Choosing Your Punishment May Foreclose UM (UIM) Coverage

Insureds who settle a claim with the tortfeasor’s liability insurer for less than the stated limit of the policy may not satisfy the exhaustion requirement for recovering UIM benefits (or UM benefits where the policy defines a UM vehicle in terms of underinsured coverage) even if the settlement is made in good faith.

In some states, the exhaustion requirement for UIM coverage may be satisfied if the injured party settles for an amount less than the tortfeasor’s liability limits as long as the UIM insurer receives a credit for the entire amount of the liability policy so that the UIM insurer is only responsible for amounts in excess of the full amount of the liability policy.

In that circumstance the insurance company is entitled to a credit for any amount of liability limits not exhausted in settlement.

Under the doctrine of constructive exhaustion, the full policy limits of the applicable liability coverages for the tortfeasor are attributable to the insured in order to both promote the settlement of disputed cases and fulfill the requirement that the insured exhaust all applicable policies of liability insurance before the insured may recover UIM benefits under his/her own vehicle policy.

A few jurisdictions subscribe to the rule that in order to receive UIM benefits the limits of liability coverage of the tortfeasor must be actually exhausted. However, the growing majority view permits the insured to make a less than policy limits settlement with the tortfeasor where the insured-claimant offers a full credit for the difference between the amount received from the tortfeasor’s policy and the amount of available coverage limits.

The insured cannot obtain a below limits settlement from the tortfeasor and recoup the “gap” from the UIM carrier. The insured-claimant is usually entitled to UIM coverage only to the extent that the damages exceed the full amount of the tortfeasor’s liability even if a settlement was reached for a lesser amount.

In Carter v. Progressive Mountain Ins., 761 S.E.2d 261 (Ga. 2014), the insured claimant brought a lawsuit against both the tortfeasor and UIM insurer following a motor vehicle accident. The tortfeasor was drunk at the time of the accident and therefore the lawsuit included a claim for punitive damages against the tortfeasor. The insured settled the liability claim for the $30,000 policy limits available through the tortfeasor’s policy but conditioned the limited release on the allocation of $29,000 of the settlement funds to be paid for punitive damages and only $1,000 to be paid for compensatory damages.

After the settlement, Progressive sought summary judgment on the UIM claim which was granted by the trial court. The trial court ruled that by imposing the condition that $29,000 of the liability coverage limit be allocated to the payment of punitive damages, the insured failed to meet a prerequisite for recovery of UIM benefits. The Court found that insured had failed to properly exhaust the limits of the tortfeasor’s liability policy and therefore forfeited the ability to make a UIM claim. In dismissing the claim, the trial court concluded that Georgia’s UIM statute OCGA § 33-24-41.1 allowed an injured party to settle a claim and then recover UM (UIM) benefits only for the claimant’s actual injuries or losses and not for punitive damages. The Georgia Court of Appeals held that Georgia’s UIM legislative scheme required that parties exhaust available liability coverage before recovering UIM benefits. The Georgia Court of Appeals had expressed concern that inclusion of an allocation to punitive damages in a release would force exhaustion of liability coverage and indirectly shift payment of punitive damages from the liability insurer to the UIM insurer which was contrary to the purpose of Georgia’s UIM statute. See Carter v. Progressive Mountain Ins., 320 Ga.App. 271, 274-75, 739 S.E.2d 750 (2013). The issue was then brought before the Georgia Supreme Court.

The Georgia Supreme Court found that the Court of Appeals concern regarding punitive damages was ill-founded because the Georgia statutory scheme prevented such a shifting.

Under OCGA § 33-24-41.1(d)(2), the amount paid under a limited release was admissible as evidence of the offset against the liability of the UIM carrier and as evidence of the offset against any verdict of the trier of fact. By the plain language of the statute, it is “the amount paid” that is admissible, not merely the amount attributed to compensatory damages. Additionally, the Georgia Supreme Court found that the shifting of punitive damages to the UIM carrier was precluded by OCGA § 33-7-11. Under that statute, the policy was limited to the insured’s losses in addition to the amounts payable under any available liability coverages and the insured’s combined recovery from the insured’s UIM coverages and the available liability coverages “shall not exceed the sum of all economic and noneconomic losses sustained by the insured.” Regardless of any designation of the payments in the release, when the UIM policy was brought into play, the combined recovery would not exceed the insured’s economic and noneconomic losses.

The Georgia Supreme Court recognized that while punitive damages could not be recovered under a UIM policy because the public policy involved with UIM coverage was to provide for only compensatory damages, that fact did not mean that there was a prohibition found in Georgia’s UIM statute against allocating punitive damages in the release.

Looking at the language of the allocation in the actual release that was used, the Court noted that the release provided that it “shall” release the carrier from “all liability from any claims of the claimant or claimants based on injuries to such claimant or claimants” and “from all personal liability from any and all claims arising from the occurrence on which the claim is based except to the extent other insurance coverage is available which covers such claim or claims.” The release did represent the limits of the tortfeasor’s policy.

According to the Court, punitive damages must arise from and be based upon a compensable injury because a claim for punitive damages has efficacy only if there was a valid claim for actual damages to which it could attach. Thus, punitive damages were not recoverable if there was no entitlement to compensatory damages. Nothing in the Georgia UIM statute precluded a statement in the release that a portion of the payment be allocated to punitive damages. The Court ruled that it was error for the trial court and Court of Appeals to construe the release allocation as a failure to exhaust the limits of the liability policy.

The Georgia Supreme Court’s decision in Carter encourages claimants to raise false claims of punitive damages to which the claimant can allocate substantial portions of the ultimate settlement with the tortfeasor thereby maximizing the opportunity to exhaust UIM coverage. An interesting question not addressed by the Court in Carter is whether public policy permits a tortfeasor to agree upon the tortfeasor’s own punishment in the form of a stipulated allocation to punitive damages. A reasonable analytic argument can be made that the allocation of punitive damages can only be determined by the trier of fact and not by the parties to the settlement agreement.