this exclusion in their proprietary (non-ISO) auto policy:
This insurance does not cover certain losses or situations….
It does not cover a non-owned car while being used or maintained in any auto business by anyone.
According to the carrier, the auto was being “used” IN an auto business by someone, so the exclusion applied. This seems to be a rather restrictive interpretation but the carrier insisted it was designed to exclude losses involving loaner cars and could be applied to test driving or even rental cars.
Note that the “auto business” exclusion above is non-ISO language. ISO’s “auto business exclusion” applies only to insureds:
While employed or otherwise engaged in the “business” of…selling…repairing…servicing…storing…or parking vehicles designed for use mainly on public highways.
Clearly, the ISO language would not apply to this claim since the insured is not the person engaged or employed in the auto business. However, the proprietary language could arguably apply to the claim to preclude coverage. Regardless, the ISO Other Insurance clause (and the clause in the non-ISO policy) clearly provide coverage only on an EXCESS basis.
So, what is the solution? With regard to the “auto business” exclusion applied in the last claim, there’s nothing you can do except, as the agent did in this claim, lobby the carrier to change the exclusion to something more reasonable like the ISO language. The alternative is to not use that carrier’s auto policy.
With regard to the Other Insurance clause making coverage excess, the solution probably lies in revising the commercial auto policy of the auto business to make an exception in their subrogation clause (“Transfer Of Rights Of Recovery Against Others To Us”) similar to that in the ISO PAP subrogation clause (“Our Right To Recover Payment”) which says:
However, our rights in this Paragraph (A.) do not apply under Part D, against any person using “your covered auto” with a reasonable belief that that person is entitled to do so.
In other words, revise the business auto policy (BAP) or provide an optional, perhaps premium-bearing, endorsement that disallows subrogation against a permissive use of a dealer auto such as a loaner vehicle or while test driving an auto.
And, one last thing…what about the carrier with the nasty “auto business” exclusion? ALWAYS remember to RTFP!
Photo by _Fidelio_ 
Bill Wilson
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Assumption of risk remains the insurer of last resort
Tim Dodge has posted about this on his blog:
http://www.iiabny.org/AskTim/Lists/Posts/Post.aspx?ID=115
It’s important to note that these inferior policy provisions are not always in nonstandard auto or E&S policies. There are deficiencies in the policies of major national carriers, some by design, some as a matter of arguable interpretation. Some of these provision are hit or miss but some, like this one, are substantial enough to make the agent think twice about placing business with a carrier with this kind of admitted deficiency.
Note: This article is based largely on PAPs that cover physical damage to nonowned autos under the Collision and Other Than Collision sections of the policy, not the Liability section. Some states and some carriers pay for damage to nonowned autos under the liability section of the policy and coverage would depend on the Other Insurance wording of those forms. In the case of a policy applying the “auto business” exclusion, there might be no coverage throughout the policy but, again, it depends on the specific wording of such forms. As noted in the article, the non-ISO carrier’s policy excludes the described claim, but the ISO PAP would not.