The three Cs.

Adequate auto insurance is a vital part of the financial planning process for both individuals and businesses. CPAs shopping for personal or business auto insurance for themselves, their clients or their employers should consider the three Cs of insurance--coverage, company and cost. Does coverage provide adequate protection? Will the insurance company be able to live up to its promises? Is the policy's cost fair?

COVERAGE

Obtaining coverage from the best insurance company at the lowest price is of little value if coverage is inadequate.

Liability coverage is the most important type of coverage. Selecting an adequate limit is difficult for those with moderate or high personal net worth since there is no upper limit on the amount of damage awards. One way to solve the limits problem is to add to the insurance program an umbrella liability policy, which provides coverage above an auto policy's (as well as homeowners and other personal policies') limits.

Umbrella policies have limits as high as $10 million. A $5 million policy for a typical two-car family might cost as little as $250 a year. Most umbrella policies require the basic auto liability coverage to be only $100,000 or $300,000, not the full $1 million, offsetting some of the umbrella policy's cost.

Another advantage of umbrella policies is they provide a single limit that applies to both bodily injury and property damage liability, eliminating the problem of choosing separate limits. (Some policies set one limit for bodily injury and another limit for property damage.)

Uninsured-underinsured coverage (protection when the party responsible for accident injuries has either no insurance or inadequate liability insurance) is critical because as many as 10% of all drivers carry no liability insurance at all and those with little or no net worth carry only minimum coverage limits.

With uninsured-underinsured coverage, the injured parties' insurance company pays the judgment or settlement up to the difference between the limits the other party carries and the uninsured-underinsured coverage he or she purchased. I recommend carrying high limits for this coverage--at least $300,000 when available. In most states, the cost is nominal.

Medical payments coverage (protection for the insured, members of the insured's household and passengers in the insured auto) extends to any car accident. Such policies pay accident-related medical bills up to the selected limit. The usual $5,000 or $10,000 limit costs little. Since most people have medical expense insurance to cover these bills, there is no need to purchase higher limits; the premium dollars are better spent upgrading medical expense insurance.

No-fault coverage (designed to eliminate frivolous lawsuits for pain and suffering) reduces the need for medical payments coverage. In no-fault states, most medical bills arising from car accidents are covered. No-fault also covers lost wages, substitute help, death benefits, travel expenses for injured parties' rehabilitation and similar expenses. Optional coverages usually are available to increase coverage limits.

Comprehensive and collision ("other than collision") insurance covers losses caused by fire, theft, vandalism, windstorms, water, animals--even flood damage. It does not pay for routine maintenance, wear and tear, road damage to tires, damage due to freezing or other problems.

People who own cars that are old or in poor condition sometimes do not buy this coverage since such cars usually have little market value.

When a car lessee has a multiyear lease, he or she should ask about "gap" insurance, which covers the shortfall when a car is totaled early in the lease and the insurance company pays only the car's book value, leaving the lessee responsible for any difference.

Optional coverages (such as those for towing, labor charges and rental expenses for a replacement when an insured car is disabled) generally have low limits and premiums. In most cases, people are better off not purchasing them: Many insurance companies consider claim frequency as significant as claim size and a number of small towing claims can be considered a bad risk even though the insured never had an at-fault accident.

COMPANY

It's important to evaluate a company's financial strength before purchasing a policy in view of recent high-profile insurance company failures.

The company should be licensed to do business in one's state. Beyond that, numerous information sources can help in selecting a financially sound company that will pay any claims fairly. Consumer Reports, for example, publishes results of surveys of reader experiences with insurance companies.

Among the information sources are rating services. A.M. Best Co. evaluates insurance companies in terms of overall policyholder satisfaction and financial strength. Policyholder ratings range from A++ (superior) down to F (nonviable).

Financial ratings range from I (up to $1 million) to XV (over $2 billion). I suggest the minimum acceptable rating be A- VIII ($100 million-S200 million).

Standard & Poor's and Moody's ratings range from AAA or Aaa (superior) to C (nonviable). Only companies that submit the necessary information and pay a fee are rated. Standard and Poor's also evaluates other insurers on the basis of public information. Such companies are identified by a q following the rating. The highest q rating is BBBq; the lowest is Bq, indicating a financially vulnerable company.

