By Jeffery Thomas, Associate Dean for Academic Affairs and Professor of Law at the University of Missouri - Kansas City
Having recently finished my annual update to the three-volume treatise Uninsured and Underinsured Motorist Insurance, I am a struck once again by how "wacky" this area of law is. Most might call it arcane, technical, or even "esoteric" (I like that description; makes me sound smarter). The reality is that it is a consumer protection system that has basically run amok.
Of course, the problem of uninsured and underinsured motorists is very real, and I don't mean in any way to demean the importance of protecting and compensating victims of traffic accidents. The truth is that a significant percentage of drivers do not have liability insurance. According to the Insurance Research Counsel's most recent study on the subject, 13.8 percent of drivers in the U.S. were uninsured in 2009. Keep in mind that this is the national average. In some states, the percentage is much higher. In Mississippi, which has the highest rate of uninsured motorists, 28% do not have insurance. The largest state with high numbers is Florida, where 24% of motorists are uninsured. Other states have rates well below the average. The lowest rate of uninsured drivers is in Massachusetts and Maine, where only 4.5% of drivers do not have insurance. The largest state with a low percentage is New York, where only 5% of drivers are not insured. See IRC, News Release, Recession Marked by Bump in Uninsured Motorists (April 21, 2011) (available at http://www.ircweb.org/News/IRCUM2011_042111.pdf, last visited June 14, 2011).
Unfortunately, we don't really have statistics on how many drivers are underinsured because the definition of being underinsured is dependent upon context. If the person who is legally responsible for your injuries does not have enough insurance (and the base line for what constitutes "enough" changes depending on the state and factual context), then that person is underinsured.
When a person is injured by a driver who is not insured or who is underinsured, the injured person finds it difficult to receive full compensation for his or her injuries. With 33,808 fatalities and 2.2 million injuries in 2009 , the absence of insurance leaves hundreds of thousands without full compensation. In reality, even with uninsured and underinsured motorist laws, tens of thousands, perhaps even hundreds of thousands, are not fully compensated because someone has opted out of the coverage, or even when the coverage applies, the damages are so catastrophic that compensation is still incomplete.
So you may ask, how has the system run amok? In an effort to balance individual autonomy and the need to compensate accident victims, the UM/UIM system requires that the coverage be offered, but in most states it is not required. But that raises the question of what kind of offer "counts" or is sufficient? Statutes, regulations, and cases have all provided partial answers to this question, and the result is a maze of confusing and conflicting legal authority. Each year when I update the treatise, dozens of new cases address this one question. It is typically the topic for which I have the largest number of new cases. Unfortunately, additional cases tend to simply add confusion and complexity. Let me give a couple of brief illustrations:
One issue that has arisen in this area is whether an insured needs to be offered UM/UIM coverage when he or she renews their policy. On one hand, the renewal is a continuation of the old coverage, so one could presume that the same coverages should apply. On the other hand, if you want to ensure protection of consumers, you might want to encourage insurers to offer UM/UIM coverage at every reasonable opportunity. The cases, not too surprisingly, are split. In a recent Florida Court of Appeals case, the court held that the applicable statute required only that the coverage be offered annually, not necessarily at renewal. See Wolf v. Progressive Am. Ins. Co., 34 So. 3d 81 (Fla. Ct. App. 2010). On the other hand, the South Carolina Court of Appeals held that the mandatory offer requirement only applies to "new applicants," so that once the UM/UIM coverage has been rejected, a second offer and rejection is not necessary. See Government Emps. Ins. Co. v. Draine, 698 S.E.2d 866 (S.C. Ct. App. 2010).
Another example turns on whether an agent can reject the UM/UIM coverage on behalf of another. Although agency law would presume that one with authority can make the rejection, the concern about compensation of victims results in a more stringent examination of the role of the agent. On one hand, where an employer signed a rejection form the Louisiana Court of Appeals held the form was invalid because the amount of UM/UIM coverage has been filled-in by the insurance agent. See Ware v. Gemini Ins. Co., 52 So. 3d 179 (La. Ct. App. 2010). On the other hand, the Eighth Circuit (applying Kansas law), held that a municipal government's risk manager was an "implied agent" of the insured and that his rejection was enforceable. See Fincher v. St. Paul Fire & Marine Ins. Co.¸ 595 F.2d 820 (8th Cir. 2010).
The third example is the most technical: is the rejection invalid without the policy number? A Federal District Court in West Virginia held that it was valid so long as it showed that the insured had knowingly and intelligently rejected the coverage. See Webb v. Shaffer, 694 F. Supp. 2d 497 (S.D. W.Va. 2010). On the other hand, in Louisiana, one of the states the generates the most case law on this topic, the Louisiana Supreme Court held some years ago that the failure to include the policy number, as required by the approved rejection form, made the rejection of coverage invalid. See Duncan v. U.S.A.A. Ins. Co., 950 So. 2d 544 (La. 2006).
