Uninsured Motorist Coverage

Uninsured motorist coverage is a first-party automobile coverage under which your own insurer pays what you would have been legally entitled to recover from an at-fault driver who has no liability insurance. Underinsured motorist coverage is its companion for the driver who carries liability insurance in an amount that turns out to be insufficient. The two are commonly abbreviated UM and UIM and sold together, and in some states the second is treated as a part of the first: California's statute provides that an uninsured motor vehicle includes an underinsured motor vehicle. Arizona takes the opposite approach and says in its statute that "uninsured and underinsured motorist coverages are separate and distinct and apply to different accident situations". Both characterizations are correct about their own state, which is the first thing to understand about this coverage: it is regulated state by state, and the differences are not cosmetic.

Start with who counts as uninsured, because it is broader than "carried no policy". California defines an uninsured motor vehicle to include a vehicle with no applicable bodily injury liability insurance or bond, a vehicle whose insurer denies coverage or "refuses to admit coverage thereunder except conditionally or with reservation", an underinsured motor vehicle as separately defined, and a vehicle used without the owner's permission where no liability insurance applies to the owner or operator. The second of those is the one people do not expect: an at-fault driver can hold a policy and still leave you in uninsured-motorist territory if their insurer declines the claim.

The mandate. In California, no bodily injury liability policy may be issued or delivered unless it contains uninsured motorist coverage at stated limits, subject to narrow exceptions such as a policy written only on an excess or umbrella basis, and the insurer and the named insured may only delete it, restrict it to named drivers, or reduce it to the financial responsibility minimum "by agreement in writing" (Cal. Ins. Code section 11580.2(a)(1)). In Arizona, by contrast, the insurer "shall make available" and "by written notice offer" both uninsured and underinsured coverage, and includes them only "at the request of the named insured" (A.R.S. section 20-259.01(A), (B)). One state gives you the coverage unless you sign it away; the other gives you a form to sign if you want it. That is the whole distance between two states, so the only reliable statement about any third state is that its own statute decides.

The hit-and-run problem. Where the at-fault driver cannot be identified, the coverage still has to distinguish a real phantom vehicle from an unwitnessed single-car accident, and states solve it with procedural conditions. California's are specific and short: the bodily injury must have "arisen out of physical contact of the automobile with the insured or with an automobile that the insured is occupying"; the accident must be reported within 24 hours to the police department where it happened, or to the county sheriff or the Highway Patrol in unincorporated territory; and a statement under oath must be filed with the insurer within 30 days. The 24-hour report is the condition that cannot be cured afterwards, and it falls due on the day when nobody is thinking about the policy.

The two underinsured designs. This is where the arithmetic diverges, and it is the reason a rule of thumb learned in one state can be wrong in another. California operates a subtraction design. It defines an underinsured motor vehicle as one insured "for an amount that is less than the uninsured motorist limits carried on the motor vehicle of the injured person"; it makes the coverage inapplicable until the at-fault liability limits "have been exhausted by payment of judgments or settlements"; and it caps the insurer's liability at "the insured's underinsured motorist coverage limits, less the amount paid to the insured by or for any person or organization that may be held legally liable for the injury". Arizona instead defines underinsured motorist coverage as reaching a person where "the sum of the limits of liability under all bodily injury or death liability bonds and liability insurance policies applicable at the time of the accident is less than the total damages", and applies the coverage "to the difference". The California test compares limits with limits. The Arizona test compares limits with damages. Two states, two designs, and no claim here about the other forty-eight: the honest general statement is that the trigger and the offset are set by state law and must be read there.

One consequence of the subtraction design deserves to be stated plainly, because it defeats an intuition many buyers have. If your underinsured limit equals the at-fault driver's liability limit, then under a design that subtracts what they paid from your limit, there is nothing left to pay. The coverage only does work where your own limit is meaningfully higher than the limits you are likely to encounter on the road.

A claim starts as an ordinary injury claim against the at-fault driver. It becomes an uninsured motorist claim when there is no applicable liability insurance, when the other insurer denies or reserves, or when the driver cannot be identified and the state's hit-and-run conditions are met. It becomes an underinsured motorist claim when the at-fault driver's liability limits are established and are not enough. Under the California design the at-fault limits must actually be paid out first, with proof of payment supplied to the insurer, before the underinsured coverage applies at all. The insurer that pays is then entitled to reimbursement or credit for anything the insured later recovers from the at-fault side.

A hypothetical example of the subtraction design, using California's rule. Suppose your underinsured motorist limit is $100,000, the at-fault driver carries a $25,000 bodily injury limit which their insurer pays in full, and your damages are $130,000. Because the statute caps your insurer's liability at your limit less the amount paid by the liable party, the maximum it will pay is $100,000 minus $25,000, or $75,000. You collect $25,000 from them and $75,000 from your own coverage, a total of $100,000, leaving $30,000 of your damages uncompensated.

Now change one number. If you had bought a $25,000 underinsured limit to match what the driver who hit you happened to carry, the same formula gives $25,000 minus $25,000, which is zero. You would have paid premium for a coverage that pays nothing in exactly the situation it exists for. That is the argument for setting these limits by reference to what a serious injury costs rather than by reference to what other drivers carry. Both statutes quoted here point the same way: California requires the coverage to be offered with limits equal to the bodily injury limits in the underlying policy, and Arizona requires the offer to be made "in limits not less than the liability limits for bodily injury or death contained within the policy".

Pros

• It answers a risk that no amount of careful driving removes, since it turns entirely on the other driver's finances.
• It reaches situations beyond a bare uninsured driver, including a hit-and-run and an insurer that denies or reserves on its own policyholder's claim.
• It is first-party coverage, so recovery does not depend on suing anyone.
• In some states it is included automatically and can only be removed in writing, which protects buyers who never think about it.

Cons

• Under a subtraction design the coverage pays nothing unless your own limit exceeds what the at-fault driver carried.
• Hit-and-run claims can fail on procedural conditions, such as a 24-hour police report, that are easy to miss on the day.
• The rules differ enough between states that guidance learned elsewhere can be actively misleading.
• Where the design requires the at-fault limits to be exhausted by payment first, settling with the other insurer without care can complicate or defeat the claim.
• It covers injuries rather than the vehicle, so it is not a substitute for physical damage coverage.