Actuarial Notes

PAP Duties and General Provisions

Study guide: Exam DISC-IA

PAP Duties and General Provisions are Parts E and F of the ISO personal auto policy (PP 00 01, 09 18 edition). Part E lists what a person seeking coverage must do after an accident or loss, and Part F holds the conditions that apply to the whole policy: changes, fraud, legal action, the insurer's right of recovery, the policy period and territory, termination, transfer, and the limit when two of the insurer's policies apply.

\text{Paid}_{\text{all policies}} \le \max_k L_k

t_{\text{notice}} = \begin{cases} 10 \text{ days} & \text{nonpayment, or first 60 days of a new policy} \\ 20 \text{ days} & \text{all other cancellations and nonrenewal} \end{cases}

  • Symbols: L_k is the applicable limit under policy k of the auto policies the same insurer has issued to the insured that apply to one accident. t_{\text{notice}} is the minimum advance notice the insurer must mail to the named insured before a cancellation takes effect, or before the end of the policy period for a nonrenewal.
  • Part E, the prejudice condition: The insurer has no duty to provide coverage if a failure to perform these duties is prejudicial to it. A late notice that doesn't harm the insurer's position does not by itself forfeit coverage.
  • Duties of everyone: The insurer must be promptly told how, when and where the accident or loss happened, with the names and addresses of injured persons and witnesses. A person seeking any coverage must cooperate in the investigation, settlement or defense; promptly send copies of notices and legal papers; submit as often as reasonably required to physical exams by physicians the insurer picks and pays for, to examination under oath and to recorded statements; authorize the insurer to obtain medical reports and other records; and submit a proof of loss when required.
  • Extra duties under Parts C and D: A person seeking uninsured motorists coverage must also promptly notify the police of a hit-and-run driver and promptly send copies of the legal papers if a suit is brought. A person seeking coverage for damage to your auto must take reasonable steps to protect the vehicle and its equipment from further loss, which the insurer pays for, promptly notify the police of a theft, and let the insurer inspect and appraise the damage before repair or disposal.
  • Bankruptcy and changes: The insured's bankruptcy or insolvency does not relieve the insurer of its obligations. The policy is the whole agreement and can be changed or waived only by an endorsement the insurer issues. The premium may be adjusted during the term for changes in the number, type or use of vehicles, the operators, the place of principal garaging, or the coverages, deductibles and limits. A change that broadens coverage without additional premium applies automatically from the date it is implemented in the state, unless it comes in a general revision that also restricts coverage.
  • Fraud: No coverage is provided for any insured who made fraudulent statements or engaged in fraudulent conduct in connection with the accident or loss for which coverage is sought.
  • Legal action against the insurer: No suit may be brought until the policy's terms have been fully complied with. Under Part A, no suit may be brought until the insurer agrees in writing that the insured owes the money, or the amount has been finally decided by a judgment after trial. No one has a right under the policy to bring the insurer into an action to decide an insured's liability.
  • Our right to recover payment: When the insurer pays someone who has a right to recover from another party, it is subrogated to that right, and the person must do what is needed to let it exercise the right and nothing after the loss to prejudice it (Salvage and Subrogation). Under Part D the insurer gives up subrogation against anyone using your covered auto with a reasonable belief of being entitled to. A person who recovers from another party after being paid must hold the recovery in trust for the insurer and reimburse it up to its payment.
  • Policy period and territory: The policy applies only to accidents and losses during the policy period and within the policy territory: the United States, its territories or possessions, Puerto Rico and Canada. It also covers your covered auto while being transported between their ports.
  • Cancellation: The named insured may cancel by returning the policy or giving advance written notice. The insurer may cancel with at least 10 days' notice for nonpayment, or during the first 60 days of a policy that isn't a renewal, and with at least 20 days' notice otherwise. Once the policy has been in effect 60 days, or at any time for a renewal, the insurer may cancel only for nonpayment; if the driver's license of the named insured, a driver living with the named insured, or a driver who customarily uses the covered auto has been suspended or revoked during the policy period (or since the last anniversary, for a policy period other than a year); or for material misrepresentation in obtaining the policy.
  • Nonrenewal and automatic termination: The insurer must mail notice of nonrenewal at least 20 days before the end of the policy period. For a policy period under six months it may nonrenew every six months from the original effective date; for six months to under a year, at the end of the period; for a year or longer, at each anniversary. If the insurer offers to renew and the named insured doesn't pay the renewal premium, the policy ends at the end of the current period. Other insurance bought on a covered auto ends the similar coverage under this policy on that auto from its effective date.
  • Other termination provisions: A notice may be delivered instead of mailed, and proof of mailing is sufficient proof of notice. Any premium refund is computed by the insurer's manuals, and making or offering it is not a condition of cancellation. The cancellation date in the notice becomes the end of the policy period.
  • Transfer of interest: The named insured's rights and duties can't be assigned without the insurer's written consent. If a named insured dies, the surviving spouse who lived in the household is covered as a named insured, and the legal representative is covered for maintaining or using the covered auto, until the end of the policy period.
  • Two or more auto policies: If this policy and another auto policy the same insurer issued to the named insured apply to the same accident, the insurer's total liability under all of them can't exceed the highest applicable limit under any one.
  • States amend these terms: The cancellation and nonrenewal rules above are the national form's. Termination is regulated by each state, and where a state amendatory endorsement is attached, its rules replace these.

