Co-signing mom fears being sued

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Dear Dr. Don,
I’ve read your columns in reference to co-signing a loan. I have another question. I co-signed a car loan for my 20-year-old daughter to help her get a car and build her credit history.

She is making her payments on time; however, the vehicle is registered in both of our names. Her boyfriend drives the car, too, and the insurance is in her name only. Can I get sued if either of them gets in a wreck with the car?
— April Auto

Dear April,
The short, seemingly simple question you raise involves several different issues. Let’s take the key issues one at a time.

I’ve asked Eric Wiening, an insurance professor at The American College in Bryn Mawr, Pa., and a Chartered Property Casualty Underwriter, to assist me in answering your questions.

His comments, as they relate to the insurance coverage, are based on a standard Insurance Services Offices personal auto policy. There may be variations among insurers’ forms, state laws and company practices.

Key co-signing issues

1. Can the mother be sued if the car is involved in an accident? The standard answer is, “Anybody can be sued for anything.” Whether a suit is likely to be successful is a legal question. The lower the likelihood of success, the lower the probability of a lawsuit. Even unsuccessful, spurious suits can involve substantial defense costs, and insurance covers the costs of defending a liability suit based on allegations that would be covered by the policy.

2. What are the mother’s protections? The name(s) on the insurance policy should be the same as the names on the vehicle’s title. ISO eligibility rules specify that vehicles owned by an individual or a husband and wife residing in the same household are eligible for coverage under an unendorsed personal auto policy. A joint ownership coverage endorsement should be added to modify the policy for your situation. It isn’t clear whether your daughter lives with you but the endorsement could be used in either case — whether the parent lives in the same household or a different one. Briefly summarized, this endorsement provides that both owners are named insureds under the policy and makes it clear that the mother, in this case, has protection under this policy for the daughter’s car but not for the ownership, maintenance or use of any other vehicle.

If the current policy does not properly reflect the identity of the vehicle’s owners, it is difficult to say to what extent the mother is protected. It seems likely that she would have protection against a liability claim, but the insurer might balk at paying for the mother’s interest in a claim for loss to the vehicle itself. She has an insurable interest in the vehicle but apparently is not named as an insured. In a worst-case scenario, an insurer might even try to deny coverage on the basis that the vehicle’s true ownership was misrepresented.

3. What is the boyfriend’s status? Unless coverage is otherwise excluded or affected by the ownership issues discussed above or some other exclusion, coverage would apply to the daughter, another driver such as the boyfriend, the mother, and anybody else legally responsible for the vehicle’s use. If the boyfriend also has a personal auto policy and the daughter’s car is regularly available for his use, the boyfriend’s own policy might not apply, but this has no bearing on the daughter’s coverage. If the boyfriend is actually a primary operator of the vehicle rather than an occasional user, he should probably be listed on the application as a driver and the policy rated accordingly.

It’s important for you and your daughter to talk to your daughter’s insurance agent to arrange to insure your ownership interest in the car. A joint ownership coverage endorsement added to your daughter’s insurance policy should do the trick for you. Having a separate discussion with the agent to make sure that the boyfriend’s use of the car is insured is important too.

All this sounds expensive, but it’s not as expensive as finding out there’s no coverage. I say your daughter should shoulder the additional cost since the only reason you’re a co-owner of the vehicle is because you’re doing her the favor of co-signing the loan, but that’s between the two of you.