6.2 Part A Liability and Supplementary Payments

The Part A Insuring Agreement

Under Part A - Liability Coverage, the insurer promises to pay damages for bodily injury (BI) or property damage (PD) for which any insured becomes legally responsible because of an auto accident. The insurer also assumes the duty to defend the insured in any suit seeking covered damages and may settle claims as it sees fit.

The defense obligation ends once the company has exhausted the limit of liability through payment of judgments or settlements.

Who Is an Insured Under Part A

Part A defines insureds broadly:

• You (named insured) and any family member for the ownership, maintenance, or use of any auto or trailer.
• Any person using your covered auto with permission (a permissive user).
• Any person or organization legally responsible for acts of a covered insured while using a covered auto (for example, the insured's employer in limited cases).

Trap: a family member is covered driving any auto, even a borrowed one, while a permissive user is covered only in your covered auto.

Reading the Limit of Liability

Limits are stated two ways.

Split limits appear as three numbers, for example 100/300/50 (in thousands):

• $100,000 maximum for BI to one person
• $300,000 maximum for BI for all persons in one accident
• $50,000 maximum for property damage per accident

Worked example: An insured with 100/300/50 injures three people - $80,000, $90,000, and $150,000 in damages. The third claimant is capped at the $100,000 per-person limit, so the BI payout is $80,000 + $90,000 + $100,000 = $270,000, within the $300,000 per-accident cap.

A combined single limit (CSL) - say $300,000 - applies one pool to BI and PD combined, giving more flexibility.

Supplementary Payments

Supplementary Payments are paid in addition to the limit of liability - they do not erode the limit. They include:

• All defense costs the insurer incurs.
• Premiums on appeal bonds and bonds to release attachments.
• Up to a stated amount (commonly $250) for bail bonds arising from a covered accident.
• Interest accruing on a judgment.
• Up to a stated amount (commonly $200 per day) for the insured's lost earnings when attending hearings or trials at the insurer's request, plus other reasonable expenses.

Exam trap: because these are paid above the limit, a $100,000 BI judgment plus $15,000 in defense costs means the insurer pays the full $100,000 limit and the $15,000 - the defense does not reduce the $100,000.

Key Part A Exclusions

The exam tests these heavily:

The Duty to Defend in Practice

The duty to defend is broader than the duty to pay. The insurer must provide a defense whenever a suit alleges covered damages, even if the allegations later prove groundless, false, or fraudulent. Defense is provided at the insurer's expense and is a Supplementary Payment that does not reduce the limit.

Two consequences appear on exams:

• The insurer controls the defense and may settle within the limit without the insured's consent.
• Once the insurer pays out the full limit in judgments or settlements, its duty to defend terminates - it is not obligated to keep funding litigation after the limit is exhausted.

Combined Single Limit Compared

Many advisors recommend a combined single limit (CSL) because a split limit can leave a serious-injury claimant short. Compare a 100/300/50 policy with a $300,000 CSL when one claimant suffers $250,000 in bodily injury:

The split-limit insured is exposed to $150,000 of uncovered liability, while the CSL insured is fully protected up to $300,000 for that claimant. This is why questions about 'best protecting a single seriously injured victim' point toward the combined single limit.

The Other-Owned-Auto and Regular-Use Gaps

Two exclusions deserve special drilling because they recur:

• Vehicles you own but did not insure. Part A excludes liability arising from an owned auto that is not a 'your covered auto.' A spouse's separately owned, uninsured car can leave a gap.
• Vehicles furnished for regular use. A non-owned auto available for the insured's regular use (a company car, a fleet vehicle, a long-term loaner) is excluded. The fix is the Extended Non-Owned Coverage endorsement.

The theory: the PAP charges premium based on the cars on the Declarations, so it will not silently absorb the exposure of vehicles the insured uses routinely but never disclosed.

Out-of-State Coverage and Other Insurance

Two conditions shape how Part A pays across borders and across policies.

• The out-of-state coverage condition automatically raises the insured's limits to meet a higher compulsory or financial responsibility limit required by the state where the accident occurs. This keeps the insured legal when traveling.
• The Other Insurance condition makes the PAP excess when the insured drives a non-owned auto that has its own coverage; for an owned covered auto, the PAP is primary.

Example: An insured borrows a friend's car and causes a covered loss. The friend's policy pays first (primary on the owned car), and the insured's PAP responds only as excess above the friend's limits - a tested point about which policy pays first.