Study guide
This final chapter pairs the mechanics of auto physical damage claims, including total losses and salvage, with the professional rules that govern adjusters: licensing, fair claims practices, ethics, and fraud. Regulatory details vary by state, so focus on the model concepts examiners draw from and remember to verify the specifics wherever you practice.
PAP Part D: Collision, Other-Than-Collision, and Endorsements
Part D of the personal auto policy covers direct and accidental loss to a covered auto or a non-owned auto the insured is using. It is divided into two coverages. Collision means the upset of the vehicle or its impact with another vehicle or object, such as when Jerome slides into a guardrail. Other-than-collision, historically called comprehensive, covers nearly everything else, and the policy lists examples: missiles or falling objects, fire, theft or larceny, explosion or earthquake, windstorm, hail, water, or flood, vandalism, riot, glass breakage, and contact with a bird or animal. The animal rule is a classic exam trap: striking a deer is other-than-collision, while swerving to avoid the deer and hitting a tree is collision. Each coverage carries its own deductible, and the insured can buy either or both. The limit of liability is the lesser of the actual cash value of the damaged property or the amount necessary to repair or replace it with like kind and quality, minus the deductible, and betterment adjustments may apply when repairs leave the vehicle better than before. Part D excludes wear and tear, mechanical breakdown, road damage to tires, custom equipment beyond stated limits, and losses to vehicles used as public livery. Common endorsements extend the coverage: towing and labor pays roadside costs, extended transportation or rental reimbursement pays for a temporary substitute after a covered loss, and lease gap coverage pays the difference between ACV and the remaining loan or lease balance on a totaled vehicle.
Business Auto Physical Damage and Garagekeepers Coverage
The business auto coverage form handles physical damage with three coverage options: comprehensive, which covers loss from any cause except collision or overturn subject to exclusions; specified causes of loss, a cheaper named peril alternative covering fire, lightning, explosion, theft, windstorm, hail, earthquake, flood, mischief or vandalism, and the sinking, burning, collision, or derailment of a conveyance transporting the auto; and collision. Which vehicles are covered depends on the numerical symbols shown on the declarations, so an adjuster's first step is matching the damaged unit to the symbols. Towing coverage and rental reimbursement can be added by endorsement. Garage operations create a special problem: a repair shop or dealer regularly holds customers' vehicles, and standard liability forms exclude property in the insured's care, custody, or control. Garagekeepers coverage fills that gap, covering damage to customers' autos left in the insured's care from perils such as collision, fire, theft, and vandalism. It can be written three ways, and exam questions test the differences. Legal liability coverage, the standard basis, pays only when the garage is legally liable for the damage, as when a technician at Vasquez Auto Repair test-drives a customer's car and rear-ends another vehicle. Direct primary coverage pays for covered damage to customers' cars regardless of the garage's liability, which protects customer goodwill. Direct excess coverage also pays without regard to liability, but only above any collectible insurance the customer carries. Dealers insure their vehicle inventory under dealers physical damage coverage, often written on a reporting basis reflecting fluctuating stock values.
Total Losses, Salvage, Titles, and Mechanical Breakdown
A vehicle is a total loss when repair is impractical or uneconomical. Insurers commonly compare repair cost plus salvage value against the vehicle's actual cash value, and many states define a total loss by statute using a total loss threshold, a percentage of ACV, commonly somewhere between 60 and 100 percent, or a formula; because the trigger varies by state, adjusters must apply the rule where the loss is adjusted. Settling a total loss, the insurer pays the vehicle's ACV, typically established through market surveys of comparable local vehicles, plus applicable taxes and fees where required, minus the deductible. The insurer then usually takes ownership of the wreck and sells it to a salvage buyer, offsetting its loss; if the insured retains the salvage, its value is deducted from the settlement. Most states require a salvage title or similar brand on a totaled vehicle's title, and a rebuilt vehicle generally must pass inspection before being retitled for road use; branding rules and thresholds are state-variable, and title-washing, moving a car between states to shed a brand, is a recognized fraud pattern adjusters should watch for. Lienholders are protected by the loss payable clause, so settlement checks on financed vehicles typically include the lender. Mechanical breakdown insurance covers the failure of a vehicle's mechanical or electrical components outside normal wear exclusions, functioning much like an extended warranty; it is sold separately because physical damage coverage expressly excludes mechanical failure. Adjusters should distinguish a breakdown claim, caused by internal failure, from a collision or OTC claim, caused by an external insured peril, since the two are handled under entirely different contracts.
