IX. Underinsurance Actions

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

IX. Underinsurance Actions

A. General

One of the leading treatises on UIM/UM coverage states:

The relationship between an injured claimant, the alleged tortfeasor, the tortfeasor's insurer, and the insurer providing underinsured motorist insurance is often considerably more complicated than that which prevails when a tortfeasor is uninsured. Viewed at the most fundamental level, the relationship is always going to be at least a trilateral one (involving the injured claimant seeking indemnification for injuries in an accident, the tortfeasor's insurer, and the underinsured motorist carrier) rather than bilateral (the injured claimant and the uninsured motorist insurer). Consequently, considerable care must be exercised at all stages of the negotiation and settlement of both the tort claims and the underinsured insurance claims.¹⁸⁷

Prior to Act No. 148 of 1989, there was neither statutory nor South Carolina case law guidance regarding the procedure for handling underinsured motorist claims. Section 21 of Act No. 148 amended code section 38-77-160 to clarify this procedure in three important ways. First, the section makes explicit that "[n]o action may be brought under the underinsured motorist provision unless copies of the pleadings in the action establishing liability are served in the manner provided by law upon the insurer writing the underinsured motorist provision. The language 'in the manner provided by law' modifies the manner of service, requiring that the insured serve the insurance carrier through the Department of Insurance as provided in section 15-9-270 and Rule 4, SCRCP. Clearly, the purpose of the statute is to provide notice to the insurance company."¹⁸⁸

The court of appeals discussed the importance of the notice requirements of § 38-77-160 in Donaldson v. Tixier.¹⁸⁹ The UIM insured, Henry Donaldson, sought to claim the UIM benefits under his policy with Allstate. Donaldson served Allstate with a copy of the summons and complaint after Donaldson's trial with the at-fault motorist ended and a damage award entered. The court held that Donaldson's tardy service was fatal to his claim against Allstate for UIM benefits. The court found that Allstate's right to fully defend its interest was greatly impaired because it did not have an opportunity to defend the claim at trial, even though Allstate could have participated in post-trial motions and an appeal.

Although failure to comply with this provision may result in the granting of a motion for summary judgment for the insurer,¹⁹⁰ the statute does not serve as a statute of limitations.¹⁹¹ No evidence of this service, however, may be made part of the record.

In Louden v. Moragne,¹⁹² the UIM insured, Louden, was involved in an accident with an underinsured motorist, Moragne, on May 1, 1992. In August 1994, the insured served the UIM carrier with a summons and complaint against Moragne. The UIM carrier then filed an answer on Moragne's behalf. Moragne was not served, however, until January, 1996, well outside the three year general statute of limitations. The court of appeals held that the statute of limitations banned the action, and stated:

In the present case, the negligence action is against the at-fault driver and not directly against the insurance company. Service on the at-fault driver is an essential component of the negligence action. Thus, we hold that the named defendant in an action for benefits under a plaintiff's underinsured motorist policy must be properly served with the summons and complaint prior to the running of the statute of limitations.

Second, the Act puts an end to much of the confusion regarding the rights and duties of an underinsured motorist insurer to appear and defend in the name of the negligent, underinsured, motorist. Section 21 states that:

The insurer has the right to appear and defend in the name of the underinsured motorist in any action which may affect its liability and has thirty days after service of process on it in which to appear.... In the event the automobile insurance [liability] insurer for the putative at-fault insured chooses to settle in part the claims against its insured by payment of its applicable liability limits on behalf of its insured, the underinsured motorist insurer may assume control of the defense of action for its own benefit.

The important point here is that the UIM carrier may not assume control of the defense until the at-fault insured chooses to settle. Until the at-fault carrier settles, the UIM carrier cannot engage in discovery, ask questions during depositions, or control the defense of the case. Counsel for the UIM carrier can likely receive copies of the discovery responses, and attend depositions. However, any other result would lead the at-fault party with two attorneys - one representing the at-fault carrier and one standing in the at-fault party's shoes for the UIM carrier.

