Underinsured motorist coverage

Underinsured Motorist Coverage

Underinsured motorist coverage (UIM) is a type of auto insurance that provides additional financial protection for a policyholder when they are involved in an accident with an at-fault driver whose liability insurance limits are insufficient to cover the full extent of the damages or injuries incurred. This coverage is a critical component within the broader category of auto insurance and is designed to bridge the gap between the at-fault driver's inadequate coverage and the actual costs of the accident, protecting the policyholder from potentially substantial out-of-pocket expenses for bodily injury and/or property damage. Underinsured motorist coverage serves as a safeguard against the prevalent issue of drivers carrying minimum liability limits that may not be adequate for serious accidents.

History and Origin

The concept of protecting motorists from financially irresponsible drivers gained traction throughout the 20th century as vehicle ownership became widespread. Initially, the primary concern was drivers with no insurance at all, leading to the development of uninsured motorist coverage. However, as states began implementing minimum liability insurance requirements, it became clear that even insured drivers might not carry enough coverage to compensate victims fully in severe accidents. This gap in protection highlighted the need for underinsured motorist coverage. Early attempts to address the issue of financially irresponsible motorists included compulsory auto insurance laws, with Massachusetts being one of the first states to adopt such an approach in 1927. Despite these laws, a significant number of drivers still operated without adequate coverage, prompting a more effective remedy in the form of uninsured and underinsured motorist coverage.⁵ Over the years, this coverage evolved as a response to the practical realities of inadequate liability limits, aiming to ensure that innocent parties could recover damages even when the at-fault driver's policy fell short.

Key Takeaways

• Underinsured motorist coverage (UIM) protects policyholders when an at-fault driver has some liability insurance, but not enough to cover the full cost of damages or injuries from an accident.
• It typically covers medical expenses, lost wages, and pain and suffering, and in some cases, property damage, up to the limits of the policyholder's own UIM coverage.
• UIM is distinct from uninsured motorist coverage, which applies when the at-fault driver has no insurance whatsoever.
• While not universally mandated, many states require insurers to offer underinsured motorist coverage, and some make its purchase compulsory.
• This coverage helps mitigate the financial risks associated with accidents involving drivers who carry only minimum state-required liability limits.

Formula and Calculation

Underinsured motorist coverage is typically calculated based on the difference between the actual damages incurred and the at-fault driver's liability limit, up to the policyholder's UIM limits. It is not a rigid mathematical formula but rather a mechanism to cover a shortfall.

The payout calculation for underinsured motorist coverage often follows this principle:

where:

• UIM Payout is the amount the underinsured motorist coverage pays.
• Actual Damages represents the total verifiable costs of the accident, including bodily injury medical bills, lost wages, pain and suffering, and/or property damage.
• At-Fault Driver's Liability Payout is the maximum amount paid by the underinsured driver's liability insurance.

The UIM Payout is capped by the policyholder's own underinsured motorist coverage limits. For instance, if a policyholder has UIM limits of $100,000 per person and incurs $150,000 in damages, but the at-fault driver's liability policy only pays out $50,000, the UIM coverage would typically pay the remaining $100,000, assuming it is within the policy's per-person limit. If the damages were $120,000, the UIM would pay $70,000 ($120,000 - $50,000).

Interpreting the Underinsured Motorist Coverage

Interpreting underinsured motorist coverage involves understanding its role as a secondary layer of protection, activating only when another driver's insurance falls short. The key is to assess whether the coverage limits selected by the policyholder are sufficient to cover potential catastrophic losses beyond what a minimum liability policy might provide. For example, in states where the minimum liability insurance for bodily injury might be $25,000 per person, a serious accident could easily result in medical bills far exceeding this amount. If the at-fault driver carries only this minimum, the underinsured motorist coverage would become vital. Policyholders should review their own UIM limits in conjunction with their overall risk management strategy, considering factors such as income, assets, and potential medical costs in the event of severe injury.

Hypothetical Example

Consider Sarah, who carries an auto insurance policy with $250,000 per person in underinsured motorist coverage for bodily injury. She is involved in an accident caused by Mark, whose liability insurance has limits of $50,000 per person.

1. Sarah suffers severe injuries, resulting in $150,000 in medical bills and lost wages.
2. Mark's insurance company pays out its maximum liability limit of $50,000 to Sarah.
3. Despite receiving Mark's full liability payout, Sarah still has $100,000 in uncompensated damages ($150,000 total damages - $50,000 from Mark's insurance).
4. Sarah then files a claim under her underinsured motorist coverage.
5. Her UIM policy, with its $250,000 limit, covers the remaining $100,000, leaving Sarah fully compensated for her injuries without having to pay out of pocket.

