Actuarial Notes

Auto Physical Damage Coverage

Study guides: Exam DISC-RM, Exam DISC-IA

Auto Physical Damage Coverage insures the insured's own vehicle against damage, destruction and theft. It is first-party coverage, paid to the insured whoever was at fault, unlike liability coverage, which pays others. In the personal auto policy it is Part D, coverage for damage to your auto, written as collision and other than collision. The ISO business auto form offers comprehensive, specified causes of loss and collision.

\text{Payment} = \min(\text{ACV},\ \text{Repair}) - d

\text{Net cost} = \text{Payment} - S

  • Symbols: ACV is the vehicle's actual cash value at the time of loss, Repair is the cost to repair or replace the damaged property with property of like kind and quality, and d is the deductible shown in the declarations. When the repair cost exceeds the ACV the vehicle is a total loss: the insurer pays the ACV less the deductible, takes the vehicle, and sells it for its salvage value S, so its net cost is lower than the payment (Salvage and Subrogation).
  • PAP insuring agreement: In the ISO personal auto policy (PP 00 01, 09 18 edition) the insurer pays for direct and accidental loss to "your covered auto" or any "non-owned auto", including its equipment, minus the deductible. An owned auto has collision or other than collision coverage only if the declarations show it for that auto, while a non-owned auto gets the broadest coverage the policy gives any covered auto. If one collision damages more than one covered or non-owned auto, only the highest deductible applies. A temporary substitute is not "your covered auto" for Part D; it is a non-owned auto.
  • Collision: Collision means the upset of the vehicle or its impact with another vehicle or an object. It pays whoever was at fault, and if another driver caused the accident, the insurer pays its own insured first and recovers from the other driver's liability insurer by subrogation, including the deductible on the insured's behalf.
  • Other than collision: This covers the listed perils that are not collision, among them fire, theft, explosion, earthquake, windstorm, hail, flood, vandalism, missiles or falling objects, riot, contact with a bird or animal, and glass breakage. Glass broken in a collision can be treated as collision so that only one deductible applies. Hitting a deer is other than collision, and swerving into a tree to avoid one is collision.
  • Limit of liability: The insurer pays the lesser of the ACV and the cost to repair or replace with property of like kind and quality, so the vehicle's value, not a stated limit, caps the payment. Within that, the most paid is $1,500 for a non-owned trailer, $1,000 for electronic equipment permanently installed where the manufacturer doesn't install such equipment, and $1,500 for "custom equipment" such as special paint, custom wheels or a height-extending roof. Depreciation and physical condition are reflected in the ACV of a total loss, and the insurer doesn't pay for betterment that leaves the vehicle in better condition than before.
  • Non-owned autos: A non-owned auto is a private passenger auto, pickup, van or trailer that is not owned by, or furnished or available for the regular use of, the named insured or a family member, while one of them has custody of it or is driving it, and any auto used as a temporary substitute for a covered auto out of normal use. Coverage for it is excess over any other source of recovery, including the owner's coverage and any other physical damage insurance; for an owned auto, other sources share pro rata by limits.
  • Transportation expenses: Without a deductible, the insurer pays up to $30 a day and $900 in total for temporary transportation after a covered loss to a covered auto, and for loss-of-use charges the insured becomes legally responsible for after a loss to a non-owned auto, provided the policy carries the coverage (collision or other than collision) that the loss falls under. After a total theft, expenses are paid from 48 hours after the theft until the auto is returned or the loss is paid; after any other loss, from when the auto has been out of use for more than 24 hours, for the time reasonably needed to repair or replace it.
  • Exclusions: Part D does not pay for (1) loss while the vehicle is used as a public or livery conveyance, including while the driver is logged into a transportation network platform, except a share-the-expense car pool or volunteer use; (2) damage due and confined to wear and tear, freezing, mechanical or electrical breakdown, or road damage to tires, unless it results from a total theft; (3) radioactive contamination, nuclear weapons or war; (4) electronic equipment that is not permanently installed, and (5) media used with it; (6) a total loss from destruction or confiscation by government, except for a loss payee's interest; (7) a trailer, camper body or motor home not shown in the declarations, and its facilities, unless it is a non-owned trailer or one acquired during the period and reported within 14 days; (8) a non-owned auto used without a reasonable belief of being entitled to; (9) radar or laser detectors; (10) custom equipment above the first $1,500; (11) a non-owned auto used in the business of selling, repairing, servicing, storing or parking vehicles; (12) racing in a racing facility; (13) a rental car loss the rental company can't recover from the insured under the rental agreement or state law; (14) and (15) losses in a personal vehicle sharing program; and (16) a vehicle that can fly. Wear, freezing and breakdown are maintenance costs rather than accidents.
  • Payment, bailees, appraisal: The insurer may pay in money, including the applicable sales tax, or repair or replace the property, and it may return stolen property, paying for any theft damage. The coverage never benefits a carrier or other bailee for hire. If the insured and insurer disagree on the amount of loss, either may demand appraisal: each picks an appraiser, the appraisers pick an umpire, the appraisers state the ACV and the loss separately, a decision by any two binds, and each side pays its own appraiser and half the umpire's and other costs. Agreeing to appraisal waives none of the insurer's rights.
  • Business auto underwriting: For a fleet, physical damage exposure is driven by the vehicles' values and types, their ages, how they are used and how far they travel, where they are garaged and parked, the drivers' quality, and maintenance. Theft exposure depends on the vehicle and the location, and vehicles parked together create a catastrophe accumulation from hail or flood (Catastrophe Risk). The underwriter's tools are the deductible, the choice between comprehensive and specified causes of loss, and declining coverage on high-value or hard-to-repair units.

