Author: Bill Wilson

Quite often, the VU "Ask an Expert" service gets a question about the insurance ramifications of something an insured was advised to do by an attorney, CPA, estate planner, or other non-insurance professional. What we have found is that such economic advice can frequently create a potentially catastrophic coverage gap that is penny wise but pound foolish.

This is not the first time we've written about this specific issue. For example, here are two other articles on the same topic: 

• Kids' Kars...Are They Ready for Their Own Policy? Are YOU Ready?

• Kids' Kars Revisited

This issue most recently raised its head again when I was responding to a post from a lawyer on an internet insurance message board. I had posted that I was amazed at how many times attorneys had advised a client to put their 17 year old son on his own auto policy and, if possible, title the vehicle in the son's name. The entire premise is to attempt to insulate the parents' assets from claims against the son who presumably has no assets. I indicated that I thought this was silly (though not necessarily using that word :-) and, in general, a bad idea for several reasons. 

The attorney's response was, "You may think it's silly but it is very good advice, which is meant to protect dad from being liable for his teenage son's accidents. From a social point of view, if you feel dad should be more responsible and ensure his son is fully insured, I understand your point. A lawyer's job is to protect his client not protect the world."

I understand the role of a lawyer. I even understand why someone like Charles Manson is entitled to a strong defense. However, that doesn't change the fact that, in most cases, it is a BAD idea to put junior on his own policy. It also raises ethical issues given the discussion that follows. Below is my response to the attorney, with some of the more heated rhetoric toned down.

Not being an attorney, I'm not qualified to speak on the soundness of legal advice to title a car in a kid's name. However, I can speak to the insurance ramifications of this and, more specifically, putting the kid on his own auto policy. First, lets address the coverage issues, then we'll take a look at what I feel is an ethical issue.

The problem is, in many (if not most) cases, the father hasn't been fully insulated from liability and, on top of that, since this lawyer is almost certainly ignorant of auto policy coverages (as evidenced by other issues discussed on this board), the chances are quite good that his recommendation just removed dad's coverage under his own policy if he is sued...no defense, no indemnity.

The attorney is probably thinking of parental liability, or family purpose doctrine, statutes when he thinks of the basis for claims against the parents. However, the father could be held accountable as the owner of the vehicle, for negligent entrustment, under direct liability for things like negligent maintenance, and other legal bases. And, of course, nothing stops anyone from suing anyone else for just about anything.

Here's a scenario:  Junior, who has his own policy to shield his parent's policy and assets (Junior doesn't have any assets, so he has a minimum limits policy in most of these scenarios), negligently collides with another vehicle, killing the driver and injuring the passenger, a medical school student, who becomes a quadriplegic.

Seeking deep pockets, as of course any competent lawyer would do, Daddy is named in a lawsuit under various legal principles, so he turns to his insurer who uses an "ISO standard" personal auto policy. The insurer refuses to defend on the basis of this exclusion:

B. We do not provide Liability Coverage for the
   ownership, maintenance or use of:

   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".

Since Junior's auto is declared under his own policy, not Pop's, Exclusion B.3. applies. Whether part a. or b. triggers the exclusion depends on the actual ownership of Junior's car but, regardless, one or the other triggers the exclusion, so the titling of the vehicle is immaterial.

However, Pop points out that, hey, there's an exception within the exclusion!  It says:

   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".

The insurer then points out that the exception only applies while Daddy is maintaining or occupying Junior's auto. The problem is, Daddy was miles away. The bigger problem is that Daddy has NO coverage under his own auto policy. He turns to his "umbrella" policy and learns that, like many such policies today, it's a following form excess policy and there's no coverage there either.

Now Daddy is faced with massive legal defense expenses that must be paid from his own pocket and a potential judgment involving wrongful death and the permanent total disability of a medical school student...all because his attorney tried to insulate him from his legal responsibilities.

So, Daddy turns to Junior's minimum limits policy for coverage (but, at this point, more importantly for defense), which takes us to the "insured" definition in the Liability insuring agreement of Junior's policy:

B. "Insured" as used in this Part means:

   1. You or any "family member" for the ownership, maintenance or use of any auto or "trailer".

   2. Any person using "your covered auto".

   3. For "your covered auto", any person or organization but only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this Part.

   4. For any auto or "trailer", other than "your covered auto", any other person or organization but only with respect to legal responsibility for acts or omissions of you or any "family member" for whom coverage is afforded under this Part. This Provision (B.4.) applies only if the person or organization does not own or hire the auto or "trailer".

We see that B.2. and B.4. don't apply since Pop wasn't using Junior's auto (B.2.) and it wasn't an auto other than Junior's auto (B.4.).That leaves B.1. or B.3.

Let's look at B.1. Daddy isn't a named insured or Junior's resident spouse, so he's not a "you" under Junior's policy. Is Pop a "family member"? Maybe, maybe not. A family member is generally someone related to "you" by blood, marriage, or adoption who is a resident of YOUR household. Is this Junior's household or Daddy's household? If the latter (in my opinion), then Pop isn't a B.1. insured. (If he is, then he has access to Junior's whopping $50K in BI limits in my state.)

That leaves B.3. If Daddy is being sued because he is legally responsible for Junior's negligence, then he hits paydirt and has access to Junior's huge $50K in BI limits!  If not (e.g., he's sued on a direct liability basis), then Daddy is back to uninsured square one...all because his brilliant attorney's "very good advice" left him in this predicament. Of course, Pop's ace in the hole is the attorney's professional liability insurance.

