By Donald S. Malecki, CPCU
Insureds jeopardize their
coverage when they
allow restricted drivers access to vehicles
Any accident involving an excluded driver precludes coverage, even for the innocent policyholder.
Individuals and families who purchase automobile insurance do so for many reasons. For one thing, it's compulsory in many states. Whether drivers have assets to lose or not, there are legal reprisals for being without insurance in cases of serious injury or damage.
A person's driving record, of course, impacts rates. A record that reflects a frequency and/or severity of claims or convictions based on various offenses will signal insurance company underwriters that these drivers do not qualify for the same protection generally available to safety-conscious drivers with good driving records.
In an effort to insure the responsible drivers in a household, carriers will exclude the family member with the less than stellar driving record. This is accomplished by way of a "named driver exclusion." Agents, brokers, consultants, insurance company claims people and underwriters all know the purpose of this type of endorsement. The only ones who appear to be in the dark about its purpose and ramifications are the policyholders who agree to it in writing.
Major exposure For many individuals and families, the most serious personal auto insurance exposure confronting them is when, unbeknownst to them, an auto is driven by someone the policyholder has agreed in writing will not operate the auto--or when the policyholder permits that person to drive, despite a written promise to the contrary.
Briefly, this exclusion, which actually appears as an endorsement attached to an auto policy, is a tool that can benefit both the insurer and the policyholder. It enables the insurer to continue providing insurance by eliminating drivers who either have had a series of serious accidents, or are capable of creating serious losses. Such persons often are youthful drivers but also can be adult drivers who've had previous encounters with the law, such as convictions for driving under the influence of alcohol or drugs.
Without this signed document, underwriters are likely to refuse the issuance of auto policies because these types of drivers are more likely than not to be involved in auto accidents. In fact, insurers are permitted to issue cancellation or non-renewal notices in many jurisdictions if this signed document is not on file. Unfortunately, owners of autos often don't realize the importance and full impact of these written directives from insurers that preclude the autos' use by unauthorized drivers--until something happens.
Sample exclusions Considering that many of the auto policies issued today are ones that are independently filed, it's difficult to repeat here the typical provision that policyholders must sign as conditions precedent to maintaining insurance. However, following are different versions of the same exclusionary provision:
"You agree that none of the insurance coverages afforded by this policy shall apply while [name] is operating your covered auto or any other motor vehicle. You further agree that this endorsement will also serve as rejection of Uninsured/Underinsured Motorists Coverage and Personal Injury Protection Coverage while your covered auto or any other motor vehicle is operated by the excluded driver."
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"No insurance is provided by this policy while any automobile is being driven by or under the direct control of [name]."
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"In consideration of the premium charged for the policy to which this endorsement is attached, it is agreed that the [insurer's name] shall not be liable for damages, losses or claims arising out of operation or use of your insured car, or any other automobile to which the terms of this policy are extended, either with or without expressed or implied permission of the named insured(s) by the drivers listed below as excluded."
Problems of policyholders One of the problems confronting policyholders who agree to these signed documents is seeing to it that the excluded drivers never operate an auto that will likely affect the policy of the policyholder. It's not easy to enforce this. There are actual cases where, despite some verbal warnings by parents of youthful drivers, the excluded drivers manage to get control of the family auto and become involved in serious accidents. Other cases reveal that some signers of these documents don't take the possible repercussions seriously enough until it's too late.
As the above exclusionary provisions reveal, any accident involving an excluded driver precludes coverage, even for the innocent policyholder! Some of these excluded drivers may be irresponsible and could care less what happens when their parents or spouses lose their homes and other assets. Others may be more sympathetic after something happens. What policyholders need to realize, however, is that their assets are at stake, and no one else's.
A case involving a minor where the parents probably had a rude awakening is Kivlin v. Nationwide Mutual Insurance Company, 765 A.2d 536 (Sup. Ct. DE). While an auto policy was in existence, the insurer sent the policyholders notice that their policy would be cancelled or not renewed because of the driving records of their two sons. As required by that state's law, the insurer informed the parents that the policy could be continued, provided the two boys were excluded from the policy and other coverage was secured for them.
