One of the most frequent questions I get as an auto insurance broker is “who is insured to drive my car?” The Hidden Dangers of “Permissive Use” Restrictions in Your Auto Insurance
Sometimes the answer to this question can be trickier than most people realize. If you never loan your car to others and you never will, none of the restrictions I discuss here should matter to you.
People that are listed on your policy enjoy the full benefits of your policy coverages with no restrictions. For those that borrow your car that aren’t listed as drivers, they are generally covered as long as you have given them permission to use your car; this is called “Permissive Use” and all policies have some form of, or interpretation of, permissive use. Excluded drivers are never covered nor are un-named drivers who “use the vehicle without a reasonable belief that the person is entitled to do so” (sometimes referred to as “theft”). Keep in mind that part of your insuring agreement states that household members must be disclosed to your insurance company so they can either be added (and an additional premium charged) or excluded on your policy as well. If an un-named household member drives your car and has an accident the insurance company may deny the claim based on the lack of full disclosure that there were other drivers in the house who might use the car. They largely consider them to be excluded because they theoretically have access to the keys to your car and might well be driving the car regularly, thusly creating more risk, and in turn the insurance company isn’t collecting enough premium to cover that additional risk. This is enforced quite strictly in the state if California where insurance rates are very high due in part to insurance fraud.
Depending on the company you are insured with, interpretations of permissive use can vary dramatically and some insurance carriers are very strict in their enforcement of the rules.
By reducing or restricting coverages through different applications of permissive use, carriers can reduce their risk (and claims costs) thereby reducing the cost of their policies to make them more affordable for their policy holders.
Three examples of the “Permissive use” restrictions carriers utilize include: “Drop-down limits”; “Double deductibles”; and “No physical damage coverage” and “No physical damage while driving impaired.”
1) Drop-down Limits:
Oftentimes there are dramatic reductions in coverage amounts on insurance policies even when a permissive user has an accident. One such reduction is called “drop-down limits”. “Drop-down limits” means that if a person has an accident while borrowing your car, the limits of liability are reduced to what the state’s minimums are. For example, the state of California requires minimum limits of only $15,000 per person for bodily injuries (BI)/$30,000 per occurrence maximum for bodily injuries (BI)/$5,000 for property damage (PD).
Example: Driver “A” has an insurance policy with full coverage with permissive use and his liability coverages are $100,000 per person (for BI)/$300,000 per occurrence (for BI maximum)/$50,000 per occurrence (for PD). His policy has a “drop-down limit” clause. Let’s say he loans his car to a friend (driver “B”) and that friend has a serious accident where the bodily injuries to other party amount to $65,000 and he totals the other car which has a value of $28,000. In this scenario, the “drop down limit” is in effect and the most Driver A’s policy will pay is $15,000 for the other persons injuries and $5,000 for their vehicle which clearly isn’t enough. In this case, Driver A is legally liable for the balance of the damages because he is the owner of the vehicle; $50,000 for injuries and $23,000 for the vehicle. If Driver B has coverage, their coverage would be secondary and their limits would then apply until they run out as well. Otherwise, Driver “A” will most likely be sued by the other party.
2) Double Deductibles:
One coverage that is available with your auto insurance is called collision insurance. Collision insurance protects your vehicle for damages that are a result of a collision with another object. I.e. another vehicle, a building, etc. Collision coverage has a deductible which is the “out of pocket” amount you have to pay first before the insurance carrier steps in to repair or replace your car. Typically deductibles can range from $100 to $2500 but most of the time they are either $500 or $1,000.
They way the “double deductible” restriction works is if an un-named driver has an accident while driving the car with your permission, the collision deductible is doubled. Hence your $500 deductible is now $1,000, or your $1,000 is now $2,000. Hopefully your friend that borrowed your car is willing to chip-in and pay the extra deductible amount.
Sometimes the “double deductible” restriction is based on the age of the driver who borrows your car. For example, the deductible for collision is only doubled if the driver is younger than 25 years old.
3) No Physical Damage Coverage:
This restriction works just like the “double deductible” described above. However, this restriction is much more punitive.
Simply stated, if an un-named driver borrows your car and has an accident the insurance company will pay the third party damages (liability), usually at the reduced state minimums (drop down limits) but the damages to your vehicle will not be eligible for coverage.
Another more recent addition to the permissive use restrictions you might see is one that will not pay for physical damage and will drop the liability limits to state minimums of you crash while driving your car impaired.
All of these “permissive use” restrictions are described in detail in your policy initially and also in your renewals. These restrictions should also be disclosed by your insurance agent when you buy your policy, which is why you want a professional insurance agent/broker who really understands these intricacies and can effectively explain these restrictions to you when you apply for coverage.
Permissive use restrictions are very common and are employed by some large, reputable nationwide insurance companies so be sure to examine your policy carefully.
This article is a very broad-strokes discussion of permissive use and should not be construed as necessarily being applicable to your individual policy. Auto insurance policies are not all standardized. They are different from carrier to carrier and there are a multitude of coverage benefits, restrictions and exclusions that are unique to each company. Make sure to consult with your agent to see how your particular policy works.
Food for thought – next time you are considering buying a policy “online” without the help of a human being, or from an “800#” with an “order taker” who’s punching a time clock, consider how details like these may not be adequately described or may somehow get lost in translation – it pays to have an agent who can really look out for you.