On top of that, the premise that Junior has no assets is built on a foundation of sand. Junior has no assets TODAY. One of our VU faculty members, a risk management consultant, has been involved in several cases in where a "no asset / low limit" insured has future earnings (like the doctor-to-be in one case) or future assets (like the young fellow who was about to receive a multi-million trust fund in another case).

Lastly, imagine that that medical student who is now a quadriplegic is YOUR son or daughter. Also, let's pretend that (while it's highly unlikely), the attorney is correct and Junior's and Dad's assets and earnings are perfectly shielded from your claim or lawsuit. I'm sure (note the sarcasm to follow) that you will be very impressed by how well they have been kept legally unaccountable for this negligent act that has forever damaged your child's and your family's lives.

This mindset reminds me of an old cartoon where a chef is placing a live lobster into a pot of boiling water. The caption is the lobster saying, "Saying it's your job, doesn't make it right." Likewise, the statement that, "A lawyer's job is to protect his client not protect the world," doesn't mean that it's "right."

People SHOULD be responsible for their actions and in a position to compensate others that they injure, whether that's done with assets or insurance. Playing clever legal games may be something that impresses the boys down at the bar or an eager law school freshman, but from a social/justice/equity standpoint, it may be viewed as an abomination that merits the scorn of anyone who believes in personal accountability.

On UM & UIM, in the insured's son example where the son is now a quad, I believe the son can collect under the parents policy since he is still in the household.

William Viney, CPCU, CIC
Underwriting Supervisor
1st Auto & Casualty Insurance Company
Madison, WI

Editor's Comment:  Excellent point, though coverage (or lack thereof) will vary from state to state. The list of exclusions for UM/UIM is typically far shorter than that for liability coverage. However, whether there is UM/UIM coverage will depend on each state's statutes. For example, Junior (if he owns his own auto) is still out of luck because of this exclusion in my state's UM law:

While "occupying" a vehicle owned by that "insured", only the Uninsured Motorists Coverage applicable to that vehicle will apply, and no other policies or provisions of coverage will apply.

I agree whole-heartedly with the author. Furthermore, I’ve been known to tell prospective clients that should I, or for that matter, my spouse or children, cause serious harm to someone, then I would want to be able to financially make things as right as possible. We purchase liability coverage to protect our assets, but perhaps more importantly, to make sure as much funding as possible is there to cover any bodily injury/property damage we might cause to someone. 

Karen A. Knowles, CISR
Personal Lines CSR
Gallaher-Tangora-Rodes Insurance Agency
Mexico, MO

I found the article, Insurance vs. Legal Advice, interesting. We recently had the opposite situation. My husband is working with a lawyer regarding protecting his mother’s assets from Medicaid. He was told to put her car in his name, but he could leave it on her insurance policy!

His mother’s agent said that he would add him as a driver only. I insisted he was a named insured because I thought there was a gap in liability. Surprisingly the agent did not see why that was important (even thought the title would be in my husband's name and the registration and insurance in his mother's). In the end, he was listed as an additional insured.

Interesting article. I think the writer may have missed a couple of points that I use when confronted with this situation. The main one is simply that courts tend to frown upon any attempt to completely shift liability to someone else, whether this is done contractually or, as in this case by a psuedo attempt to change ownership. (One would hope that the attorney made sure the title was changed to the son's name.) In reality, Dad probably paid for the car and pays for the maintenance as well as the cost of insuring the vehicle. I believe this would leave him open to being named as a defendant and having to pay another attorney to cover him while hoping he is not held liable.

Another issue is simply the premium, the savings, if any, usually aren't there to justify the additional risks. The son would lose the multi-car, multi-policy discount, usually the best rating level, and possibly renewal and good driver credits. The cost of carrying higher liability limits just aren't that substantial when measured against the additional risk the father would incur by trying to shift the liability.

Douglas M McNurlin
McNurlin Insurance Agencies
Minneapolis, MN

It is too bad, but this is why lawyers have a bad reputation. After fourteen years as an agent, I have the opinion that examples like yours are the rule and not the exception. It is amazing to me how others, who claim to be professionals, i.e., lawyers, accountants, bankers, etc. know so little about the insurance mechanism. They give their clients the impression that obtaining insurance is no more difficult than going to the grocery store for a gallon of milk and a loaf of bread.

John Gulbranson
Shaw-Belden Insurance Agency, Inc.
Stuart, IA

 P.S. Thanks for the opportunity to vent some frustration

 .

Thanks for an excellent article. I've been telling clients for years that they can't ELIMINATE the chance of being held responsible for kids' actions by having the children on their own. Rather, I advise, have substantial liability protection (Umbrella Liability) should a claim occur. I didn't realize the probability that the parents would not be covered under their own policy(s) should the child be on his or her own policy!

Here's another question. The child, a household member, is on his or her own policy. The father (or mother) borrows the child's car and has an accident and is sued. Will the parent's auto and/or umbrella protect the parent, or is the parent left with only the protection afforded under the child's policy?

Thanks again,  Mike Boyle

Michael Boyle
Michael Boyle Insurance Agency, LLC
Tonawanda NY

In your question, there WOULD now be coverage under the parents' policy because of the "occupancy" exception to the exclusion:

   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".