This scenario highlights how underinsured motorist coverage can bridge a significant financial gap when an at-fault driver's coverage is insufficient.

Practical Applications

Underinsured motorist coverage is a crucial component of a comprehensive auto insurance strategy for individuals and families seeking to protect their assets from unexpected liabilities. Its primary application is to provide a safety net when the at-fault driver's liability insurance limits are exhausted, and the injured party's damages exceed those limits.

• Medical Expenses: It covers medical bills, rehabilitation costs, and long-term care for the policyholder and passengers in their vehicle when the at-fault driver's bodily injury liability is too low. This is particularly important for severe injuries where costs can quickly escalate beyond typical state minimums.⁴
• Lost Wages and Pain and Suffering: Underinsured motorist coverage can also compensate for lost income due to injuries sustained in an accident, as well as non-economic damages such as pain and suffering.
• Property Damage: While often separate, some underinsured motorist policies may include or offer an option for property damage, covering repairs or replacement of the policyholder's vehicle if the at-fault driver's property damage liability is insufficient. This complements other coverages like collision coverage.
• Legal Protections: In many states, insurers are required to offer underinsured motorist coverage, even if it is not mandatory for drivers to purchase it.³ Consumers can learn more about auto insurance protections and requirements through resources provided by regulatory bodies like the National Association of Insurance Commissioners (NAIC).²

Underinsured motorist coverage is a valuable addition to an insurance policy even when other coverages like medical payments coverage or personal injury protection are present, as UIM often provides higher limits and broader coverage for severe accidents involving underinsured drivers.

Limitations and Criticisms

While underinsured motorist coverage offers vital protection, it is not without limitations and criticisms. A primary limitation is that the coverage limits are determined by the policyholder, meaning that if the policyholder chooses low UIM limits to reduce premiums, they may still face a shortfall if damages exceed both the at-fault driver's and their own UIM limits. The effectiveness of underinsured motorist coverage also depends on the specific definitions and exclusions within a particular insurance policy, which can vary by state and insurer. For instance, some policies may have anti-stacking provisions, which prevent a policyholder from combining UIM limits from multiple vehicles on the same policy or from multiple policies.

Another criticism relates to the ongoing challenge of uninsured and underinsured drivers. Despite compulsory insurance laws in most states, a significant percentage of motorists continue to drive without adequate coverage. The Insurance Research Council estimated that 12.6% of motorists were uninsured in 2019, leading to increased costs for insured drivers who must rely on their own UIM or uninsured motorist coverage.¹ This persistent problem means that even with UIM, policyholders may encounter complex claims processes if they are involved in an accident with an underinsured driver, potentially facing disputes over the actual extent of damages or the solvency of the at-fault party. Furthermore, a deductible may apply to underinsured motorist property damage coverage in some states, which means the policyholder would still bear an initial portion of the repair costs.

Underinsured Motorist Coverage vs. Uninsured Motorist Coverage

Underinsured motorist coverage (UIM) and uninsured motorist coverage (UM) are often discussed together, and while both provide protection against financially irresponsible drivers, they address distinct scenarios. The primary point of confusion lies in differentiating between a driver who has no insurance and one who has some, but not enough.

Both coverages are designed to protect the policyholder from out-of-pocket expenses resulting from accidents where the at-fault driver cannot fully cover the costs. However, UIM specifically steps in when there is some coverage, but it is too low, whereas UM is for situations with literally no existing third-party liability coverage.

FAQs

What does "underinsured" mean in the context of auto insurance?

In auto insurance, an "underinsured" motorist is a driver who has a valid liability insurance policy, but the coverage limits of that policy are not high enough to pay for all the damages and injuries they cause in an accident. Your underinsured motorist coverage would then help pay for the remaining costs that the at-fault driver's policy couldn't cover.

Is underinsured motorist coverage mandatory?

The requirement for underinsured motorist coverage varies by state. While some states make it compulsory, others only require insurance companies to offer it, allowing policyholders to decline the coverage. It's advisable to check the specific regulations in your state and assess your personal risk management needs when deciding on this coverage.

Does underinsured motorist coverage apply to both bodily injury and property damage?

Underinsured motorist coverage typically has two components: bodily injury (UIMBI) and property damage (UIMPD). While UIMBI, which covers medical expenses, lost wages, and pain and suffering, is more commonly available and sometimes mandatory, UIMPD for vehicle repairs is not offered in all states or may be optional. It is important to review your specific insurance policy to understand what is included.

How are my underinsured motorist coverage limits determined?

Your underinsured motorist coverage limits are chosen by you, the policyholder, when you purchase your insurance policy. These limits represent the maximum amount your insurer will pay under this coverage. Many experts recommend selecting UIM limits that are at least equal to your own bodily injury liability limits, providing a robust layer of financial protection.