Summary: This article examines part A of the personal auto policy (PAP) PP 00 01 01 05. The insuring agreement of part A of the PAP provides liability coverage to the insured should the insured become legally responsible for damages to another party because of an auto accident; the agreement also provides for defense costs coverage in case the insured is sued by the injured party. These coverages are subject to certain exclusions that are listed on the policy, and to a limit of liability that is shown in the declarations.

Topics covered: Insuring agreement

Insureds

Supplementary payments

Exclusions

Limit of liability

Additional provisions

Insuring Agreement

We will pay damages for "bodily injury" or "property damage" for which any "insured" becomes legally responsible because of an auto accident. Damages include prejudgment interest awarded against the "insured". We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgments or settlements. We have no duty to defend any suit or settle any claim for "bodily injury" or "property damage" not covered under this policy.

Analysis

The promises to pay damages and to defend any claim or suit asking for those damages are separate and independent promises. The insurer has a duty to indemnify and a duty to defend the insured. That is why defense costs are considered to be in addition to the limit of liability. For example, if the policy has a limit of liability of $300,000, this full amount is available for indemnification; an attorney's fee of $10,000 plus court costs of $2000 will not reduce the limit of liability by the $12,000. However, the insurer's duty to settle or defend does end when the limit of liability has been exhausted through the payment of judgments or settlements. Note this point, in that it means that the insurer can not just deposit the policy limits into an escrow account and walk away from the defense of the insured; the duty to defend the insured must be carried on until the actual payment of a judgment against the insured or if a settlement with the claimant exhausts the limit of liability.

Furthermore, the insuring agreement includes as covered damages, i.e., paid within policy limits, any prejudgment interest awarded against the insured. This coverage, which parallels similar coverages in other commercial liability policies, has resulted from the enactment in several states of laws that allow claimants to collect interest on judgments between the time suit was entered and judgment was rendered. Because the policy language states that such amounts are included as damages, they are subject to PAP limits that apply to all damages. In contrast, interest that accrues after a judgment is entered and up to the time that judgment is paid remains a supplementary payment, that is, payable in addition to the limit of liability.

Also present in the insuring agreement is a statement that the insurer has no duty to defend any suit or settle any claim for bodily injury or property damage not covered under the policy. This serves to clarify the insurer's duty to defend. The general rule is that the insurer's duty to defend is triggered by the allegations of the complaint against the insured regardless of the apparent facts, or the insurer's interpretation of facts, of a particular loss. If, for example, an obviously fraudulent suit is filed against the insured, the insurer is still required to defend so long as the suit alleges bodily injury or property damage that could conceivably be covered under the policy. However, a suit alleging the insured committed an assault with the express intention of causing bodily injury is not considered as alleging an act that is covered by the policy (regardless of the truth or falsity of the allegation), and so the insurance company would be on solid ground should it decide not to mount a defense.

Note that the personal auto policy ties coverage to "auto accident." Since 1966, general liability insurance provisions have used "occurrence"—defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions"—as the triggering event; the purpose has been to meet the particular needs of public liability where repeated exposure to dangerous conditions in areas of products, operations, professional activities, etc., is a large concern. In automobile liability insurance, the distinction between the two terms is of less significance. The reverting to "accident" in the personal auto policy might be viewed as no more than another of the drafters' attempts to achieve greater understandability.

Insureds