II. Method of Offering Coverage

• Library: The Law of Automobile Insurance in SC (SCBar) (2015 Ed.)

II. Method of Offering Coverage

A. Case Law Discussion Prior to Act No. 148 of 1989

Statutes regulating the providing of UIM and other optional coverages generally fall within four main types: (1) the insurer is required to provide the coverage on a mandatory basis, as is the case for basic uninsured motorist coverage in South Carolina;²⁹ (2) the insurer is required to "offer" or "make available" the coverage at the insured's option; (3) the insurer is required to provide the coverage unless the insured affirmatively rejects it; and (4) the burden is placed on the insured to request the coverage.³⁰

Prior to Act No. 148, section 38-77-160 stated, without elaboration, that automobile insurers "shall also offer, at the option of the insured, underinsured motorist coverage."³¹ "The statute [did] not specify the form or the manner in which insurers must offer the coverage."³² Construing this statute, the South Carolina Supreme Court held that "underinsured motorist coverage in any amount up to the insured's liability coverage must be offered to a policyholder."³³ The section required a UIM carrier:

(1) to offer its insured underinsured motorist coverage up to the limits of the insured's liability coverage;
(2) to effectively transmit this offer to the insured;
(3) to give the insured the option of accepting or rejecting the offer; and
(4) to provide the insured with adequate information, and in such a manner, as to allow the insured to make an intelligent decision of whether to accept or reject the coverage.³⁴

Minnesota, perhaps the leading jurisdiction on underinsured motorist decisions, provided guidance to South Carolina in evaluating underinsured motorist offers. In Hastings v. United Pacific Insurance Co.,³⁵ the Minnesota Supreme Court identified four concerns to be utilized in determining whether a meaningful underinsured motorist coverage offer has been made:

(1) "The first of these concerns, where the purported offer is made in other than face-to-face negotiations, is that the notification process be commercially reasonable;"³⁶
(2) "the insurer must specify the limits of optional coverages and not merely offer additional coverage in general terms;"³⁷
(3) "the insurer [must] intelligibly advise the insured of the nature of the optional coverage;"³⁸ and
(4) "the insured [must] be apprised that optional coverages are available for a relatively modest increase in premiums."³⁹

In State Farm Mutual Insurance Co. v. Wannamaker,⁴⁰ the South Carolina Supreme Court stated that "We find [the Bastings] standard reasonable and expressly adopt it here."⁴¹ Similarly, in McLeod v. Bome Insurance Co.,⁴² District Judge G. Ross Anderson, Jr. declared that "[t]he insured must be provided with adequate information, and in such a manner, as to allow the insured to make an intelligent decision whether to accept or reject coverage."

"The insurer has the initial burden of proving that it made a meaningful offer of optional coverage to the insured."⁴³ A "noncomplying offer has the legal effect of no offer at all,"⁴⁴ so that a policy must be reformed to include UIM coverage at the same limits as the liability coverage⁴⁵ "Furthermore, a third party not privy to the contract may assert the lack of an adequate offer and reform the contract to increase the coverage."⁴⁶

Our appellate courts have consistently held that "even if the insured expressly rejects the optional coverage, a noncomplying offer has the legal effect of no offer at all."⁴⁷ For example, in American Security Insurance Co. v. Boward,⁴⁸ the court of appeals stated:

Carolina contends these deficiencies do not matter in this case, because Mrs. Howard had consistently rejected underinsured motorist coverage in the past, indicating she was only interested in purchasing mandatory liability coverage at the lowest premium cost and would have rejected the optional coverages even if the required information had been included in the offer. However, our Supreme Court has held that even if the insured expressly refuses the optional coverage, a noncomplying offer has the legal effect of no offer at all.⁴⁹

The South Carolina Court of Appeals, per curiam, summarized these rules as follows:

The leading case establishing the standards for making an effective offer, State Farm Mutual Automobile Insurance Co. v. Wannamaker, created a four[-]prong test which must be met by the insurer to establish it complied with its duty to offer the optional underinsured motorist coverage:

(1) the insurer's notification process must be commercially reasonable, whether oral or in writing; (2) the insurer must specify the limits of optional coverage and not merely offer additional coverage in general terms; (3) the insurer must intelligibly advise the insured of the nature of the optional coverage; and (4) the insured must be told that optional coverages are available for an additional premium.⁵⁰

