The Hidden Dangers of “Permissive Use” Restrictions in Your Auto Insurance Policy

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As an agent for auto insurance, one of my most frequently asked questions is “Who is insured to drive my vehicle?”

Sometimes, the answer to this question is more complicated than people realize. You can skip reading this article if you have never lent your car to anyone.

Short Answer:

Your policy covers all people who are on it. There are no restrictions. If they borrow your car, even if they aren’t listed on your policy, they are covered provided that you give them permission to use it. All policies include some form of permissive usage or an interpretation thereof. Un-named drivers, who “use the car without a reasonable belief that they are entitled to do so”, are not covered.

Depending on which insurance company you have, the interpretations of permissive usage can differ greatly. Some insurance companies are very strict about enforcing the rules.

Carriers can reduce or limit coverages by using different permissive uses. This will lower their risk and claims costs, which in turn makes their policies more affordable for policyholders.

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There are three types of “Permissive Use” restrictions that carriers use: Drop-down limits; Double deductibles; and No physical damage coverage.

Drop-down Limits:

Even if a user is not at fault, insurance policies often have dramatic reductions in coverage. Drop-down limits is one example of such a reduction. Drop-down limits are a way to reduce liability if someone is in an accident while borrowing your vehicle. California, for example, requires that there be no minimum limits on bodily injury (BI)/$30,000/occurrence (PD) and that property damage (PD) not exceed $15,000 per person.

Example: Driver A has an insurance policy that covers full coverage and permissive use. His liability coverages are $100,000 per individual (for BI maximum), $300,000 per incident (for the BI maximum) and $50,000 per occurrence for PD. His policy includes a “drop down limit” clause. Let’s suppose he lends his car to a friend (driver B) and has a serious accident with bodily injuries that exceed $65,000. He totals the car, which has a $28,000 value. The “drop down limit” applies in this case. Driver A’s policy will only pay $15,000 for injuries to other people and $5,000 for the vehicle. This is clearly not enough. Because Driver A is the owner, he is legally responsible for the remainder of the damages. He is responsible for $50,000 for injuries and $23,000 to the vehicle. Driver B would have coverage. Their coverage would be secondary, and they would apply their limits until they ran out. Driver “A” is most likely to be sued by the other side.

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Double Deductibles

Collision insurance is one coverage you can get with your auto insurance. Collision insurance covers your vehicle against damage that results from a collision with another object. I.e. Another vehicle, a building, etc. A deductible is what you pay before your insurance company will cover the cost of collision coverage. This is the amount that you must first pay to have your vehicle repaired or replaced. The deductibles range in price from $100 to $2500, but they tend to be $500 to $1,000.

The “double deductible” restriction is that if an unnamed driver causes an accident while driving your car, the collision deductible will be doubled. Your $500 deductible now stands at $1,000. Or, your $1,000 collision deductible now stands at $2,000. Your $500 deductible is now $1,000, or your $1,000 is now $2,000.

Sometimes, the “double-deductible” restriction depends on the age of your car’s borrower. The collision deductible is not doubled for drivers under 25 years of age.

No physical damage coverage:

This restriction is similar to the “double-deductible” mentioned above. This restriction is more severe.

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Simply put, an unnamed driver can borrow your car and cause an accident. However, your insurance company will not pay third-party damages (liability). The damages to your vehicle won’t be covered.

These “permissive usage” restrictions will be described in detail in your policy, as well as in your renewals. These restrictions should be made clear by your agent at the time you purchase your policy. This is why you need a professional broker who understands these details and can explain them to you when you apply.

Permissive use restrictions can also be very common. They are used by some large, well-respected nationwide insurance companies. Make sure you carefully review your policy.

There are many auto insurance policies that aren’t all the same. They differ from one carrier to the next and each company has its own set of benefits, restrictions, and exclusions. To understand how your policy works, consult your agent.

Consider this: Next time you’re thinking about buying an insurance policy online without having someone assist you or calling an 800 number with an order taker, think about how the details may not be properly described or get lost in translation. It pays to have an agent who is able to look after you.

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