For a number of years, the market for substandard auto policies has been a growing one. Initially, there were insurers that were not in the mainstream that identified this underserved market and were able to reap tremendous benefits from concentrating on this market. More recently, many of the mainline insurers have seen the financial rewards that are available in this market and have attempted to enter the market as well.
One issue that has arisen has been the policy forms that have been used to serve this market. Many states no longer regulate the forms that are being used. Standard policies are no longer mandatory. As a result, insurers serving the substandard market have created forms that heretofore did not exist. The purpose of many of these forms was to identify more precisely the risks and individuals who were being underwritten and to ensure that only those risks and individuals received coverage from the policies.
Many insurers have resorted to the use of "named driver" policies limiting the coverage afforded to only those drivers identified in the policy. Under the typical personal auto policy, the named insured, residents of his or her household, and anyone operating the vehicle with permissive use would be covered under the policy.
Texas Joins the Fray
Effective January 1, 2014, Texas (through S.B. No. 1567) passed laws limiting the use of a "named driver policy." This bill places several requirements on not only the insurer but also the agent who is issuing the policy. First, section 1952.0515 of the Texas Insurance Code prohibits an agent or insurer from delivering in the state a personal automobile policy unless it provides the minimum coverage specified by the Financial Responsibility Statute. This amount is currently $30,000/60,000 for "bodily injury" and $25,000 for property damage. These requirements would apply to all personal auto policies regardless of whether they are a "named driver policy."
The statute goes on to define a "named driver policy" as an "automobile insurance policy that provides coverage only for drivers specifically named on the policy and not for all individuals residing in a named insured's household, and that may or may not provide coverage for drivers using a vehicle covered by the policy with permission and not residing in the insured's household. The term includes an automobile insurance policy that has been endorsed to provide coverage only for drivers specifically named on the policy."
Under S.B. 1567, before accepting a premium for a "named driver policy," the agent or insurer must make the following disclosures both orally and in writing to the applicant or the insured:
WARNING: A NAMED DRIVER POLICY DOES NOT PROVIDE COVERAGE FOR INDIVIDUALS RESIDING IN THE INSURED'S HOUSEHOLD THAT ARE NOT NAMED ON THE POLICY.
The bill goes on to provide that, before accepting a premium or fee for a named driver policy, the agent or insurer must receive a copy of this disclosure that has been signed by the applicant or the insured. The bill also requires that an agent or insurer that delivers or issues a named driver policy specifically include in the policy and conspicuously identify on the front of any proof of insurance document issued to the insured this required disclosure. Finally, the statute requires that the agent or insurer require that the applicant or insured confirm contemporaneously in writing the provision of oral disclosure.
Unanswered Questions
This statute and the way it is drafted will no doubt create several unanswered questions for insureds, agents, and insurers. First, the statute requires that this disclosure be made orally and in writing before accepting "any" premium for the policy. That just means that if the insured is paying the premium under an installment plan, a disclosure must be provided each time.
Second, the statute requires that the disclosure be made both orally and in writing. No doubt, some questions will arise as to whether the oral disclosure was given. However, the statute does require that there be a written confirmation of the oral disclosure, which hopefully should eliminate many of those issues.
Third, the statute does not provide any indication that it is limited to the initial issuance of the policy as opposed to any renewal of the policy. Will the agent or insurer have to provide the same oral and written disclosures for renewals of the original policy?
Finally, the bill is silent as to what is the effect of the failure to make such oral and written disclosures. Are the remedies administrative? Is the limitation of "who is an insured" in the policy invalid? These are some of the many questions that are created by this statute and will have to be resolved by either the courts or the Texas Department of Insurance.
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