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Understanding Underinsured Motorist Coverage

UIM Laws Vary
Most states have laws that provide underinsured motorist ("UIM") insurance, which allows the insured to recover damages if he or she is involved in an accident and the driver responsible for those injuries doesn't have sufficient insurance coverage.
Significant differences may exist in the UIM policies that are written by various insurers depending on the state’s law. In some states, underinsured motorist coverage is mandatory, that is, insurers must offer it to their insureds and car owners must carry it. Most of these mandatory UIM laws set a minimum amount of coverage that has to be offered or carried. In some states, the insured is permitted to buy extra UIM coverage, up to a set maximum amount.
In other states, UIM coverage is optional. In these states, the UIM laws provide that insurers have to offer UIM coverage or make it “available" to their insureds, or use words with similar meaning. UIM laws might provide that
  • Insurers must provide written notice of the availability and option for UIM coverage
  • Insurers have to make the offer for UIM coverage when the insured applies for general car insurance
  • Insurers have to offer UIM coverage when it offers uninsured motorist insurance coverage ("UM") 
In most states, however, underinsured motorist coverage is automatically included in an insured's general liability car insurance unless the insured specifically rejects it. Most of these UIM laws require the insured to reject UIM coverage in writing, and in some states, a specific form must be used when coverage is rejected. If UIM coverage is not rejected in the way required by the UIM law, the rejection will be ignored by the courts and UIM coverage will be read into the policy.
Coverage under UIM Laws
All of the various UIM laws provide coverage in either one of two ways:
  • UIM coverage is triggered when the insured's damages are more than the liability limits of the tortfeasor, that is, the insured's damages are more than the tortfeasor's policy will pay.
  • UIM coverage is triggered when the insured victim's UIM coverage is more than the tortfeasor's liability insurance limits available from the tortfeasor. Most UIM laws fall into this category. 
What's Not Covered
With respect to UIM coverage, the UIM laws allow insurers to make certain exclusions. In addition, insurers often make other exclusions in the policy, although sometimes the courts will invalidate those restrictions. For example, UIM laws often include an exclusion for claims involving an uninsured vehicle that the insured owns or an uninsured vehicle owned by the insured’s spouse or a member of the insured’s residence. Additionally, this exclusion will often include uninsured vehicles that the insured uses regularly, regardless of who owns them.
UIM policies often contain an exclusion that bars the insured's vehicle from qualifying as an "uninsured vehicle," but state courts vary in the enforcement of this exclusion. Further, UIM policies may include an exclusion for coverage to the insured if he or she is injured while occupying or if struck by a vehicle that is owned by the insured, or his or her spouse or a member of the insured's residence, but is not listed in the insured's policy. 
How Much Can Be Recovered?
Although the policy limits usually define how much in UIM benefits an insured can be paid, there are several things that can increase or reduce those amounts. Most UIM policies permit the insurer to set off or reduce UIM benefits by the amount, if any, that has been paid to the insured by the tortfeasor or his or her insurer. Some states, however, do not permit insurers to make this reduction.
Does the insured have more than one policy or more than one insured vehicle? If so, the insured might be able to "stack" insurance coverage. "Stacking" is when UIM provisions in multiple policies, or UIM coverage for multiple cars covered by a single policy, are added together so that the insured can recover the full amount of his or damages. For example, if an insured has two cars covered by a UIM policy, and each car has UIM limits of $25,000, and the insured's damages are $50,000, some state UIM laws will allow the insured to stack the two UIM provisions so that he or she can recover the full $50,000.
Stacking can also come into play if the applicable UIM law does not allow the recovery of UIM benefits unless the UIM coverage is more than the limits of the tortfeasor's insurance policy. For example, the insured’s two cars are covered by a UIM policy, and each car has UIM limits of $25,000. The damages from an accident are $50,000, but the tortfeasor's policy limit is only $30,000. Some state UIM laws will allow the insured to stack the two UIM provisions so that the UIM coverage is $50,000 (more than the tortfeasor's $30,000 limit), which then triggers the UIM coverage of the policy.
Claiming UIM Benefits
Notice must be given to the insurer to make a claim for UIM benefits- usually the insured has to provide notice of the accident and notice that the insured intends to make a UIM claim. Also, some states' UIM laws require the insured-victim to exhaust or "use up" the limits of the tortfeasor's insurance policy before the insured-victim can recover UIM benefits under his or her own policy. Some UIM law require the insured-victim to sue the tortfeasor and obtain a court judgment against the tortfeasor that is in amount greater than the tortfeasor's policy limits before the insured can claim UIM benefits. Again, this practice varies from state to state.
Be careful about settling a claim with a tortfeasor. Most UIM policies have a consent-to-settle clause, which provides that the insured will lose his or her rights to UIM benefits if he or she settles with the tortfeasor without the insurer's consent.
Finally, the insurance policy might require arbitration of a claim for UIM benefits.