Can the Insurer Cancel? An insurer issues a new six-month PAP. Decide whether it may cancel, and with how much notice, if (a) on day 40 it decides the risk is undesirable; (b) on day 75 the named insured misses a premium payment; (c) on day 90 it learns that the named insured's son, who lives with her and drives the car, had his license suspended on day 70; (d) on day 100 it learns the named insured has moved to a higher-rated territory.

Answer

  • (a) Yes, 10 days: In the first 60 days of a policy that is not a renewal the insurer may cancel for any reason with 10 days' notice.
  • (b) Yes, 10 days: Nonpayment is a ground at any time, with 10 days' notice.
  • (c) Yes, 20 days: After 60 days the insurer may cancel when a driver living with the named insured has had a license suspended during the policy period. This is not nonpayment, so 20 days' notice applies.
  • (d) No: A change of territory is not one of the grounds after 60 days. The insurer may adjust the premium for the change in principal garaging, and it may decline to renew at the end of the period with 20 days' notice.

Two Policies With the Same Insurer The named insured has two PAPs with the same insurer, one with a $100,000 bodily injury each person limit and one with $250,000. Both apply to an accident in which he injures one person whose damages are $400,000. Later, the insurer pays $9,000 under Part D for his car, damaged by another driver who was at fault. What does the insurer pay on the liability claim, and what may it do after the Part D payment?

Answer The insurer's total under the two policies is capped at the higher single limit.

\begin{align*}
\text{Paid} &= \min\big(400{,}000,\ \max(100{,}000,\ 250{,}000)\big) \\
&= 250{,}000
\end{align*}

The insured remains personally liable for the other $150,000. After the Part D payment the insurer is subrogated to the insured's right against the at-fault driver, and the insured must do nothing to prejudice it, such as signing a release.

How it appears on the exam

  • DISC-IA: Section 4.6 covers the PAP's duties and general provisions. Questions describe an insured's conduct after a loss, a cancellation or nonrenewal, an accident abroad, or a death in the family, and ask what the policy requires or allows.
  • Applied questions: Stems test the cancellation clock (the 60-day mark, the 10- and 20-day notices, the permitted grounds), the territory (Mexico is outside it), and who may sue the insurer and when.

Exam traps

  • Mexico is not in the territory: The PAP covers the U.S., its territories and possessions, Puerto Rico and Canada. An accident in Mexico needs an endorsement.
  • Grounds after 60 days are narrow: After the first 60 days, or on a renewal, the insurer can cancel only for nonpayment, a license suspension or revocation, or material misrepresentation. An answer that cancels for a speeding ticket or a change of address is wrong.
  • Nonrenewal is not cancellation: Declining to renew needs no reason under the national form, only 20 days' notice before the period ends.
  • No subrogation against a permissive driver under Part D: The insurer that pays for the named insured's car can't recover from a friend who was driving it with a reasonable belief of permission.
  • Prejudice is required: A failure to perform a duty bars coverage only if it prejudices the insurer.