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Chapter 11

Chapter 11 BU353.docx

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Heather Graham

BU353 Chapter 11 – Automobile Insurance Week 5 Overview of Automobile Loss Exposures and Insurance -Losses from automobile accidents are a major risk exposure for almost every Canadian -Drivers who are found to be at fault for accidents can be sued for both property damage and bodily injury under a negligence standard -No-fault insurance – drivers cannot sue for bodily injury losses -In Ontario, injured party’s insurer pays for relatively small losses but the injured party can sue the at-fault party for losses that are exceed a given threshold -The major loss exposures arising out of owning an automobile are: -Legal liability for property damage or bodily injury to others that the insured driver may negligently cause -Bodily injury to the insured driver and the occupants of the insured vehicle -Property damage to and/or theft of the insured vehicle -Standard auto policy – a statutory document unique to each province which establishes standardized wording for auto insurance -Personal auto policy includes three main types of coverage: -Third-party liability coverage for liability to third parties harmed by the negligence of an insured person -“Accident benefits” – uninsured motorists coverage for losses caused to an insured by drivers without liability insurance -Coverage for physical damage to, or theft of, insured autos Liability Coverage -Auto liability coverage – provides broad coverage for liability for bodily injury and property damage to other parties arising out of the negligent use and operation of an automobile by an insured person -The insurer agrees to defend the insured and bear the defence costs of any lawsuit against the insured driver and/or the insured owner, and is responsible for negotiating and settling claims -Personal auto liability coverage is sold with a single limit that specifies the maximum amount that the insurer will pay for all damages from a single accident -Third-party liability (TPL) coverage is mandatory in all provinces and territories and no policy may be issued for less than minimum limits -When policyholders travel outside of their home province, the liability limits under their personal auto policy automatically adjust to provide the limits required by law when they are higher than in the insured’s home jurisdiction -Covers spouses and family members that operate the car -Liability insurance will cover all persons who use the automobile with permission, including the insured driver, members of the same household, and other people whom the policyholder permits to use the covered auto -Someone who borrows a friend’s car will be covered under the car owner’s personal auto policy -If something happens to the vehicle while being driven by someone else, the owner’s insurance will be affected, and the vehicle could be written off -If the driver is involved in an at-fault accident, the claim will go through the owner’s policy and affect future insurance premiums -Liability coverage under the personal auto policy contains many exclusions: 1. For any liability imposed by any workers’ compensation law upon any person insured by this section 2. For loss or damage resulting from bodily injury to or the death of any employee of any person insured while engaged in the operation or repair of the auto 3. For loss of or damage to any non-auto related property carried in or upon the auto or to any property owned or rented by, or in the care, custody or control of any person insured by this section BU353 Chapter 11 – Automobile Insurance Week 5 Absolute Liability Law -The insurance contract between the insurer and insured is subject to a number of terms and conditions – Ex. The insured is prohibited from using their vehicle in any race or speed test -If the insured breaks a clause then the insurer is no longer obligated to pay a claim -Absolute Liability Law – gives third parties a direct right of action against the insurer to have the insurance money under the policy paid directly to them -The insured shall not be prejudiced by: a. Any assignment, waiver, surrender, cancellation or discharge of the policy b. Any act or default of the insured before or after the event in violation of the Act or policy c. Any violation of the Criminal Code or statute of any province by the owner or driver of the car Accident Benefits Coverage -Auto insurance policies also provide first-party accident benefits coverage -Mandatory in Ontario -Provides compensation to injured parties regardless of fault -Injured party will collect losses under their own insurance first -Coverage is provided for: -Medical expenses -Funeral and death benefits -Loss of income/total disability -Accident in a no-fault province -Uninsured motor coverage Direction Compensation Property Damage (DC/PD) -Even though someone else causes the damage, the insured person collects directly from his or her insurer instead of from the person who caused the accident -With DC/PD policyholders receive compensation from their own insurance to the extent that they were not at fault Uninsured Motorists Coverage -Provides compensation for bodily injury and property damage -An insured may recover damages from the highway victims’ indemnity fund, or from their own insurer -To be eligible to make a claim, the insured must be legally entitled to recover a loss