The parents informed the insurer that they wanted to continue their insurance and that the two boys were surrendering their licenses instead of obtaining other insurance. Thereafter, a renewal policy was issued along with an endorsement known as "Voiding Automobile Insurance While A Certain Person Is Operating the Car." The parents also executed an Authorization to Exclude a Driver form.
Three months after the renewal, one of the sons was involved in an accident while operating one of the family's autos, without a license, causing injuries to another person. One of the common defenses of defendants is to show that these exclusionary provisions are against public policy. In this particular case, the endorsement was held to be valid, excluding all coverage (defense costs and damages) to the parents.
Spouses also have created problems for their partners on a number of occasions. One such case is Principal Mutual Life Insurance Company v. Progressive Mutual Insurance Company, 27 P.3d 343 (Sup. Ct. CO ), where the male of the household, who was specifically excluded from his spouse's personal auto policy, injured their infant daughter while backing up the auto in their driveway.
Although the medical benefits were paid by the wife's employer's health insurance plan, the insurer of that plan sought to recover the amounts paid, in subrogation against the wife's personal auto insurance. The parents also sought personal injury protection under their own personal auto policy for their daughter. As it turned out, however, the wife had agreed in writing to exclude her husband. The named driver exclusion was held to be valid in Colorado, thereby precluding the PIP benefits and subrogation action against the auto insurer.
What can be doubly damaging is when a family also maintains a personal umbrella to protect their assets only to find that this policy also does not apply. This type of endorsement also has been held applicable even when an excluded driver is no longer a resident of the named insured's household at the time of an accident, in a situation where the parents' auto policy is affected.
These are not isolated cases. There are many of them. Among other states where these cases have arisen are: Alabama, Arkansas, Arizona, Delaware, Illinois, Kentucky, Louisiana, Maryland, Michigan, Nebraska, New Mexico, Ohio, Pennsylvania, South Dakota, and Texas.
Possible defenses In most of these cases, the named insureds go on the offensive when they find themselves confronted with the prospects of no protection for legal costs and resulting damages. So they attempt to show that the signed agreement to exclude drivers is invalid for a variety of reasons.
For example, in one case the named driver exclusion endorsement was held to be inapplicable to property damage from an accident that was not the driver's fault. The endorsement was limited solely to losses or damages caused by the named driver. In another case, the named insured's agreement to exclude her spouse from auto coverage was held not to satisfy the state's statutory requirement of a written contract.
In another case, an otherwise valid named driver exclusion was held to be void as against public policy to the extent that it denied an insured both uninsured and underinsured motorists coverage.
These exclusionary endorsements also are used for commercial auto policies. While there are some cases involving these policies, most deal with individuals and families--and for good reason. Commercial entities have a better opportunity to manage the risks of commercial auto usage.
Individuals and families, on the other hand, may be able to practice some control over the persons who are excluded from driving, but not entirely. There is nothing to prevent a youthful driver, for example, from using someone else's auto and becoming involved in an accident. So long as that youth is a member of the household, the parents will likely be adversely affected in the event of an accident leading to claim or suit.
The exposure still may persist even when these undesirable drivers are able to maintain some auto insurance. The reason is that the nature of coverages available may be limited, or cost-prohibitive. If an accident occurs and the limits are insufficient, the remainder may impact the auto insurance maintained by those named insureds who are found to be responsible for the drivers' actions.
Given the number of suits dealing with these exclusionary endorsements, and their potential impact, agents and brokers could provide a definite service if they would make clear to their insureds the full impact of what could happen if these written promises were to be broken. The effect would be as though the named insureds had never purchased an auto policy, and even a personal umbrella policy. That is frightening, particularly when insureds stand to lose everything they own, not to speak of the traumatic experience of it all. *
By Donald S. Malecki, CPCU