The South Carolina Department of Insurance construed this provision as follows:

Ordinarily, the underinsured motorist carrier is under no obligation or duty to appear or defend the putative at-fault driver who has been sued by an injured party claiming entitlement to underinsured motorist benefits. This SECTION, however, affords the underinsured motorist insurer the right to appear and participate in the defense of the at-fault party. The words "may assume control of the defense" clearly indicate that the underinsured motorist carrier has the election of: (1) relying on the continued defense by the liability carrier of the putative underinsured motorist; (2) joining with the liability carrier for the putative underinsured motorist to monitor or jointly provide a defense; or (3) requesting that the primary control of the defense be relinquished by the liability insurer when that insurer's limits have been exhausted by tender and payment to the injured party. Nothing in this section requires the liability insurer to withdraw from the defense of the action nor requires the underinsured motorist carrier to assume control of the defense. It is the intent of this SECTION that the control of the defense of the putative underinsured motorist pass to the underinsured motorist carrier only when the liability limits for at-fault driver have been tendered and paid and the underinsured motorist carrier elects to assume control of the defense.¹⁹³

A UIM carrier has a right to participate in a trial whether or not they control the defense. The court of appeals held that a "UIM carrier always has the right to 'appear and defend in the name of the underinsured in any action which may affect its liability,' notwithstanding the fact that it may have a right to 'control' the defense."¹⁹⁴

Finally, the Act prohibits "consent to settlement" clauses in underinsured motorist endorsements.¹⁹⁵

This allows the at-fault party and his insurer to negotiate a settlement with the insured which exhausts the liability coverages available yet still allows the action to proceed to judgment to establish the amount of underinsured motorist recovery. The SECTION does not, however, sanction collusive settlements or to otherwise circumvent the underinsured motorist insurer's opportunity to appear and defend. Thus, for example, while a settlement calling for a Confession of Judgment for an amount in excess of the applicable liability limits may not technically require the consent of the underinsured motorist insurer, the underinsured motorist insurer would not be bound by the terms or amounts of such a settlement between the insured and the liability insurer for the at-fault motorist.¹⁹⁶

In the typical case, the insured will bring an action and obtain a judgment against the at-fault motorist, thus establishing the negligence of the at-fault motorist and plaintiff's damages. This civil action will be identical to any other negligence lawsuit (except that the pleading for the underlying civil action will be served on the UIM insurer), and neither the existence of underinsurance nor any UIM policy defenses, offsets, or exclusions would be relevant or admissible.

The insured will then present the judgment and proof that the at-fault motorist was underinsured, i.e., by producing a certified copy of the tortfeasor's liability policy, to his underinsured motorist carrier for payment. In the event that payment in the proper amount is not forthcoming, the insured should file a direct action against the underinsured motorist insurer for breach of the underinsured motorist endorsement.

The underinsured motorist insurer generally has no duty to pay benefits until its insured has recovered a judgment in excess of the at-fault motorist's liability limits.¹⁹⁷ In Cobb v. Benjamin,¹⁹⁸ discussed below, the court of appeals considered the UIM insurer's argument that § 38-77-160 requires payment of liability limits as a precondition of entitlement to UIM benefits and ultimately determined that the UIM carrier is entitled to a credit for any amount of liability insurance coverage not exhausted in a settlement with its insured. The underinsured motorist insurer is free, of course, to initiate settlement negotiations with its insured and the liability insurer for the tortfeasor.

B. How to Settle a UIM Claim

1. Settling with the Liability Insurer

Every claimant's attorney sooner or later will be faced with the situation where the liability insurer has tendered its policy limits but the UIM insurer will not offer any or all of its coverage. Likewise, there will be occasions where the liability insurer will often suggest a compromise of its limits offering 95% of the coverage in return for a covenant not to execute. Perhaps there are multiple defendants and one wants to settle but the others will not.¹⁹⁹ Each of these scenarios presents a potential problem if the attorney wants to preserve the client's right to collect UIM coverage.

Most attorneys acknowledge that a UIM insurer generally has no duty to pay UIM benefits until the insured recovered a judgment in excess...