Standard Exceptions to Your Auto Insurance Coverage: Because Simple is Boring!

 No insurance policy would be complete without some good ole' convoluted language! We're going to decipher all that stuff for you, or at least give it our best shot!

No insurance policy would be complete without some good ole' convoluted language! We're going to decipher all that stuff for you, or at least give it our best shot!

This sounds familiar.

In my last article, we talked at length about the North Carolina Financial Responsibility Act of 1957 and how it governs what losses your auto insurance carrier does and doesn't have to cover. To sum it up, the main points were that (i) the FRA was passed in order to prevent tortfeasors and injured parties from becoming destitute "wards of the state," (ii) that carriers are required to provide minimum amounts of liability, uninsured, and underinsured coverages, (iii) that policies are required to cover the policyholder, any related member of the same household, and anyone driving the covered vehicle with express or implied permission to do so, and (iv) that covered losses aren't limited to auto collisions, but also include any loss arising out of the ownership, maintenance, or use of the covered vehicle.

That all sounds great, right? Well, don't get too excited. As it turns out, insurance companies aren't big fans of hemorrhaging money; and to be fair, their conservatism (within reason!) does help to keep premiums down for the rest of us. In any event, it follows that these insurance carriers have gone to great lengths over the years to determine exactly where the boundaries are between coverage and non-coverage. These same carriers have then used that knowledge to carve out various exclusions to coverage, most of which you'll find in the standard auto policy.

We don't have time to go through every single standard exclusion, but I do want to make you aware of the ones that cause the most problems for injured folks. Let's jump in!

Intentional Acts

The "Intentional Acts" exclusion bears out the general notion that insurance coverage is only going to apply to negligent acts; it isn't going to cover intentional bodily injury or property damage. So if Ryu from Street Fighter II goes on a 'roid rage all over your car, then you're probably out of luck.

Now, there are a couple caveats here; exceptions to the exclusion, if you will. First, case law dictates that the FRA's requirement of minimum liability limits is going to preempt the Intentional Acts exclusion. That means that even if a loss was clearly intentional on the part of the insured, you can at least get the minimum amount of coverage. However, if the insured has more than the minimum limits, you probably won't be able to go after that additional amount of coverage.

The second thing to remember about this exclusion is that when somebody does smash into you, you may feel the urge to exaggerate or try to paint the loss in the most extreme terms possible. It's important to keep in mind that if such an exaggeration is interpreted by the adjuster as an allegation of intentional conduct, it could give that adjuster an avenue to deny coverage under the Intentional Acts exclusion. This is what we refer to as "pleading yourself out of coverage," and it's important to steer clear by remaining calm and objective.

Finally, you should keep in mind that the Intentional Acts exclusion also applies to homeowner's insurance, but in a different way. This exclusion is triggered under auto insurance when the act is intentional, right? Well, under the homeowner's analysis, the exclusion is only triggered if both the act and the resulting injury are intended. The difference may seem like an unimportant one, but under certain circumstances it can mean the difference between getting coverage and losing out.

Employees

Your standard auto policy is going to exclude coverage for employees of the insured, provided that they are acting within the course of employment at the time of the loss. This exclusion basically operates to make the auto policy a "secondary payer" behind worker's compensation coverage in the event of a work-related auto collision.

Two things to remember. First, if worker's compensation isn't available or required for whatever reason, there should still be at least minimum coverage under the FRA. Second, "domestic employees" are not lumped into the Employees exclusion unless they have a form of worker's compensation coverage available to them (which is going to be rare in the case of domestic employees). The IRS defines the term to include, for example, babysitters, housekeepers, nannies, et cetera. Importantly, this means that if you're a "domestic employee" and you don't have worker's comp, you're covered up to the full policy limits.

Business Use

This one is fairly straightforward. If the insured causes a loss while acting for any business purpose (other than a few limited exceptions like farming or ranching), then that loss will not be covered under the insured's auto policy. However! Please note the extremely important exception to this exclusion. If the insured is using his own covered auto or a substitution therefor, even if the use is for a business purpose, then the Business Use exclusion will not apply and the loss will be covered. Business Use applies to insureds operating another vehicle, like a truck or a tractor belonging to the insured's employer. It's also important to remember that even when the Business Use exclusion operates to bar coverage, the FRA still requires that minimum liability limits be honored.

Entitlement

This one can be a doozie. The standard language says that "[w]e do not provide Liability coverage for any insured using a vehicle without a reasonable belief that that insured is entitled to do so." So, yeah. Whenever the word "reasonable" is involved, you can expect a fight from the insurance carrier pretty much every time.

It used to be that the standard for insureds driving vehicles was "permissive use," meaning that like the FRA requires, the insured had some express or implied permission from the owner of the vehicle. If this is confusing, just remember that the determinative factor was the mindset of the vehicle's owner. Now, however, the standard is less about whether that permission actually existed and more about whether the insured believed in his or her own mind that permission existed; and further, whether that subjective belief was reasonable under the circumstances.

So what does that look like in the typical case? Let's say that the policyholder Bob has an adult son, Derek, who lives across the street, and that Derek has a substance abuse problem. Knowing this, Bob instructs Derek that he is never permitted to drive any of Bob's vehicles, regardless of the circumstances. If Derek goes on a bender, takes Bob's car joyriding and causes an accident, then there won't be any coverage because there's no way under those facts that Derek could have had a reasonable belief that he was entitled to drive the car.

But the plot thickens! There is an extremely important exception to the Entitlement exclusion, providing that the Exclusion does not apply to a family member using a covered auto. "Family member," like we talked about last time, means a relative living in the same household as the policyholder. So using the above example, if Derek lived in Bob's house instead of across the street, then there would be coverage if Derek caused a wreck. Fun stuff, huh?

Family Use 

This is the one we probably see the most implicated. The wording is ridiculously confusing, so I'm just going to give you the super-duper-broad-strokes-watered-down version.

1. No coverage for any vehicle owned by the named insured or furnished for his regular use, other than those listed on the policy.

2. No coverage for the ownership, maintenance, or use of any unlisted vehicle owned by the named insured or a family member, or furnished for the regular use of either.

3. With regard to No. 2 above, there's a narrow exception where coverage is available for the named insured's (or his/her spouse's) maintenance or use of a vehicle owned by a family member or furnished for his/her regular use.

I could write a completely separate article on the Family Use Exclusion, and I probably should, and I maybe will, so I'm not going to explore it at length here. Suffice it to say that this one gets really contentious on a fairly regular basis.

If you're confronted by one or more of these exclusions, I encourage you to resist the urge to go it alone. Call me, call another lawyer, call your insurance agent, but for goodness sake call somebody. This is complicated stuff, and you're seriously up the creek if you mess it up. Cheers!