Health and Disability Basics, Residual Markets, and Guaranty Associations
All-lines adjusters need working knowledge of health and disability concepts because casualty claims often intersect with them. Medical expense insurance pays hospital, surgical, and physician costs, typically subject to deductibles, coinsurance percentages the insured shares, copayments, and an out-of-pocket maximum. Disability income insurance replaces a portion of earnings when illness or injury prevents work; key features include the elimination period, a waiting period functioning like a time deductible before benefits begin, the benefit period, and the definition of disability, with own-occupation definitions more generous than any-occupation definitions. Coordination of benefits provisions prevent duplicate recovery when multiple plans cover the same expense, and adjusters resolving bodily injury or PIP claims frequently coordinate with health insurers and address subrogation or lien interests, including Medicare's recovery rights under federal secondary payer rules. Medicare supplement (Medigap) policies, sold by private insurers under federally standardized plans, pay amounts original Medicare does not, such as deductibles and coinsurance. On the property-casualty side, residual market mechanisms insure risks the voluntary market rejects: automobile insurance plans, often called assigned risk plans, distribute high-risk drivers among insurers writing auto in the state; FAIR plans provide basic property coverage in high-risk areas; and beach or windstorm plans operate in some coastal states. Workers compensation assigned risk pools serve employers who cannot find voluntary coverage. Finally, state guaranty associations, funded by assessments on admitted insurers, pay covered claims of insolvent admitted insurers up to statutory caps that vary by state. Surplus lines carriers are generally outside this protection, a distinction examiners like to test.
Licensing, Unfair Claims Practices, Ethics, and Fraud
Adjusters are licensed by the states, and requirements differ: most licensing states require passing an examination, paying fees, and meeting character standards, with licenses renewed periodically and continuing education, commonly around 24 hours per renewal cycle in many states, required to keep skills current. Some states do not license adjusters at all, and nonresidents often qualify by holding a home-state or designated-home-state license. Regulators may deny, suspend, or revoke a license and levy fines for causes such as misappropriating funds, misrepresentation, fraud, felony convictions, or forgery, and license discipline procedures are state-specific. Claims conduct is governed by state statutes modeled on the NAIC Unfair Claims Settlement Practices Act. Prohibited practices, when committed knowingly or so frequently as to indicate a general business practice, include misrepresenting policy provisions or pertinent facts, failing to acknowledge and act reasonably promptly on communications, failing to adopt reasonable standards for prompt investigation, refusing to pay claims without a reasonable investigation, failing to affirm or deny coverage within a reasonable time after proof of loss, failing to attempt a prompt, fair, and equitable settlement once liability is reasonably clear, offering substantially less than a claim is worth to force litigation, and failing to explain in writing the basis for a denial. Specific deadlines for acknowledgment, decision, and payment are set by each state and vary widely. Ethical adjusting means honesty with all parties, treating insureds' information confidentially, avoiding conflicts of interest and the unauthorized practice of law, and documenting files accurately. Adjusters also serve as a fraud defense: material misrepresentation by a claimant can void coverage, most states require reporting suspected fraud to a state fraud bureau, and insurers maintain special investigation units to examine red-flag claims.
Key terms
- Collision coverage
- — PAP Part D coverage for loss caused by the vehicle's impact with another vehicle or object, or by upset of the vehicle.
- Other-than-collision (comprehensive)
- — PAP Part D coverage for losses such as fire, theft, glass breakage, falling objects, flood, vandalism, and contact with a bird or animal.
- Limit of liability (physical damage)
- — The insurer pays the lesser of the property's actual cash value or the cost to repair or replace with like kind and quality, minus the deductible.
- Garagekeepers coverage
- — Coverage for damage to customers' autos in a garage business's care, written on a legal liability, direct primary, or direct excess basis.
- Total loss threshold
- — A state-set percentage or formula comparing repair and salvage costs to vehicle value that determines when a vehicle must be declared a total loss; it varies by state.
- Salvage title
- — A title brand most states require on a vehicle declared a total loss; rebuilt vehicles generally need inspection before returning to road use.
- Mechanical breakdown insurance
- — Coverage for failure of a vehicle's mechanical or electrical components, similar to an extended warranty, since physical damage forms exclude breakdown.
- Guaranty association
- — A state fund, financed by assessments on admitted insurers, that pays covered claims of insolvent admitted insurers up to statutory limits.
- Residual market
- — Mechanisms of last resort, such as assigned risk auto plans and FAIR plans, that provide coverage for risks the voluntary market declines.
- Unfair claims settlement practices
- — Claim-handling conduct prohibited by state laws modeled on the NAIC act, such as failing to acknowledge claims promptly or denying without reasonable investigation.
- Elimination period
- — The waiting period in disability income insurance between the onset of disability and the start of benefits, functioning as a time deductible.
- Material misrepresentation
- — A false statement significant enough to affect an insurer's decision to issue coverage or pay a claim; it can void coverage and constitutes fraud when intentional.
Exam tips
- Master the animal question: hitting an animal is other-than-collision, but swerving to avoid one and hitting anything else is collision. Expect at least one scenario testing this line.
- For garagekeepers, match the basis to the trigger: legal liability pays only if the garage is at fault, direct primary pays regardless of fault, and direct excess pays regardless of fault but only above the customer's own insurance.
- Treat total loss thresholds, title-branding rules, and claim-payment deadlines as state-variable; the exam typically tests the concept and the NAIC model framework, not one state's specific numbers, unless it is a state-specific law section.
- Learn the unfair claims practices list as behaviors: slow acknowledgment, no real investigation, lowball offers to force suit, and unexplained denials. Remember most statutes require the conduct to be knowing or a general business practice.
- Know where guaranty associations stop: they back admitted insurers only, are funded by insurer assessments, and cap recoveries at statutory limits, so surplus lines policyholders generally have no guaranty fund protection.