A Repairable Loss and a Total Loss A car with an ACV of $12,000 is insured for collision with a $500 deductible. Find the payment if the repair estimate after an accident is (a) $7,800 and (b) $13,500. In (b), the insurer sells the wreck for $2,200.

Answer

\begin{align*}
\text{(a) Payment} &= \min(12{,}000,\ 7{,}800) - 500 \\
&= 7{,}300 \\
\text{(b) Payment} &= \min(12{,}000,\ 13{,}500) - 500 \\
&= 11{,}500 \\
\text{Net cost} &= 11{,}500 - 2{,}200 \\
&= 9{,}300
\end{align*}

In (b) the repair would cost more than the car is worth, so the insurer declares a total loss and pays the ACV less the deductible. The insured bears the $500 deductible in both cases, and recovers it as well if the insurer subrogates successfully against an at-fault driver.

Pricing a Higher Fleet Deductible A business insures 40 vans, each with an ACV of $30,000, for collision. With illustrative figures, each van has 0.12 collisions a year. Of collisions, 70% cost $4,000 to repair, 25% cost $12,000, and 5% are total losses with a salvage value of $6,000. Find the insurer's expected annual net cost for the fleet at a $1,000 and a $2,500 deductible.

Answer Every loss exceeds both deductibles, so the deductible comes off each one in full.

\begin{align*}
E_{1{,}000} &= 0.70(3{,}000) + 0.25(11{,}000) + 0.05(23{,}000) \\
&= 6{,}000 \\
E_{2{,}500} &= 0.70(1{,}500) + 0.25(9{,}500) + 0.05(21{,}500) \\
&= 4{,}500 \\
\text{Fleet}_{1{,}000} &= 40(0.12)(6{,}000) \\
&= 28{,}800 \\
\text{Fleet}_{2{,}500} &= 40(0.12)(4{,}500) \\
&= 21{,}600
\end{align*}

The higher deductible removes $7,200 a year of expected cost, which is $1,500 on each of the 4.8 expected collisions. The business keeps those small losses, and the insurer's remaining exposure is concentrated in the larger repairs and total losses.

How it appears on the exam

  • DISC-IA: Questions ask what PAP Part D pays for a described loss: whether it is collision or other than collision, whether the vehicle is a covered auto or a non-owned auto, the lesser of ACV and repair cost less the deductible, and whether transportation expenses or an exclusion apply.
  • DISC-RM: The business auto questions ask which characteristics of a fleet and its operations an underwriter evaluates for physical damage coverage, and how the deductible and the choice of covered causes of loss respond to them.

Exam traps

  • Collision or not: Contact with a bird or animal is other than collision, but hitting a tree to avoid the animal is collision. The two often carry different deductibles, so the classification changes the payment.
  • Value caps the payment: Part D has no dollar limit in the usual case. The payment is capped by the lesser of ACV and repair cost, so a repair estimate above the ACV is paid as a total loss, not in full.
  • Deductible after the cap: The deductible comes off the lesser of ACV and repair cost. Subtracting it from the repair estimate first and then comparing with the ACV overpays a total loss by the deductible.
  • Physical damage is not liability: Damage to the insured's own car is never paid under Part A, and damage to the other driver's car is never paid under Part D. Placing a loss under the wrong part misreads whose property it is.