The Rough Notes Company Inc.

National advisory group’s new initiative addresses transformative changes in consumer risk exposures and personal automobile use

For the most part, property/casualty insurers have two choices when it comes to coverage forms they use to define the promise their agents sell consumers: create company-specific forms or use standardized forms developed and maintained by an advisory organization.

For years, Insurance Services Office, Inc. (ISO), was the only advisory program available countrywide for personal auto insurance. That changed this fall, when the American Association of Insurance Services (AAIS) rolled out its new national Personal Auto Program. AAIS is an 80-year-old nonprofit advisory organization governed by member companies. It offers standardized policy forms, program rules, and loss costs for rate making for 34 programs, as well as industry leadership in research and data development. Over 700 insurers, including most of the largest national carriers, rely on the organization.

The new AAIS Personal Auto Program is the advisory organization’s first venture into the auto insurance arena. “We believe this state-of-the-art program fills a product void in the marketplace,” says Edmund Kelly, president and chief executive officer, who emphasizes that the product offering would enable AAIS to better serve the insurance marketplace by enhancing competition in the largest personal line of business.

Industry value

“Whenever there’s competition, that promotes innovation,” Kelly adds. “By developing a standardized form and cutting-edge endorsements, we brought to market something that will let carriers respond to a changing consumer marketplace, and that will bring real value to independent agents and the customers they work with day in and day out.”

To develop the personal auto program—and the 30-some other programs the organization offers—AAIS combines in-house expertise with independent research and input from agents, carriers, and regulators. “The key is in really getting into the market and getting insight from all of our stakeholders,” Kelly notes.

The toughest work may be balancing stakeholders’ interests. “For instance, we could create a form the departments of insurance love that wouldn’t sell in the market,” Kelly notes. “Or forms that carriers love might not get approved by the department, or the best forms for agents would meet resistance from carriers.”

According to John Kadous, vice president of personal lines at AAIS, “Apart from wanting an alternative to a single industry standard, our members value having complementary products delivered by one provider. This program will let insurers offer a full suite of personal lines products based on AAIS forms.”

The association already holds leadership positions in the inland marine and commercial output program markets, as well as farm and agricultural. “For commercial and other personal lines, we’re certainly the preferred provider for member companies that use us, but we want to become the preferred provider for the industry,” Kelly notes.

Coverage flexibility

The AAIS Personal Auto Program is composed of several distinct parts: a multi-state base form; state-specific amendatory endorsements to align the base form with requirements in every jurisdiction; endorsements to provide all other mandatory coverages in  each state; and more than 60 optional endorsements.

“The base product provides a level of coverage that’s in keeping with general industry standards and meets each state’s specific requirements,” says Casey Brewer, AAIS senior product development specialist and the principal developer of the new AAIS auto forms. “The host of optional endorsements is a defining feature of the program.”

Kadous, who oversaw auto and other personal lines products while working for GEICO and USAA, concurs. “AAIS forms meet the exacting standards of an advisory organization program,” he says, “but the program’s most distinctive feature is the flexibility provided through its many optional endorsements, including some that are exclusive to the AAIS program. The auto insurance market is competitive, and our suite of optional endorsements gives carriers greater latitude in serving their agents’ and policyholders’ diverse needs.”

Throughout the policy, AAIS base policy form wording differs from ISO’s, but in most areas the net effect is essentially the same. “Similarities far outnumber differences,” Brewer explains. “For example, under the liability coverage section of both forms, prejudgment interest is subject to the policy limit, while defense costs apply in addition to them. In addition to the limit of liability, the standard policy provides for costs for bail bonds and appeal bonds, post-judgment interest, lost wages, and other expenses incurred at the company’s request.”

He points out that the AAIS form provides coverage for vehicles with a gross vehicle weight (GVW) of up to 12,000 pounds, to account for some of the larger utility vehicles now available to consumers, while the ISO program limits the cutoff weight to about 10,000 pounds.

He points to other differences. “Perhaps most important, the AAIS personal auto coverage forms use clear, concise, and easily understood policy language,” Brewer says. “That’s something all of our forms are known for, and it’s something our member companies and their agents value.” Other differences, he says, can be found primarily in the definitions and in the structure of several common exclusions that appear with minor variations in each of the four primary coverage parts of the AAIS form.

Detailed look

As with the ISO program, the AAIS policy includes exclusions that apply to the use of a vehicle as a public or livery conveyance. Brewer points out, however, “Our form specifically addresses use of a vehicle for transportation network company activity or use in commerce to deliver or transport food or other goods. Exceptions to both exclusions state that they don’t apply to share-the-expense car pools or to volunteer or charitable activities for which the insured’s expenses are reimbursed.” While standard base form language excludes coverage in these situations, agents and carriers can insure these exposures using optional endorsements.