The initial burden of proving that a meaningful offer of optional coverage had been made to the insured is placed on the insurer. The insurer must satisfy all four prongs of the Wannamaker test to prove there was an effective offer of underinsured motorist coverage, and failure of any one of these prongs vitiates the offer and requires reformation of the policy to include underinsured motorist coverage to the limits of liability coverage.⁵¹

In Wannamaker, the insured received a renewal premium notice accompanied by a nine-page "stuffer" booklet from State Farm, which he, admittedly, did not read. Thereafter, he went to his State Farm agent's office to pay the renewal premium. No mention was made of underinsured motorist coverage either by the agent or by the insured. The insured's daughter was subsequently killed in an automobile wreck. The insured then filed suit contending that he was entitled to underinsured motorist coverage from State Farm because State Farm had failed to offer such coverage to him. The issue in the case was whether the unread nine page booklet constituted an effective offer of coverage.

The booklet contained the following:

IMPORTANT INFORMATION ABOUT COVERAGES U AND W * * * * About Coverage W, Underinsured Motor Vehicle Coverage W, Underinsured Motor Vehicle Coverage, protects you and your passengers for bodily injury and property damage caused by an underinsured motor vehicle.... If the damages for which the at-fault driver is legally liable to you and your passengers exceed the other driver's liability limits or self insurance, Coverage W can apply up to the limits you choose (see "Available Limits" inside).
Underinsured Motor Vehicle Coverage has been broadened to include coverage when that available under your Coverage W has been exhausted.
* * * * Available Limits You may purchase Coverage U [uninsured motor vehicle coverage] and coverage W with limits up to your bodily injury and property damage liability . limits. The basic limits for both Coverages U and W are $15,000/$30,000/$5,000.
Listed to the right are premium charges for various Coverage U and Coverage W limits.
SEMIANNUAL PREMIUMS UNINSURED MOTOR VEHICLE COVERAGE (Coverage U) * * * * [Listed were the premium charge for various limits, as stated below, of uninsured motorist coverage]
UNDERINSURED MOTOR VEHICLE COVERAGE (Coverage W) Coverage W is available at limits which shall not exceed the limits provided under your policy for bodily injury and property damage liability.

Bodily Injury Per Person/Per Accident	Property Damage	Premium
$15,000/$30,000	$5,000	$5.00
$20,000/$40,000	$5,000	$6.00
$25,000/$50,000	$5,000	$7.00
$50,000/$100,000	$5,000	$10.00
$100,000/$300,000	$5,000	$15.00

* * * * Higher coverages U and W limits may also be available by contacting your agent. If you're interested in raising coverage U or Coverage W limits or adding Coverage W, contact your agent immediately. If no change in coverage is desired, you need do nothing.⁵²

Included in the booklet was the actual endorsement for uninsured and underinsured motorist coverages contained in State Farm's policies for those who purchased the coverage. The endorsement defined uninsured motorist coverage as follows: "We will pay damages for bodily injury or property damage an insured is legally entitled to collect from the owner or driver of an uninsured motor vehicle. The bodily injury or property damage must be caused by accident arising out of the operation or ownership of the uninsured motor vehicle." The endorsement then went on to define "uninsured motor vehicle" as well as the remainder of the terms quoted in bold above.

The endorsement next defined underinsured motorist coverage as follows: "We will pay damages for bodily injury or property damage an insured is legally entitled to collect from the owner or driver of an underinsured motor vehicle. The bodily injury or property damage must be caused by accident arising out of the operation or ownership of the underinsured motor vehicle." The endorsement then defined "underinsured motor vehicle" as well as the remainder of the terms.

In holding that the unread booklet together with the actual UM and UIM endorsement did not constitute an effective offer, the court noted that (1) "the burden is on the insurer to effectively transmit the offer to the insured;"⁵³ and (2) "the statute mandates the insured to be provided with adequate information, and in such a manner, as to allow the insured to make an intelligent decision of whether to accept or reject coverage."⁵⁴ The court then compared the State Farm booklet (which was not quoted in its decision) to the offer rejected in Hastings, in which the Minnesota Supreme Court stated "The message printed on the bottom of the premium notice was, at best, vague. It gave no explanation of the underinsured motorist coverage and how it differed from uninsured motorist coverage."⁵⁵ Unfortunately, the court in Wannamaker failed to give any hint as to why the lengthy and detailed State Farm Booklet and endorsement failed to...