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Understanding Uninsured/Underinsured Motorist Coverage

Learn To Protect Yourself And Your Client

When auto accidents occur in Michigan, there is a fairly good chance that one or both of the drivers involved is either uninsured or underinsured. In other words, the drivers are likely to have either no insurance, or very low limits.

For the victim, it could mean little or no compensation for a serious injury. For the driver who caused the accident, it could mean personal exposure of assets. And for an agent, it could mean liability for failing to advise an insured of the adequacy of coverage.

That is where uninsured and underinsured motorist coverage come into play. These coverages are designed to fill the gaps where an at-fault driver’s coverage is lacking.

However, they are also the source of much misunderstanding in the insurance industry. Agents and other insurance practitioners need to understand the difference between the two types of coverage, how UM/UIM

Contracts are interpreted, and how to avoid liability for failing to advise clients regarding the adequacy of their coverage (for a detailed discussion of agent liability see, ‘Agent Liability: How To Protect Yourself,’ in the October 2003 issue of the Michigan Auto Law News).

Uninsured Vs. Underinsured

The law requires minimum liability insurance coverage of $20,000 for one individual and $40,000 for more than one individual for bodily injury or death and $10,000 for property damage. However, some individuals get their license plates each year by paying the minimum insurance premium and then letting the coverage lapse for nonpayment. This is one reason why the risk of encountering an uninsured driver in Michigan is so high.

Uninsured motorist coverage (UM) was designed to provide a source of recovery when a driver without insurance causes harm. With UM coverage, the insurer pays the insured the damages the insured would have recovered had the other driver been insured, subject of course to the UM policy limit.

Underinsured motorist coverage (UIM) goes one step further, allowing the insured victim to recover from his or her insurer damages sustained in an accident with an underinsured driver, or, put another way, a driver who has inadequate coverage to compensate for the injuries that are caused.

Contract Language Controls

Michigan’s No-Fault Act does not require a driver to carry uninsured or underinsured motorist coverage. Therefore, when a driver does have such coverage, the terms of the insurance contract control.

To recover under an uninsured motorist policy, the claimant must show that the other driver was: 1) uninsured; and 2) legally at fault. If the claimant would not have been able to recover damages from the other driver, he or she will not be entitled to UM coverage.

To recover under an underinsured motorist policy, the claimant must first recover the full policy limit from the other driver. This precludes the claimant from accepting an amount less than the other driver’s policy limit as a settlement.

Claimants should also note that they need the permission of the underlying UM/UIM carrier to settle with the wrongdoer, even when the wrongdoer is offering the full policy limits. In Spearman v. State Farm, for example, the Michigan Court of Appeals ruled that a plaintiff forfeited UM coverage where he settled his bodily injury claim with the owner without his UIM insurer’s consent.

‘Special Relationship’

In addition to understanding how UM/UIM coverage works and how to help your clients protect themselves, it is also important to protect yourself from liability in the event a client declines an appropriate level of coverage.

Under Michigan law, when an agent has developed a “special relationship” with an insured, a duty to advise the client regarding the adequacy of coverage arises.

A special relationship is formed when one or more of the following factors is present: 1) the agent misrepresents the nature or extent of the coverage offered or provided; 2) the insured makes an ambiguous request that requires clarification; 3) the insured seeks advice and the agent gives advice that is not accurate; or 4) the agent assumes an additional duty by either express agreement with or promise to the insured.

Whether a special relationship has formed or not, an agent would be well advised to cover all of his or her bases. This means, at a minimum, offering a variety of coverages in clear, unambiguous terms, and documenting all requests or rejections of coverage.

Recent Developments

Over the past two years, Michigan’s appellate courts have decided several significant UM/UIM insurance cases.

In Wilkie v. Auto Owners Ins. Co., the Michigan Supreme Court abolished the rule of reasonable expectations. Now, where a policy is clear regarding the manner in which UM/UIM coverage applies, courts cannot look outside the four corners of the policy to determine what the parties’ intent may have been.

Further, in Pyles v. MIC General Ins. Corp., the Michigan Court of Appeals stated that, where the terms are clear, an insurance policy can dictate the definition of an “underinsured” vehicle.

In addition, the Court of Appeals in Frances v. Yelle v. Farm Bureau General Ins. Co. ruled that a default against a UM/UIM insurer may be set aside if the insurer has a meritorious defense that would be an absolute defense, even if the insurer makes a weak “good cause” showing.

Finally, the Court of Appeals ruled in Allstate v. Maroki that the standard to be applied in fraud cases appears to be “clear and convincing evidence,” although the Supreme Court still has not made such an affirmative ruling.

For a detailed summary of each of these cases, see the “Auto Law ‘Snapshot’” on page 2 of this issue.

