Life, the NC Financial Responsibility Act, and You

What is the meaning of life? Why does the universe exist? Does North Carolina law REALLY require me to buy all this auto insurance?

What is the meaning of life? Why does the universe exist? Does North Carolina law REALLY require me to buy all this auto insurance?

What, no more subrogation articles?!?

That's right! Henceforth, we're leaving the fabled land of Liens and Subrogation in pursuit of other, less yawn-inducing Personal Injury pastures. All of the lien articles are still up, and if you have any questions that aren't addressed on the blog, I really hope that you'll pick up the phone and give me a call. Seriously; that's what I'm here for.

So the Financial Responsibility Act, huh?

That's right. Before we continue on, you should know that the Financial Responsibility Act isn't some law that requires people to put money in their piggy bank. As it happens, the Act relates to auto insurance, which is why you see it popping up in a highly Personal Injury-centric article.

Over the past months that I've been here at Felton Banks, we've covered a good bit of information about auto insurance. For instance, we know that North Carolina law requires owners of automobiles to carry auto insurance in the form of liability, uninsured, and underinsured coverages. We know that the minimum amount of liability coverage is $30,000 per person, $60,000 per accident, and $25,000 per property damage. But what you might not know is that the source of all these requirements can be found in one tidy piece of legislation; the North Carolina Financial Responsibility Act of 1953 (what we'll call the "FRA"), codified at Article 9A of Chapter 20 of the North Carolina General Statutes.

Why does the FRA exist?

The FRA is what we lawyers term a "remedial" act, meaning that it was drafted to address a specific problem in North Carolina. This problem is really two sides of the same coin; on one hand, you have Defendant injuring Plaintiff in a car crash, getting himself sued, and then losing all of his assets when the judgment against him is enforced. This results in Defendant becoming a "ward of the state," which is unpleasant for all parties. That problem has been somewhat ameliorated by North Carolina's relatively generous judgment exemptions laws, but those can only do so much.

Contrast that with the other problem; Plaintiff gets injured by Defendant's negligent act, goes to sue Defendant, and quickly realizes that Defendant doesn't have any assets from which Plaintiff can recover. Plaintiff then loses all of his assets paying for his medical bills, and because he's unable to work, he then becomes a ward of the state. Equally unpleasant, right?

What does the FRA say?

Here's the part of the FRA that I want to focus on today. It's codified at N.C. General Statutes § 20-279.21(b)(2), and it states that a vehicle owner's liability insurance policy:

Shall insure the person named therein and any other person, as insured, using any such motor vehicle or motor vehicles with the express or implied permission of such named insured, or any other persons in lawful possession, against loss from the liability imposed by law for damages arising out of the ownership, maintenance or use of such motor vehicle or motor vehicles within the United States of America or the Dominion of Canada subject to limits exclusive of interest and costs, with respect to each such motor vehicle, as follows: thirty thousand dollars ($30,000) because of bodily injury to or death of one person in any one accident and, subject to said limit for one person, sixty thousand dollars ($60,000) because of bodily injury to or death of two or more persons in any one accident ...

Now, a couple of things before we go all "lawyer" on this text. First, keep in mind that the point of the FRA is to prevent people from being rendered destitute because of the severe damages that so often attend car accidents. This public policy dictates that where coverage disputes arise, it behooves everyone involved (except the liability insurer, of course) to interpret the policy language broadly in favor of coverage. Second, the FRA is the end-all-be-all when it comes to auto insurance. If a North Carolina auto policy has language that conflicts with the FRA, the policy language gets kicked out and the FRA language controls.

If you're paying attention, you can see that the insurance industry, taken as a whole, has a massive interest in minimizing the effects of the FRA as much as possible. It follows that there's a wealth of case law pertaining to nearly every single clause in the Act. Let's jump in and look at a few of the more "popular" ones!

"An auto accident ..."

A lot of auto policies extend coverage for damages "for which any insured becomes legally responsible because of an auto accident." I mean, duh, right? Well, here's the thing. The FRA requires coverage, not just for auto accidents, but for "liability imposed by law for damages arising out of the ownership, maintenance or use" of a covered auto. That clause conflicts with the policy language that we just talked about, and we all know what happens when policy language conflicts with the FRA, right? The FRA language controls! This concept, which has been incorporated into North Carolina law through cases like this one and this one, sets forth that coverage isn't just triggered by a motor vehicle collision; as long as there's a "causal connection" between the auto's use and the loss, the liability carrier is compelled to provide coverage.

But how attenuated can that "causal connection" be without losing coverage? Pretty daggum attenuated, as it turns out. For instance, there are a multitude of North Carolina cases setting forth that injuries or death arising out of the accidental discharge of firearms can be covered provided that (i) the discharge wasn't intentional and (ii) the covered auto was "regularly used" to transport the firearms. Cases like these obviously have nothing at all to do with motor vehicle collisions, but coverage is still triggered because they arise out of the use of a covered auto.

Other cases have yielded equally surprising results arising out of activities that are similarly unrelated to driving. For instance, the Court of Appeals found UIM coverage in a 2000 case wherein a man died when his car was struck while he was underneath the vehicle performing work on the undercarriage. Five years earlier, the same court found coverage where a young girl was struck by a vehicle as she walked from her grandmother's car into a store. 

As you can see, the "ownership, maintenance or use" of a vehicle can mean a ton of different things. The catch, as we'll see, is that the claimant has to be considered an "insured" under the policy.

What does it mean to be an "insured?"

Your standard policy, under the FRA, isn't just going to cover the person or people whose names appear on the Declaration Page; there are categories of people who are covered, and you're included as long as you're a member of at least one of those categories. So what are they, anyway?

  1. "You." This means the "named insured" whose name is at the top of the Declaration Page, and it also means that person's spouse, provided that the spouse is a resident of the same household. Now, the word "resident" is loaded with conflicting meanings, and we don't have time to jump down that rabbit hole today. But suffice it to say that given the public policy behind the FRA, and given the ardent judicial commitment to interpreting policy language broadly, the scope of who's a "resident" for coverage purposes is quite broad.
  2. "Any family member." You better believe that this term is specifically defined in your average policy, since otherwise everybody would be everybody's family member for coverage purposes. Under the prevailing definition, a "family member" is any person (i) related to the named insured by blood, marriage or adoption who is (ii) a resident of the named insured's household, including a ward or foster child. Even despite the insurance industry's commitment to defining this category narrowly, there's a massive amount of case law speaking to who, exactly, is included in this group.

This all kinda seems too simple to be the whole story.

That's because it is! There are a multitude of loopholes, exceptions, exclusions, and otherwise wacky little peccadilloes to be aware of. On Tuesday, we'll cover some of the more basic exceptions included in the standard auto policy. Until then, enjoy your weekend and let me know if you have any questions!