These are just a few examples. The treatise has hundreds of citations on this topic. But what makes matters even worse is that this mandatory disclosure approach is now being applied to another even more complicated area of UM/UIM law: stacking. A claimant will seek to "stack" more than one policy in order to create additional layers of coverage. So, for example, a husband and wife each have an insured vehicle with UM/UIM coverage. Both are insured under both policies. Should one of them be injured by an uninsured motorist, that person may seek to "stack" the two policies to double the amount of UM coverage. This has been a hotly contested practice, leading to legislation, dozens of cases deciding whether policies can or cannot be stacked, the introduction of so-called anti-stacking language in statutes and policies, followed by judicial decisions on whether the anti-stacking language is enforceable. In the most recent development in this area, some states now require that anti-stacking language be disclosed to the insured, which will lead to a whole new body of mandatory disclosure law. The Florida Supreme Court recently ruled that insurers had a heightened duty of disclosure for anti-stacking language. The court held that the statutory provision which requires insurers to "inform the named insured, applicant, or lessee, on a form approved by the office, of the limitations imposed under this subsection and that such coverage is an alternative to coverage without such limitations," Fla. Stat. § 627.727(9), applied to anti-stacking language. Thus, unless the insured disclosed the anti-stacking language on a form approved by the insurance commissioner and in a way that disclosed alternatives to the anti-stacking language, the anti-stacking provision was invalid. See Rando v. Gov't Employees Ins. Co., 39 So.3d 244 (Fla. 2010).
So where does this leave us? We are left in the "wonderland" of UM/UIM law, where creative and diligent lawyers can find all kinds of interesting arguments to support their clients. There are lots of tools to consider. While this is good for lawyers, and in some cases is good for clients, as a matter of public policy it undermines the predictability of the law and it drives up the cost of dispute resolution. The transaction costs associated with UM/UIM claims are high and not terribly beneficial.
What would I do if I were the "insurance czar"? Unfortunately, I don't have a quick and easy answer. One solution, though one likely to be unpopular with many, would be to simply make UM/UIM insurance mandatory at the levels of the liability insurance. This would increase the cost of insurance to some extent, but it would allow more of the costs to go towards payment of claims rather than to the transactions costs. And it might result in a more fair distribution of UM/UIM benefits. This approach would maximize compensation, but would reduce freedom. At the other end of the spectrum, we could abandon mandatory offering. Perhaps the market is sufficiently familiar with the coverage and its benefits that people would choose to buy it anyway. This would maximize freedom, but would likely leave a substantial number of people with inadequate compensation. A third option would be to rely on other coverages to provide the needed benefits. Perhaps we should have more medical coverage in auto policies, and perhaps a type of first-party loss of wages. For underinsured motorist insurance, we could reduce the need for such insurance by raising the statutory minimum amount of required insurance. We are decades beyond the point where $25,000 (the statutory minimum in Missouri, where I teach) is enough insurance coverage for a traffic accident of any significant size.
It seems unlikely that state legislatures will have the time, energy, and motivation to try to sort all of this out. So for the time being, those involved in UM/UIM claims should spend a little extra time and effort of their own to see if the "wacky world" can offer some arguments to advance their claims.
 See Remarks of Ronald Medford, Deputy Administrator, NFTSA (May 5, 2011) (available at http://www.nhtsa.gov/staticfiles/administration/pdf/presentations_speeches/Medford-AASHTO_Keynote_05052011.pdf, last viewed June 15, 2011).
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My friend and colleague, Jeff Thomas, has offered an excellent perspective on this subject, and, in particular, on the jurisprudence of mandatory offer. He describes this as "a consumer protection system that has basically run amok." I agree with that description. I have some thoughts on why it has run amok.
UM/UIM insurance protects not only the consumer, it protects the plaintiffs' bar. From the standpoint of a plaintiff's lawyer, it is particularly tragic when an injured party who seeks representation has a good tort claim, but either no insurance or inadequate insurance. Not only does this mean that the injured party goes without (adequate) compensation, it also means that the lawyer has either no opportunity to earn a fee or can earn only a reduced fee based on the insurance available. Not surprisingly, it is the plaintiffs' bar that has been the lobbying force behind the rapid spread and expansion of UM/UIM insurance.
Of course, UM/UIM insurance provides no compensation (and no fee) to the extent that it has not been purchased or purchased in an amount that is inadequate to the injury that later results. So, there is lots of incentive to challenge the adequacy of the offer. In general, plaintiffs' lawyers tend to advocate the view that, given its modest cost, almost everyone would (if properly informed) take all the coverage that is offered. And once the accident has happened, everyone would do so if given the opportunity. Insurers find this unfair because the premium structure depends on sale of the insurance to a large population, only a few of whose members will suffer covered injuries. Having to sell the insurance after the injury denies them adequate revenue to pay the losses.
That would be fair if the insurer failed to comply with clear requirements governing the offer. But the jurisprudence dominantly involves courts finding requireements that were not clear at the time of the offer and, often, were truly surprising when announced. That, of course, increases the incentive for plaintiffs' bar to press creative, even far-fetched arguments, because such arguments prevail in a significant number of cases.
I suggest that one reason for this pattern of jurisprudence is that courts are (perhaps unconsciously) protecting not only consumers but also plaintiffs' lawyers. Of course, I represent insurers, so my biases run the other way. But I think an objective observer would conclude that there is a judicial thumb on the scale and that it presses harder in this area than in areas where pure consumer protection is involved.
I suggest that courts and, especially, legislatures ought to take account of the fact that UM/UIM coverage is a very inefficient method of compensating injured parties. It involves huge overhead in fees for both plaintiffs' and defense lawyers and other costs of claim adjustment. Uncertainty about offer requirements adds even more wasted expense (in terms of victim compensation). A more efficient method of compensation is no-fault insurance, which largely cuts out the lawyers. But, precisely because it cuts out the lawyers, it has fewer and less passionate lobbyists.
From a consumer standpoint, there is much to be said for rejecting UM/UIM coverage to the extent permitted by law and spending the money on good medical and disability insurance. That is the course that I follow personally.