Protecting Auto Accident Victims from the UM/UIM Insurer Identity Crisis

Automobile liability insurance is mandatory for drivers in all states, so as to provide for an available source of compensation for auto accident victims. Yet more than 20% of drivers in some states drive without valid, collectible automobile liability insurance. Another vast proportion of drivers have woefully inadequate financial limits of liability insurance that could not pay for even a modest percentage of a typical accident victim's compensatory needs. An auto accident victim cannot choose which tortfeasor driver injures her in a collision. Without the at-fault tortfeasor driver's liability insurance to act as a source of full compensation for her injuries, an injured accident victim risks having her compensation fall drastically short. In response to prodding, the insurance industry invented two types of insurance coverages to fill in the gaps created when an accident victim wants a higher level of potential accident compensation if injured by an uninsured or underinsured at-fault tortfeasor driver: uninsured motorist and underinsured motorist coverage (collectively "UM/UIM"). These two coverages allow prudent auto insurance policyholders to purchase insurance that takes over if the policyholder is injured by a tortfeasor driver who has no or insufficient insurance to cover the victim's injury costs. UM/UIM coverage pays the policyholder, the first party, but acts in the context of third-party liability insurance because UM/UIM coverage is triggered only when the policyholder is in an accident and the at-fault tortfeasor driver has inadequate liability insurance to respond to the loss. UM/UIM coverage can be thought of as both first-party (purchased by the policyholder as part of a bilateral contract with the insurer, who is the second party) and third-party insurance in that it is designed to replace the liability insurance that in theory should have been purchased by the tortfeasor causing injury to the conscientious policyholder who purchased UM/UIM insurance. But courts and commentators have not definitively addressed the proper function of UM/UIM insurers in responding to policyholders' claims. Despite its role as additional liability insurance for the inadequately insured tortfeasor, UM/UIM insurers routinely take the position that their standard of care is less demanding than that imposed on an ordinary third-party liability insurer and that UM/UIM carriers are not required to make the reasonable settlement decisions required of an ordinary liability insurer. UMIUIM insurers take the position that they may instead deny policyholder claims so long as there is any colorable basis for disputing the extent of injury, the volume of treatment, or medical billings. Insurers then routinely argue that they have a 'fairly debatable" basis for valuing the amount of injury at a lower amount than that sought by the policyholder just as a true first-party insurer such as a property insurer might assess the worth of lost property at a lower amount than does a policyholder. The insurer does all this with a considerably reduced chance of incurring significant liability for even a recklessly wrong decision. This self-serving perspective of many UM/UIM insurers is wrong in light of the history, purpose and operation of UM/UIM coverage. It undermines the basic contractual and public policy goals of the UMIUIM policy feature which are to put the policyholder in a position equivalent to that it would have if suing an adequately insured tortfeasor. Under the first party UM/UIM perspective, the insurer's own policyholder - the customer who prudently paid for protection - is treated worse than the third party the policyholder would sue. This occurs because the first-party construct preferred by insurers imposes weaker incentives on an insurer than the more stringent obligation of liability insurers to make reasonable settlement decisions in light of the range of results possible at trial and the duty to protect a policyholder from the risk of a judgment in excess of policy limits. As a result of the misunderstanding that many UM/UIM insurers hold about their duties to their policyholders, UM/UIM policyholders tend to receive harsher treatment than they would if suing a stranger tortfeasor and his liability insurer who, unlike the UM/UIM insurer, has never received a dime of premium from the claimant. In addition to harsher treatment of policyholders, who are injured victims, lowball offers, and reduced compensation, this situation causes unnecessary waste of social, economic, and judicial resources due to the reduced incentives UMIUIM insurers have for settlement. A proper understanding of the history, purpose, and function of UM/UIM coverage requires that the insurers fully assume their proper role: acting as if they were an additional form of a tortfeasor's liability insurance. The liability insurer orientation more fairly, transparently and efficiently fits the contours of UM/UIM claims. It also makes a meaningful improvement to the public policy buttressing the automobile collision compensation system.

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