and must not be at fault Underinsured Motorists Coverage -Allows an insured person to recover damages from his or her own insurer that in principle could have been obtained from an insured, at-fault driver, including damages for pain and suffering -The maximum amount payable under underinsured motorists coverage is the difference between the underinsured motorists coverage limit and the at-fault driver’s liability insurance limit Damage and Other Losses to Autos -All-perils coverage – provides coverage against all-perils except those excluded such as loss caused by contamination by radioactive material or if the insured drives the automobile under the influence of alcohol or drugs -Collision coverage – covers the upset of a covered auto or impact with another object, including another vehicle -Comprehensive/specialized perils coverage – covers losses such as fire, lightning, theft of the BU353 Chapter 11 – Automobile Insurance Week 5 vehicle, explosion, windstorm, and hail -These coverages can be purchased separately or combined -These coverages apply to autos listed in the policy and newly acquired autos if requested by the owner within 30 days of the acquisition Should Tort Liability be Limited with No-fault Laws? No-fault Compared to Tort Liability -Under a tort system, at-fault drivers are held liable for bodily injuries and property damages to others -Under a pure no-fault approach to compensating auto accident victims, tort liability for auto accidents is eliminated – instead, drivers collect from their own insurers regardless of fault, and insurers do not subrogate against each other -Compulsory no-fault laws are similar to worker-comp laws in that they specify mandatory insurance benefits for injuries and limit tort liability No-fault Benefits and Limitations on Tort Liability with No-fault No-fault Benefits -The magnitude of benefits available to persons injured in auto accidents in no-fault provinces varies -Compensation is generally paid for medical payments, funeral expenses, loss of income and death and impairment benefits Limitations on Tort Liability -No-fault laws place some restrictions on tort liability -An injured party who receives benefits generally cannot sue another driver for losses covered -An injured party may be prohibited from suing for pain and suffering losses or economic losses unless the magnitude of the injury satisfies a threshold specified in the no-fault law The Rationales For and Against No-fault More Efficient Compensation with No-fault -All no-fault laws to some extent increase compensation for economic loss through first-party insurance and reduce compensation for economic loss and pain and suffering through third- party liability insurance -The reduction in coverage for pain and sufferingis potentially beneficial from the perspective of optimal compensation if consumers generally would not be willing to purchase coverage for pain and suffering voluntarily -More economic losses are covered by insurance because, among other reasons, more people will have first-party coverage that pays even when no other driver is at fault -Payment for los generally is faster with no-fault coverage than with a tort liability suit -Claim settlement costs are lower with no-fault because there are fewer tort liability suits Effect on Safety and the Decision to Drive -Limits on tort liability will cause more costs of driver negligence to fall on other parties, thus reducing incentives not to be negligent -Premiums for no-fault coverage will depend on accident involvement, traffic safety violations, and whether the driver was “at fault” as long as these factors help predict future accident involvement -Reduced safety incentives under experience-rated liability insurance when tort liability is limited will at least in part be offset by improved safety incentives associated with experience-rated no- fault coverage BU353 Chapter 11 – Automobile Insurance Week 5 -Persons will have to consider the cost of no-fault coverage when they decide whether to drive Retribution and Fairness -A common argument against no-fault with strong limitations on tort liability is that it would be unfair to allow drunk not to be sued for causing a severe injury -Two responses to this argument: -Do not limit tort liability in these specific cases -Increase fines and criminal penalties for these cases, which might achieve more punishment than simply having the person’s liability insurance premium go up How Does No-fault Affect Premiums? Effect on Auto Insurance Premiums 1. The liability portion of insurance premiums should decline 2. The PIP portion of premiums will increase directly with the magnitude of required benefits -In general, large mandatory PIP benefits with little restriction on lawsuits for pain and suffering will cause average premiums to go up -If the threshold for pain and suffering suits is strong enough, the reduction in liability insurance premiums can exceed the magnitude of required PIP premiums so that total auto premiums will decline Choice No-fault -Auto insurance company trade associations have historically supported no-fault -Choice no-fault allows drivers to decide whether to purchase PIP coverage and accept restrictions in tort rights -Drivers who choose no-fault receive coverage for the majority of their expenses if they are injured -Choice no-fault laws make participation in the agreement to
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