UIM Coverage and Multiple Tortfeasors

Underinsured motorist (UIM) coverage allows insureds to seek recovery from their own insurance company when an at-fault driver is underinsured—carrying less liability coverage than necessary to cover the injured party’s claim. While UIM coverage offers important protection and is often a straightforward claim, the issue can become more complicated if multiple tortfeasors are responsible for the injury. In such circumstances, the question has arisen whether an injured party must exhaust the limits of insurance of all tortfeasors before seeking UIM coverage or if exhausting a single tortfeasor’s policy is enough to trigger the UIM benefits.

Faced with this question, the North Carolina Supreme Court recently determined in Lunsford v. Mills, No. 385PA13, 2014 N.C. LEXIS 1202 (N.C. Dec. 19, 2014) that an insured is required only to exhaust the liability insurance of a single at-fault driver and need not wait to exhaust the limits of all the at-fault drivers to recover underinsured motorists benefits.

The court first pointed to the plain language of North Carolina’s UIM statute. UIM coverage is governed by statute and the statutory language effectively becomes part of the UIM policy. The North Carolina statute defines an “underinsured highway vehicle” as a vehicle for which the sum of the insurance limits of liability under all bodily injury liability bonds and insurance policies applicable at the time of the accident is less than the limits of the insured’s UIM coverage. The statute says that UIM coverage is triggered when “by reason of payment of judgment or settlement, all liability bonds or insurance policies providing coverage for bodily injury caused by the ownership, maintenance, or use of the underinsured highway vehicle have been exhausted.”

According to the court, the statute’s triggering provision refers to “the” underinsured highway vehicle, indicating that the legislature intended the term to have a “singular referent.” The court concluded that under the statute, UIM coverage is triggered when an insured suffers bodily injury caused by an underinsured vehicle and when “the liability bonds or insurance policies providing coverage for that vehicle have been exhausted.”

The court further backed its decision by appealing to the statute’s purpose and public policy considerations. The court observed that if an insured needed to exhaust the policies of every tortfeasor then “insureds would be required to pursue all claims, including weak, tenuous ones, against all potentially liable parties, no matter how impractical, before being eligible to collect their contracted-for UIM benefits.” The court did not think placing this burden on the insured accomplished the purpose of the statute—to protect innocent insureds—and thought that such a requirement would increase costs and delay recovery of UIM benefits. In addition, the court noted that UIM carriers retain subrogation or reimbursement rights, preventing any windfall for the insured and enabling recovery for the UIM carrier.

A dissenting justice thought the majority misread the issue. According to the dissent, the majority focused on the statute’s triggering provision but missed the first step of determining whether UIM coverage applied at all. As the dissenting justice noted, the statutory definition of an underinsured vehicle compares the limits of liability insurance with the insured’s UIM limits, and the UIM coverage is activated only if its limits are greater than the liability insurance. Acknowledging that a case applying the statute to multiple tortfeasors was one of first impression in the state, the dissent thought that the “activation” provision in the UIM statute contemplated the combined limits of all the tortfeasors and was not limited to a single tortfeasor. In this case because the plaintiff had $400,000 in UIM coverage, incurred damages amounting to $900,000 and brought suit jointly and severally against the multiple tortfeasors whose collective liability limits totaled $1,050,000, the dissent argued that UIM coverage did not apply.

Nevertheless, the prevailing majority opinion read the statute to require only a single underinsured tortfeasor, and the plaintiff initially settled with the first tortfeasor for his policy’s liability limits of $50,000 thereby triggering the UIM coverage.

As seen in the both the majority and dissenting opinions, the UIM coverage analysis hinges on statutory interpretation. Courts in other states have likewise been asked to interpret UIM statutes in light of multiple tortfeasors and have come to varying conclusions.

In Wade v. Allstate Fire and Cas. Co., 751 S.E.2d 153 (Ga. Ct. App. 2013), a Georgia Court of Appeals determined that its underinsured motorist statute required the injured party only to exhaust the limits of single defendant’s insurance before recovering UIM benefits. In Corn v. Farmers Ins. Co., 430 S.W.3d 655 (Ark. 2013), the Arkansas Supreme Court came to the opposite conclusion, holding that the liability limits from all the tortfeasors must be exhausted before an insured can recover UIM benefits. Significantly, the Arkansas court questioned whether the statutory language was “a legislative oversight or whether it was the General Assembly’s intent that the joint-and-several liability modification statute have no effect on UIM coverage.” Recognizing that public policy is the province of the legislature and not the courts, the court encouraged the state legislature to revisit the issue. In a similar situation, the Minnesota legislature did in fact respond to a decision from the Minnesota Supreme Court. In Johnson v. Am. Fam. Mut. Ins. Co., 426 N.W.2d 419 (Minn. 1988), the court held that UIM benefits cover “only those damages in excess of the combined liability insurance limits of all tortfeasors.” The legislature subsequently changed the applicable UIM statute, which now provides, “If a person is injured by two or more vehicles, underinsured motorist coverage is payable whenever any one of those vehicles meets the definition of underinsured motor vehicle…” Minn. Stat. § 65B.49, subd. 4a.

The applicability of UIM coverage can be complicated by multiple tortfeasors. Because UIM coverage is generally controlled by state law, coverage decisions may raise questions of statutory interpretation. State statues differ on the subject and courts have applied various interpretations. Insurers and insureds should understand how UIM coverage is activated and triggered in their state, especially in the event that multiple tortfeasors are at fault.