For insurers rated by Standard & Poor's and Moody's, an A- rating from Standard & Poor's or an A3 rating from Moody's is my minimum requirement, although I do not disqualify companies that receive a BBBq rating.

Several state insurance departments publish complaint ratios--the number of consumer complaints compared with the dollar volume of car insurance premiums written by the insurer. Ratio lists usually are available without charge from state insurance departments.

COST

Insurance company representatives can provide information on policy discounts, which typically include these types:

* Multicar, for persons with two or more cars insured by the same insurance company.

* Passive restraint, for cars with factory-installed passive seat belts or air bags.

* Driver training, for drivers who successfully complete accredited driver training courses.

* Mature driver credit, for insureds over age 55.

* Good student, for young drivers with good scholastic averages.

* Antitheft device, for autos with burglar alarms.

* Antilock brakes, for cars equipped with factory-installed antilock brake systems.

* Car pool, for commuters (make sure the car is classified properly).

* Auto-home, for people who insure their autos and homes with the same company.

* Good driver, for drivers with accident- or violation-free driving records.

Additional ways to reduce premium costs are to increase the deductible, to consider dropping comprehensive and collision coverage for an older car and to compare premium costs before purchasing a certain car model. Insurance costs are higher for cars that are expensive to buy and repair. Representatives can identify which sporty and luxury cars are prime targets for car thieves and thus are more costly to insure.

BUSINESS AUTO INSURANCE

Much of the preceding information applies to business insurance as well. However, several additional tips are worth mentioning.

Obtain nonowned auto liability coverage. Such coverage is particularly pertinent for CPA firms and is a necessity for almost every business. It covers a business's liability when employees or others (such as volunteers working for nonprofits) use their own cars while attending to its business.

If, for example, an audit manager driving to a client's office has an accident, his or her employer can be sued in addition to the vehicle's owner and driver. While the vehicle owner's insurance protects the employer, there is no assurance employees carry adequate limits.

Consider symbol "1" auto liability coverage. To simplify business auto insurance, the types of vehicles a policy covers are indicated by numerals, which have various meanings ranging from "any auto" through "any owned auto" to "only scheduled autos." In most cases, coverage specifying any auto (indicated by the number 1 appearing opposite "liability coverage" on the policy's declarations page) is best. (The declarations page customizes the policy, showing the insured's name and address, the coverages purchased, the limits of coverage, the policy period, etc.)

Obtain umbrella liability coverage. Many businesses also have other exposures, such as product liability, that make umbrella liability coverage vital. The minimum for most businesses generally is $5 million to $10 million; I generally recommend $25 million to $50 million.

Self-insure comprehensive and collision coverage. Any business with 25 or more low- or medium-priced vehicles should consider self-insuring the comprehensive and collision exposures or at least retaining such coverage once the financing requirements have been fulfilled. (Some insurance may be needed if the vehicles are exposed to the same loss, such as those kept overnight in a company garage.)

Emphasize safe driving. Employers should check motor vehicle driving records for all drivers, encourage them to use seat belts and provide driver training. Most insurance companies can assist with these programs.

Obtain "driver other car" coverage. Personal auto insurance policies provide excess coverage when the insured is driving someone else's car (primary coverage is provided by the car owner's policy). Such coverage is not included in a business auto policy. "Driver other car" coverage can be very important for corporate officers whose only cars are owned by the corporation. It can be added to a business auto policy for specified individuals and their spouses.

A NECESSARY CONVENIENCE

Cars are a great convenience--for many a necessity--but they also can be a source of catastrophic loss. Combining safe driving with sound insurance is the best protection for families, businesses and clients.

For more information...

A free, 24-page booklet, Understand Your Auto Insurance Policy, is available by writing the Society of Chartered Property and Casualty Underwriters (SCPCU) at 720 Providence Road, P.O. Box 3009, Malvern, Pennsylvania 19355-0709. The SCPCU is a professional association of more than 24,000 members who work in all facets of the property and casualty insurance industry. CPCUs earn the designation by completing 10 national examinations, satisfying an experience requirement and agreeing to be bound by a code of ethics.

JEROME TRUPIN, CPCU, CLU, is an insurance consultant with Trupin Insurance Services, White Plains, New York. He is a member of the Society of Chartered Property and Casualty Underwriters.