The Catch 22 of Underinsured Motorist Settlements
| Publication year | 1988 |
| Pages | 49 |
| Citation | Vol. 17 No. 1 Pg. 49 |
1988, January, Pg. 49. The Catch 22 of Underinsured Motorist Settlements
Just as Sisyphus was condemned forever to push the boulder up the hill in Hades, only to have it roll back before reaching the summit,(fn1) so too the parties in an underinsured motorist settlement may discover that despite any measure of labor performed, they often find themselves back at square one with no settlement. In an effort to facilitate a minimum level of recovery for damages arising from automobile accidents caused by uninsured motorists, Colorado complimented the Auto Accident Reparations ("No Fault") Act(fn2) with the uninsured motorist ("UM") statute.(fn3) The UM statute is designed to provide coverage when the tortfeasor is either uninsured or carries insurance limits which are less than the claimant's.
Despite this apparent harmony between the two statutes, pertinent insurance policy language often throws a wrench into their implementation. Most underinsured motorists ("UIM") policies contain the following "consent clause": "The insured shall not make any settlements with any person or entity legally liable for the insured's damages without the insurer's written consent." The obvious purpose of the consent clause is to protect the carrier's subrogation rights. However, despite recognition of this purpose, in UIM settlement negotiations parties are rarely able to develop a plan which preserves subrogation rights and yet satisfies all.(fn4)
In a typical UIM settlement, the players include the injured claimant, his or her UIM carrier, the tortfeasor and his or her automobile liability carrier. The settlement process begins with the liability carrier offering policy limits to the injured claimant in exchange for a complete release. Because the claimant's damages generally exceed those limits, the claimant then seeks additional funds from his or her UIM carrier.
It would appear that the No Fault Act's purpose of providing primary coverage melds perfectly with the UM statute's mandate of furnishing excess coverage.(fn5) However, in actual application the UIM carrier would typically respond that no payments will be made until the tortfeasor's liability limits are paid. Moreover, no UIM benefits will be paid if the claimant executes a general release when securing those limits. When the claimant brings this proposal back to the liability carrier, he or she is shocked to discover that no settlement will be consummated until the claimant releases both the tortfeasor and the liability carrier. This of course would bar the UIM carrier from bringing a subrogation suit.
Despite the existence of two insurance pools from which to be compensated, the claimant is in a "Catch 22" situation. The claimant cannot settle with the tortfeasor because that will forfeit any UIM claim. If the claimant does not settle with the liability carrier, he or she cannot gain access to the UIM fund short of obtaining a judgment against the tortfeasor.
With this seemingly inequitable result in mind, the question arises whether Colorado courts would enforce such consent clauses. Although no reported Colorado decisions have addressed this issue,(fn6) an examination of pertinent Colorado statutes and cases may suggest how a court would rule if presented with the question. A review of other jurisdictions may then offer further guidance.
The UM statute includes UIM protection in its definition of UM coverage, and UIM coverage is triggered when the tortfeasor's available liability limits are lower than the claimant's UIM coverage.(fn7)
Maximum liability for the UIM carrier is limited to the lesser of (1) UIM limits minus amounts paid by the tortfeasor, or (2) the amount of damages sustained but not recovered.(fn8) The statute does not mandate that the claimant initially collect from the tortfeasor. Therefore, if the claimant does not first proceed against the tortfeasor, his or her UIM arbitration award should be determined by subtracting the tortfeasor's liability limits from total damages, up to UIM limits.(fn9)
The Motor Vehicle Responsibility Act(fn10) may provide additional guidance. In the context of liability coverage, this Act relieves a carrier from liability on a judgment if it did not receive reasonable notice of the action. It could be argued that this represents a codification of public policy mandating cooperation between the insured and the carrier. Accordingly,
Finally, the intercompany arbitration section in the No Fault Act prohibits an insurer from seeking recovery for amounts paid if doing so would reduce the amount of liability coverage available to an injured victim suing the tortfeasor.(fn11) Although this section concerns recovery of direct benefits and not UIM coverage, it might be argued that this espouses a general policy to provide full tort recovery undiminished by...
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