Dig a Little Deeper
Helping clients understand and navigate uninsured and underinsured motorists limits
Court Decisions is one of the most popular features of Rough Notes magazine. Its popularity likely stems from the fact that courtrooms often are where the paper promises made in insurance contracts become real. As insurance professionals, we all can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. In this column, the editors of PF&M Analysis, a Rough Notes Company technical publication, dig a little deeper into the coverage examined in a current featured court decision as a way to identify a coverage problem and then provide possible solutions. The decision we’re looking at today, Loomis vs. State Farm Fire & Casualty Company, is about a binder that was issued but cancelled before the policy was issued. The appellate decision didn’t deal with the particular coverage dispute but instead focused on a basic question of when the accident that resulted in the injury actually occurred. Only after that dispute was resolved could the court turn its attention to the coverage issue itself, namely, how underinsured motorists coverage limits are applied.
The key to this coverage is found not in the insuring agreement but, instead, in the definition of underinsured motor vehicle.
Uninsured motorists coverage was introduced many years ago as a way to protect a driver who was appropriately insured when struck by a driver without coverage. The coverage is available to compensate an insured when injured by another who, at the time of the accident, has no liability bond or policy in effect.
PF&M explains uninsured motorists coverage like this:
“Uninsured motorists coverage compensates an insured for injuries and damages caused by drivers of uninsured automobiles who are legally liable for the insured’s injuries and are subject to the laws of each state or jurisdiction. Financial responsibility laws in the state or jurisdiction where the motor vehicle is registered control the minimum limits of insurance for uninsured motorists coverage. Higher limits are available and may be requested, with some states requiring that they match the coverage form or policy’s bodily injury limits. This coverage is available for use with all business auto liability coverage forms and policies and a number of states make it mandatory.
“Although uninsured motorists coverage must be offered in connection with auto liability insurance, some states allow the named insured to reject it, in some cases without any restrictions and in others only under certain circumstances. An insurer must be familiar with the laws that apply in the states where it conducts business.”
Underinsured motorists coverage came along much later. As it turned out, many insureds were disappointed that, although they had sufficient uninsured motorists limits, those limits could not be accessed if the injuring party was insured with even minimum limits. In such a situation, the injured party would have been better off if the injuring party had been totally uninsured.
As more states began enacting financial responsibility laws with minimum limits, pressure increased for a new kind of coverage that would bridge the gap and allow an injured party to be compensated appropriately if that party had purchased his or her own compensating coverage. This coverage is called underinsured motorists and is available, but not required, in all states.
Insurance Services Office (ISO) does not provide a countrywide uninsured motorists coverage form,
but it does provide a countrywide underinsured motorists coverage form. The reason is that states have been deeply involved in developing rules on coverage provided in uninsured motorists insurance, but they have been more hands-off on underinsured motorists coverage.
The form says
The relevant ISO form for personal lines is PP 03 11–Underinsured Motorists Coverage. The key to this coverage is found not in the insuring agreement but, instead, in the definition of underinsured motor vehicle. The first paragraph of the definition states:
“‘Underinsured motor vehicle’ means a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage.”
What that means is, if an insured purchases $50,000 of underinsured motor-ists coverage and the injuring party’s limit also is $50,000, no coverage applies.
What happens if the named insured purchases $100,000 in underinsured motorists coverage and the injuring party’s limit is $50,000? The limit of liability section in the endorsement has many parts; this is how it works with the injuring party’s coverage:
“B. The limit of liability shall be reduced by all sums paid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible. This includes all sums paid under Part A of this policy.”
This means that the injuring party’s policy would respond with its $50,000 limit and the injured party’s underinsured motorists coverage would respond with no more than $100,000 – $50,000 = $50,000.
Insureds may be confused to learn that the limit purchased is not the limit available. The only limit available to the insured is the difference between the limit the injuring party carries and the limit the insured carries. Helping your clients understand how the limits actually apply could result in their purchasing higher limits—and maybe even an umbrella—to make certain they have the coverage they really want and need.
Linda Ferguson, CPCU, has more than 30 years of underwriting experience with national commercial lines carriers. She is vice president of Technical and Educational Products at The Rough Notes Company, Inc.