Family Members: What You Auto Know

Those that design personal auto insurance policies learned years ago that folks living in the same house will take turns driving the family cars. That’s why auto insurance policies are designed to provide coverage not just for the person specifically named on the policy (you) but also your spouse and family members.

But whether it’s attributable to a child’s dream of independence or a parent trying to save money by pawning off costs on kiddo, many family members who live in the same house have their own cars and their own car insurance. If this is the case in your home, there is a danger lurking in that folder where you keep the auto insurance policy; a danger that if unknown can be very costly.

Here’s the problem: most policies contain a limitation for the use of a vehicle that is owned by a family member and not specifically covered by your insurance policy. While the limitation may not apply to you or your spouse, it does apply to any other family member who is normally covered by your policy. Consider the following example:

Al and Peg have children living at home—a 19-year-old daughter, Kelly, and 17-year-old son, Bud. Kelly has her own car and car insurance with liability limits of $25,000/50,000/10,000. The first two numbers represent limits that apply to bodily injury suffered by a third party— the first is the maximum per person, the second is the maximum per accident. The third number is the limit that applies to property damage— this could be to another car or any other property belonging to a third party.

Al and Peg have much higher limits of $100,000/300,000/100,000. Bud is still whining that he doesn’t have a car. One night, with her permission, Bud takes out Kelly’s car and causes an accident that seriously injures the other driver. Since it was Kelly’s car, her policy limits will apply. Unfortunately, the cost of the other driver’s injuries is much greater than the $25,000 limit on Kelly’s policy. Bud looks to his parents’ car insurance for help. His search is in vain: Kelly’s car is owned by a family member and therefore not covered by his parents’ policy.

Were the situation different and it was Al or Peg who borrowed Kelly’s, car, the limitation would not apply. Were Bud to borrow the neighbor’s car the limitation would not apply. But since it was a family member’s car and it was Bud driving, the limitation applies. And since Bud has no insurance of his own to turn to, the family could be responsible for the remainder of the other driver’s injuries out-of-pocket.

Unfortunately there is no easy fix for this limitation. The best method is avoidance, but telling the kids not to drive each other’s cars may be more ideal than realistic. If your current household arrangement could make this scary situation a reality for your family, consider encouraging your kids to increase their liability limits to a level more sufficient to pay for a serious injury. This way more of the cost will be absorbed by the insurance company and less by your family.
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