410.6-7

UNDERINSURED MOTORISTS COVERAGE - PP 03 11

(September, 2007)

Agents and insurers have, for many years, sought to educate their customers about adequate insurance protection. Many states have long established regulations for handling accidents involving uninsured motorists. However, there is a shadowy zone that lies between the coverage insureds choose for handling their own accidents and how states have structured/mandated uninsured motorists coverage. That zone is covered by Underinsured Motorists (UIM) protection. The PP 03 11 Underinsured Motorists Coverage endorsement sheds light on that zone, handling the needs of insureds who suffer losses caused by drivers with inadequate protection.

The Schedule

The form has a schedule that includes the limit of liability (per accident) and spaces for showing a premium for a maximum of three vehicles.

Coverage Analysis

The PP 03 11, Underinsured Motorists Coverage endorsement is more self-contained than most forms. It has its own insuring agreement, exclusions, limit of liability, other insurance and arbitration provisions. Further, the form modifies the basic PAP’s Additional Duties and General Provisions sections.

Insuring Agreement

Similar to Uninsured Motorists coverage, UIM Coverage treats the policy’s insureds as though they were third parties. The insurer becomes obligated to compensate the insured as a claimant for bodily injury caused by an accident with an underinsured vehicle. However, coverage does not apply until at least one of two conditions is met. One condition is that any policies or bonds that would apply to the loss must have had their limits exhausted by a judgment or settlement. Another condition could independently trigger coverage. A primary insurer and the insured can reach a tentative settlement. The insured must contact the primary carrier (in writing). Receiving this notice, the company advances a settlement to the insured that is equal to the amount of the tentative settlement within 30 days of being notified.

Definition of Insured

An insured is defined as “You” (named insured and resident spouse), any “family member,” and persons occupying a “covered auto.” Any person who is entitled to damages because of bodily injury to the named insured, resident spouse or “family member” also qualifies as an insured.

Definition of Underinsured Motor Vehicle

An underinsured motor vehicle is a motorized vehicle which operates on land (including a trailer) and which is protected at the time of the accident by either a bodily injury liability policy or bond. However, the limit of the available coverage must be less than the limit of liability for underinsured motorists written under the applicable Personal Auto Policy. The endorsement specifies several instances that disqualify a vehicle as an underinsured motor vehicle. A vehicle is not an underinsured motor vehicle if it is:

·         protected by a bond or policy which has a limit that is less than what is required by the laws of the state in which “your covered auto” is principally garaged

·         owned by any government entity

·         operated on rails or treads

·         designed principally for off-road use

·         currently being used as a residence

·         owned or operated by a self-insurer

·         protected by a bonding company or insurer that has denied coverage or has solvency problems.

Exclusions

The endorsement has several situations for which underinsured coverage is excluded. No underinsured motorist coverage is extended for bodily injuries incurred by:

·         any “insured” while occupying a covered auto that is publicly hired to transport people or goods

Example: Joe’s PAP policy has a $100/300,000 limit for UIM. He is severely injury when the vehicle he is riding in is hit by a driver who has a policy with $50/100,000 limits. Joe files a claim under his UIM policy but the insurer denies it. At the time of the accident, Joe was riding in a city taxi.

·         an insured as an occupant of or as a pedestrian struck by an auto which he or she owns, but is not covered under the same Personal Auto Policy that provides the underinsurance coverage

·         any “family member” as an occupant of or as a pedestrian struck by an auto that is owned by the named insured (or resident spouse), but which is protected by another policy for underinsured motorists coverage on a primary basis

·         a person using a vehicle without an insured’s permission.

Further, no underinsurance coverage is provided when doing so would:

·         benefit a party which is covered by either workers compensation or disability coverage

·         result in providing compensation for punitive or exemplary damages.

Limit of Liability

The limit of liability for Underinsured Motorist coverage is restricted in the following ways:

·         The limit of liability that appears in the endorsement’s schedule is the maximum amount available for coverage for any single accident. The maximum is unaffected by the number of “insureds,” filed claims, vehicles/premiums shown on the Declarations or vehicles involved in the loss.

·         The total amount paid will be offset by any coverage available from any entity that is illegally responsible for the damages.

·         Coverage under the underinsured motorists endorsement will not be duplicated by payments under any other coverage parts of the personal auto policy.

