In other articles, we discuss the potential coverage gaps if a resident child buys a car and it is insured under a separate policy, as opposed to the parent's policy. Recently this issue came up again in one of our "Ask an Expert" questions. In this follow-up, we'd like to stress again how important it is to consider issues like this when evaluating insurance coverages for both adults and "children."
"Thank you for the article on "Kid's Kars" in June 2001. While we have a practice of not putting minors' cars on separate policies, I have still been concerned about insuring majority age (legal adult) children on separate policies when the parents have paid for all or part of the car or when the child still lives at home. My concern results from an article I read several years ago where the possibility of "negligent entrustment" of a vehicle was brought up in relation to parents buying a vehicle titled in the name of their majority age (legal adult) child and also wanting it on a separate policy in the child's name. Any guidance on handling this variation?"
Before proceeding, readers might want to review the article cited above: "Kid's Kars...Are They Ready for Their Own Policy?" The legal issues of this question are probably best left to an attorney with a good knowledge of local statutes and case law since parental liability varies significantly from state to state. Just because the child is an adult doesn't necessarily relinquish the parents from legal responsibility under a number of situations. On the other hand, just because an adult child still lives at home doesn't mean the parents are universally liable for their actions. A lot of it has to do with the situation and degrees of control.
However, from a pure coverage standpoint, the entire issue boils down to: IF the child is still living at home (and, thus a "family member") AND IF the parent is held liable, the parent has no coverage under their own PAP as per the following exclusion:
3. Any vehicle, other than "your covered auto", which is:
a. Owned by any "family member"; or
b. Furnished or available for the regular use of any "family member".
However, this Exclusion (B.3.) does not apply to you while you are maintaining or "occupying" any vehicle which is:
a. Owned by a "family member"; or
b. Furnished or available for the regular use of a "family member".
IF the child's auto is insured under the parent's policy, then the exclusion doesn't apply since the auto is a "your covered auto" under that policy. So, the issue boils down to whether or not there could be liability...and that requires the opinion of a qualified attorney. It's hard to imagine a scenario where a suit couldn't enjoin the parents under one of several bases of liability. If so, no PAP coverage...they're on their own as long as that car is insured under a separate policy.
The key is that the child is still a "family member." If the auto is necessarily written under another policy, if I were the parents I'd do everything necessary to establish that the child is not a member of the household, despite the fact that he/she is living at home. I'd charge for rent, food, etc. and make it clear that the parents no longer have parental control. This might even require a written agreement...a lot of trouble for such a situation.
One of our faculty members, Jim Mahurin, is an insurance and risk management consultant who's practice includes extensive experience providing risk management counseling for high profile and wealthy clients. During his many years of practice, he has witnessed, first-hand, the potentially catastrophic losses that can be suffered by insureds and their dependents, and how critical it is to manage potential coverage gaps and advocate high liability limits for ALL parties, including children.
The courts have a long history of circumventing efforts to avoid liability. The practice of purchasing separate policies for resident children after reaching adult status creates several situations with very serious problems.
1. A parent borrows the child's vehicle and has an accident in a vehicle with lower limits. I know of a case where this occurred.
2. Assume an adult child of an affluent family is negligent in a catastrophic accident. There is a suit against the child by the injured party to establish their recovery under Underinsured Motorists. The verdict is large. How long will the UIM provider pursue the adult child to subrogate their loss? How will an unsatisfied judgment affect the adult child's career? How will a bankruptcy filing affect the adult child's career and life?
This was one of the first things we were taught by the Aetna C&S when I went though their training program almost thirty years ago. They provided several examples. One was a physician resident who had a $100,000/$300,000 policy and the subject of a $250,000 malpractice judgment. The courts wouldn't let the young doctor file bankruptcy, even though he had no assets, because he would have future earnings. Another was the son of a very wealthy family. He was heir to substantial assets. He may not have had a lot of money today, but he was not without means.
3. Assume the parents were found responsible, in whole or in part, for the act of the adult child. How will their primary carrier respond? How will their umbrella carrier respond?
I have done a lot of work with wealthy families. This is a far more serious problem than folks realize. There have been several situations where insurance for an adult child was placed with another carrier. But attorneys for the families wanted limits to match the parents' limits. And that has been the position I take in conversations with all of them.
So, the moral is to carefully consider all of the potential ramifications when structuring an insurance program for families, and make sure that ALL have access to high limits of liability!