The Future Of UM/UIM

The only thing certain about the future of UM/UIM coverage is that the terms of the insurance policy will control. Courts seem to be further clarifying the area with each decision.

As such, a quick review every now and then will help those in the insurance industry better serve their clients and themselves.

Auto Law ‘Snapshot’ Uninsured/Underinsured Motorist Coverage

The following cases have recently modified the law in terms of uninsured and underinsured motorist coverage in Michigan. From contract interpretation to fraud to claims against agents, each decision has impacted how UM/UIM contracts are being interpreted today.


2003 Case: Wilkie v. Auto-Owners Ins. Co.

Facts: One person was killed and another seriously injured in a head-on collision caused by another driver whose coverage was inadequate. The plaintiffs sued Auto-Owners, the victims’ UIM carrier, claiming they were each entitled to the per person UIM limits minus half of the other driver’s policy limits. They based their argument on the rule of reasonable expectations.

Ruling: The Michigan Supreme Court disagreed, finding the policy unambiguous and discarding the rule of reasonable expectations. According to the court, a policy holder cannot be said to have reasonably expected something different than the clear language of the contract. In this case, the court said, the policy clearly provided that the insureds were each entitled to the UIM limits minus the other driver’s full policy limits.

Impact On Insurance Industry: This case abolished the rule of reasonable expectations. Now, parties to an insurance contract must read each document literally.


2003 Case: Pyles v. MIC General Ins. Corp.

Facts: A plaintiff who was injured by a driver with $50,000/$100,000 liability limits sued her UIM carrier, with whom she also had $50,000/$100,000 limits, seeking to collect further damages.

Ruling: The Michigan Court of Appeals denied the plaintiff’s claim, finding that, where the policy says so, an at-fault vehicle with liability limits equal to the UIM limits is not “underinsured,” even where, as here, multiple parties are forced to share the liability limits and thus recover less than the UIM limits.

Impact On Insurance Industry: The clear terms of an insurance policy can dictate what constitutes an “underinsured” vehicle.


2003 Case: Frances v. Yelle v. Farm Bureau General Ins. Co.

Facts: The plaintiff sued her UIM insurer (with whom she had $100,000 coverage) and the at-fault parties (who had $20,000 coverage). When the insurer’s answer was one week late, the plaintiff obtained a default. The insurer filed a motion to set aside the default.

Ruling: The Michigan Court of Appeals found that the insurer’s motion raised an absolute defense: that the plaintiff failed to establish preconditions to her UIM recovery because she did not have a judgment or settlement against the at-fault parties.

Impact On Insurance Industry: A default against a UM/UIM insurer may be set aside if the insurer has a meritorious defense that would be an absolute defense, even if the insurer makes a weak “good cause” showing. 2 January 2004


2002Case: Spearman v. State Farm Mutual Auto Ins. Co.

Facts: A plaintiff who was injured in a car accident signed a release absolving the car owners and others allegedly responsible for her injuries. She then sued her insurer after it declined to arbitrate her UIM claim.

Ruling: The Michigan Court of Appeals denied the plaintiff’s claim, finding that the insurer was not required to arbitrate because the insured had settled the underlying claim without its consent.

Impact On Insurance Industry: Policy exclusions precluding insureds from settling underlying claims without the insurer’s consent are being strictly enforced (see Linebaugh v. Farm Bureau Mut. Ins. below).


2001 Case: Muganis v. Citizens Ins. Co., et al.

Facts: Insured’s auto policy included $300,000 in uninsured and underinsured motorist coverage. After a an auto accident with an underinsured motorist, he claimed the agent told him his underinsured coverage was “in addition to” any benefit he received from the underinsured motorist. However, the policy had a set-off provision. Still, the insured sued the agent and the insurance company.

Ruling: The court denied the agent’s motion for summary disposition, finding that there was an unresolved factual question.

Impact On Insurance Agents: This ruling demonstrates that an insurance agent can face liability when advising on UM/UIM coverage.


1997 Case: Linebaugh v. Farm Bureau Mut. Ins.

Facts: The plaintiff, who was struck by an automobile, had UIM coverage under a policy that precluded coverage for claims settled without the insurer’s consent. Despite this exclusion, the plaintiff settled the underlying claim, contending that his own insurer unreasonably refused to consent because the settlement was for less than policy limits. The plaintiff then sued his insurer after the insurer declined to arbitrate the UIM claim.

Ruling: The Michigan Court of Appeals found that the plaintiff was not entitled to arbitration under the policy because he had clearly violated the policy exclusion by settling the underlying claim without his insurer’s consent. In so ruling, the court noted that the policy language did not require the insurer’s withholding of consent to be reasonable and declined to impose such a requirement.

Impact On Insurance Industry: Policy exclusions precluding insureds from settling underlying claims without the insurer’s consent will be strictly enforced, and the courts will not require that the insurer’s refusal to consent be reasonable.