What You Should Know About Uninsured/Underinsured Motorist Benefits and Exhaustion Clauses
A recent Colorado Court of Appeals case, Tubbs v. Famers Insurance, covers whether or not the insured was entitled to uninsured/underinsured motorists (UIM) coverage when his UIM policy contained an exhaustion clause. Exhaustion clauses are common in auto policies in Colorado, and could directly affect your car insurance policy, so you might want to refer to it to make sure you know what kind of coverage you have.
The exhaustion clause in this case provided that the insurance company, Farmers, “will pay [UIM] coverage only after the limits of all [liable party’s] liability bonds or policies have been exhausted by the payment of settlement of judgments.” Meaning that Farmers will only pay the insured UIM benefits once the insured has received the maximum amount under the liable party’s coverage.
In this case, the insured, Mr. Tubbs, settled with the liable driver for $30,000 even though the liable driver’s liability coverage was for up to $100,000 and Mr. Tubbs had injuries that exceeded $100,000. Famers refused to pay UIM benefits to Mr. Tubbs, because he settled with the other driver for less than the liability coverage, and thus did not trigger the requirements under the exhaustion clause.
Mr. Tubbs argued that the exhaustion clause violated C.R.S. § 10-4-609(1)(c), which provides that UIM coverage is “in addition to any legal liability coverage and shall cover the difference, if any, between the amount of the limits of any legal liability coverage and the amount of the damages sustained.” The court looked at the plain and ordinary meaning of the statute and concluded that Famers was required to cover Mr. Tubbs for the damages he sustained in excess of the $100,000 (the other driver’s legal liability limits), and in an amount of up to $500,000, which was the limit on Mr. Tubbs’s UIM coverage. The exact amount he recovered under the other driver’s liability coverage was irrelevant. Only the maximum liability coverage of the other driver was relevant. The court stated that exhaustion clauses such as this one are void and unenforceable because coverage is mandated by statute.
In other words, say Mr. Tubbs’s damages equaled $400,000. Since the liable party’s coverage was $100,000, Farmers is required to pay $300,000 (the excess amount) in UIM benefits if Mr. Tubbs proves that he has received that much in damages. In this scenario Mr. Tubbs would end up with $330,000 in total payment for the car accident. If the insurance company withholds this payment then they will be acting in bad faith and the policy holder could sue the company. This decision by the Colorado Court of Appeals helps clarify exhaustion clauses in auto policies in Colorado, and helps protect the injured when the liable party’s insurance coverage isn’t enough to cover the damages caused in the accident.
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