8.5 The Insurer’s Obligations

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

8.5 THE INSURER'S OBLIGATIONS

8.501 In General. The obligations of the insurer under an automobile policy are largely determined by the policy language rather than by statute or case law. As previously noted, the basic policy form in Virginia for many years was the Family Auto Policy (FAP) from the Insurance Services Office (ISO). In the early 2000s, the FAP was phased out and the Personal Auto Policy (PAP) form was introduced. As of July 1, 2008, all Virginia insurers were required to use the PAP form. Almost all cases now will be litigated under the PAP form, but it is important to review the actual policy to determine the coverage language.

8.502 Basic Policy Coverage. The insurance company's basic obligation under its liability coverage covers the duty to indemnify and the duty to defend. The PAP form states the obligation as follows:

We will pay damages for "bodily injury" or "property damage" for which any "insured" becomes legally responsible because of an auto accident. Damages include prejudgment interest awarded against the "insured." We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgments or settlements. We have no duty to defend any suit or settle any claim for "bodily injury" or "property damage" not covered under this policy.

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The old FAP form described "indemnification" as the duty to pay sums that the insured "shall become legally obligated to pay as damages . . . arising out of the ownership, maintenance or use of the owned automobile or nonowned automobile." The PAP form simplifies that language to damages for which an insured "becomes legally responsible because of an auto accident." Virginia courts have decided many cases on what constitutes "ownership, maintenance, and use" of a motor vehicle. ²⁴⁶ It is unclear to what extent cases decided under the old language will apply to the current definition of the indemnity obligation.

The insurer's obligation to pay arises only when the insured becomes "legally obligated" to pay damages, so there is no obligation to pay until judgment is rendered against the insured. ²⁴⁷ However, the insurance company also has the right to settle any case, regardless of the wishes of the insured, before judgment.

8.503 Limits of Liability. Under Section II, Part A—Liability Coverage, the insurer's obligation to pay "damages for 'bodily injury' or 'property damage' for which any 'insured' becomes legally responsible because of an auto accident" appears broad. However, it is limited by reference to the declarations page of the policy, which states what coverages apply and the limits of liability for each coverage. The declarations page is a separate sheet attached to the form policy that identifies the named insured, the vehicles covered, the specific coverages that have been purchased, and the amount of each coverage. In determining the company's obligations, it is essential to have an accurate copy of the declarations page.

The insurer's indemnity obligation is also subject to the provisions of the PAP section D headed "limit of liability" which state as follows:

The limit of liability shown in the Declarations for each person for bodily injury liability is our maximum limit of liability for all damages, including damages for care, loss of services or death, arising out of "bodily injury" sustained by any one person in any one auto accident. Subject to this limit for each person, the limit of liability shown in the

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Declarations for each accident for bodily injury liability is our maximum limit of liability for all damages for "bodily injury" resulting from any one auto accident. However, subject to this limit of liability for each accident, when one auto accident involves more than one "insured" against whom claim is made or brought, the Limit of Liability shown in the Declarations for each person for Bodily Injury Liability applies separately to each "insured."

The limit of liability shown in the Declarations for each accident for property damage liability is our maximum limit of liability for all "property damage" resulting from any one auto accident.

This is the most we will pay regardless of the number of:

1.	"Insureds";
2.	Claims made;
3.	Vehicles or premiums shown in the Declarations; or
4.	Vehicles involved in the auto accident.

Typically, a Virginia personal automobile policy states the bodily injury liability limits as "per person" and "per accident." The first and lower limit is the maximum amount the company will pay for damages to one person from any single accident. The second and higher limit is the maximum a company will pay to all persons arising out of any one accident where more than one person is injured. In discussions of policy limits, these split perperson/per-accident limits are often abbreviated; for example, a policy with limits of $25,000 per person and $50,000 per occurrence will be described as a "25/50" policy under the present statute.

The final paragraph in the PAP regarding "limit of liability" seeks to clarify uncertainties about when and how the policy limits apply. It states that they are "the most we will pay regardless of the number of insureds, claims made, or vehicles or premiums shown in the Declarations.

Although the "per accident" or "per occurrence" limit does cap the total payment to be made by any insurer, the "per person" limit does not limit a plaintiff's recovery when the same policy provides coverage to more than one defendant. This situation arises when there is a claim against a driver who has the owner's permission and against an owner for negligent entrustment.

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In Haislip v. Southern Heritage Insurance Co., ²⁴⁸ the Virginia Supreme Court, in a four-to-three decision, ruled that the omnibus statute ²⁴⁹ mandated separate limits of liability for an owner and a driver where there was an allegation of negligent entrustment by the owner. In 1999 the General Assembly amended section 38.2-2204(A) to provide that

nothing contained in this section shall be deemed to prohibit an insurer from limiting its liability under any one policy for bodily injury or property damage resulting from any one accident or occurrence to the liability limits for such coverage set forth in the policy for any such accident or occurrence regardless of the number of insureds under that policy.

Many thought this amendment effectively overruled the decision in Haislip, but in Johnson v. Windsor Insurance Co., ²⁵⁰ the court reviewed the 1999 amendment and found that it applied only to the "per accident" or "per occurrence" limit. Where there were two defendants insured under the policy, each was entitled to the coverage and there was a separate "per person" limit, subject to the overall "per accident" maximum coverage.

In 2005, the legislature amended the statute to bring it in line with the court's decision in Johnson. The statute now states, "[p]rovided that, when one accident or occurrence involves more than one defendant who is covered by the policy, the plaintiff may recover the per person limit of the policy against each such...