·         No coverage will be provided for losses that are eligible for either workers compensation or disability coverage.

Other Insurance

If other sources of insurance or other policy provisions apply to an underinsured motorist loss, this provision takes such circumstances into consideration. The PP 03 11, Underinsured Motorists endorsement operates under an increasingly common constraint. It considers the total amount of coverage available to pay for losses involving underinsured motorists to be no more than the largest limit of liability provided by a single source, for a single vehicle.

Example: In the case of a covered underinsurance loss having two different sources of recovery, one for a $34,000 limit and the second for $30,000, the total amount available is not $64,000 (the sum of the two sources); instead, it is $34,000, the limit of the first source.

Further, the PP 03 11, Underinsured Motorists endorsement will only pay on a basis that equals its share of the total amount of insurance available to cover an eligible loss involving an owned auto. Finally, the total amount that may be paid on the loss may not exceed the total amount of primary and excess coverage available for any single auto. If the loss involves a non-owned auto, the uninsured motorist coverage part responds on an excess basis, paying only after the other available coverage has paid its limit.

'05 Change: The Other Insurance provision of this form was slightly changed. The wording makes it clear that the UIM coverage applies as excess coverage even when the vehicle is a temporary substitute for a covered auto.

Arbitration

A. If We And An "Insured" Do Not Agree:

If the company and their insured are not on the same wavelength regarding how much is due in an underinsured motorist loss, the argument may go to arbitration. However, both the company and the insured must want the disagreement to be handled by representatives of their own choosing. A judge may be called upon to select a third arbitrator if this person is not selected by the first two arbitrators within 30 days.

B. Distribution Of Costs

Each party will handle their own out-of-pocket expenses, as well as equally share the cost of the third arbitrator. The arbitrators must follow the local rules of law in their discussions.

C. Unless Both Parties Agree Otherwise

The insurance company and the insured must accept the decisions agreed on by any two arbitrators as legally binding in the areas of determining a valid claim and the amount to be paid. An exception is made if the arbitrated amount is greater than the minimum bodily injury liability established by the applicable financial responsibility law. If this disparity occurs, either the insurer or the insured can insist on going to trial. However, if no party contests the amount within 60 days, the decision, regardless of the amount, is binding.

Additional Duties

A person who wants to claim coverage under this endorsement has a couple of additional obligations. First, he or she has to send copies of any legal documents to the insurer. Second, the insured has to send the insurance company a written notice of any tentative settlements that he or she may accept from the “underinsured motor vehicle’s” insurer. The insurer, upon receiving the notice, must also be granted 30 days to advance payment, equal to the tentative settlement to their insured. This part of the provision allows the insurer to protect their subrogation rights.

Our Right to Recover Payment

The PP 03 11, Underinsured Motorists endorsement’s last provision, states that if the company has received proper settlement notice but fails to advance payment within 30 days, it gives up the right to subrogate against any party that is legally responsible for the underinsured loss. However, if the company does protect its rights by advancing an amount equal to their insured’s tentative settlement:

·         that payment is separate from any sums that the insured is entitled to under this endorsement’s coverage, and

·         the company retains the right to recover the advanced funds.

While an insurer may want to provide its customers with adequate protection, it still wants to preserve the ability to collect from the proper party, as well as to avoid strategies that could cheat it out of recovery.

Example: Lyman Smashedfast was hit by another driver. The driver who caused the loss had a policy with limits of $15,000. Lyman’s policy, from Guard ‘R’ Bottumlyn Casualty, included Underinsured Motorist coverage with a limit of $50,000. Lyman suffered an estimated loss of $27,000. The other driver’s insurance company offered Lyman an immediate settlement of $10,000. Lyman told his insurer that he was willing to take the payment and then submit a claim for the balance of his loss under his own policy’s UIM coverage. Guard ‘R’ Bottumlyn’s adjuster said he had another plan. The company gave Lyman a $10,000 advance. Later it settled with Lyman for a total of $27,000 and then sued the other driver’s insurer for its full policy limit of $15,000. Without the recover payment provision, Lyman could have received a “low-ball” payment from the other driver’s insurer and Guard ‘R’ Bottumlyn would have been obligated to pay $17,000 instead of a net of $12,000 ($27,000 payment to Lyman minus $15,000 recovery from other insurer).