Robin Westcott, AAIS vice president of government affairs, says, “These sharing economy activities are becoming more than just incidental use, and the specific risk continues to evolve. With this fundamental shift in how people use their personal vehicles, it becomes more and more difficult for an insurance company to isolate the simple kinds of use that were covered or excluded in traditional insurance programs. Segregating this activity and providing an endorsement to specifically define the risk is a prudent approach to understanding the underwriting implications for the expanded use of the personal automobile.”

According to Brewer, the AAIS policy also excludes coverage for any insured while that person is employed or otherwise engaged in an “auto business,” which AAIS has made a defined term. “The ISO PAP simply lists several excluded activities,” he says, “but by defining the term, we’ve eliminated the need to repeat the list of activities in each coverage part’s exclusion.” He points out that the AAIS form’s definition also mentions several kinds of activities not included in the ISO exclusion. “This ensures that the scope of the exclusion is more clearly communicated and understood by all parties involved.”

“By developing a standardized form and cutting-edge endorsements, we brought to market something that will let carriers respond to a changing consumer marketplace, and that will bring real value to independent agents and the customers they work with day in and day out.”

—Edmund Kelly

President and CEO American Association of

Insurance Services

The AAIS form also excludes liability coverage for a covered auto enrolled in a personal vehicle sharing program and being used in connection with a vehicle sharing program by someone other than the named insured or a family member, Brewer notes. “The unendorsed ISO policy contains no similar exclusions,” he says. “Our exclusion eliminates coverage for an insured who enrolls an owned, scheduled vehicle in a peer-to-peer car sharing program.”

He adds, however, that the exclusion generally would not eliminate coverage for the named insured or family member who rents a car from somebody else. “With that said,” Brewer says, “keeping the goal of flexibility in mind, the package of optional endorsements does include the option for agents and carriers to extend physical damage coverage for identified vehicles used in a car sharing program.”

Issues and benefits

Brewer says it’s also worth noting that AAIS took the opportunity created by developing a new program to ad- dress issues that carriers and agents alike have struggled with over the years, as well as building in a few new policyholder benefits.

First, he notes, the liability coverage section of the AAIS multi-state policy form specifies that coverage is provided only for compensatory damages. “While this is modified where required on a state-specific basis within our program, the ISO policy doesn’t specifically address the application of coverage to compensatory or punitive damages,” Brewer says. “This has left the language open to interpretation and subjected it to substantial litigation and a jumble of controlling case law across the country.”

Within the physical damage section, he explains, a benefit providing coverage for the expense to replace a child safety seat has been added. “The AAIS policy, like the ISO form, contains an exclusion that applies to custom equipment,” Brewer says. “Within the AAIS policy, however, the exclusion applies to all insured vehicles, rather than solely to pickups or vans.”

He adds, “It benefits everyone—the policyholder, the agent, and the carrier—when forms clearly define the coverage being provided, and the roles and expectations for all parties. Beyond that, we felt it was important for carriers and their agents to have the tools to address a broad spectrum of customer needs and risk exposures.”

To that end, Brewer says the AAIS Personal Auto Program provides much more than just the standard coverage forms, with over 60 optional endorsements to address, where permitted, several categories of coverage, including:

Policy conditions, such as accident forgiveness, combined single limits, and named driver exclusions

Ownership arrangements, such as lessors, trusts, and joint owners

Car-sharing and ride-sharing, including endorsements to allow carriers to provide coverage for all three phases of transportation network activity

Coverage for non-owned autos, including options to provide coverage for damage to a rental vehicle

Options for insuring a wide range of miscellaneous vehicles, such as farm motor vehicles, recreational vehicles, snowmobiles, golf carts, and motor homes

Travel-related coverages such as emergency roadside service, trip interruption, and limited coverage in Mexico

A wide range of physical damage coverage options, including new vehicle replacement coverage, stated maximum value, and agreed value endorsements

Coverage for losses to vehicle components and personal property, such as custom equipment or audio/video/data equipment, as well as optional mechanical breakdown insurance and first-party coverage for injury to a pet

According to Kadous, “We placed heavy emphasis on the ability to customize coverage because, as an advisory organization, we need to be able to respond to various unique needs of companies across the spectrum.”

He points out that, although the forms are innovative, they’re still compatible with rating, policy administration, and agency management systems. “From a forms perspective, this program can be a ‘plug and play’ solution,” he notes.

AAIS began the process of filing its new program across the country this fall and has created a series of YouTube-hosted TED Talk-style videos for carriers and agents that provide in-depth information about rules manuals, optional endorsements, how the new auto program interacts with other AAIS programs, and what’s coming up next for the program.

For more information:

www.aaisonline.com

By Dave Willis, CPIA