Underinsured Insurance And The Law

Most insureds in Grand Prairie, Arlington, Fort Worth, Dallas, and other places in the Dallas – Fort Worth metroplex do not have much understanding how Underinsured Motorist (UIM) protection works. Here is a case that helps to explain a little of it.
The case is styled, Salvador Olivas v. State Farm Mutual Automobile Insurance Company and Dan McDowell. The opinion was issued in 1993, by the El Paso Court of Appeals. Here is some background.
Salvador Olivas, while driving an automobile belonging to Dan McDowell, had an accident with a vehicle driven by Alex Harrison IV. Harrison’s liability insurance policy had coverage limits of $25,000 for one person. Olivas settled his tort claim against Harrison for $15,000. This lawsuit was then filed in which it was alleged that Olivas’s damages exceeded $25,000 and recovery was sought on McDowells’ and Olivas’s UIM policies, both of which were issued by State Farm.
Both State Farm and McDowell filed special exceptions which were sustained and when Olivas failed to amend, the case was dismissed with prejudice.
The issue here was: Does the settlement of a third-party tort claim for less than the full amount of the liability coverage carried by the tortfeasor bar a claim for UIM coverage for the injured party?
The conclusion by this court was, “An injured party may settle a third-party claim for less than the full amount of the tortfeasor’s liability coverage and still claim underinsured motorist coverage, but recovery may be had only for damages sustained in an amount in excess of the total amount of the tortfeasor’s liability coverage.”
So, what does this mean?
In this case, Harrison had liability coverage for $25,000. Olivas settled his claim with Harrison for $15,000. Olivas may recover on any underinsured motorist coverage only to the extent that his damages exceed $25,000. This means that if Olivas obtains a judgment for $48,000 then State Farm would get a credit for the amount of the Harrison policy, which was $25,000. Which means Olivas would be able to collect only $23,000 from State Farm.
In the court’s discussion of this case they pointed out Texas Insurance Code, Section 1952.103 which provides for UIM coverage, that says the term “underinsured motor vehicle” means an insured motor vehicle on which there is collectable liability insurance coverage with limits of liability for the owner or operator that were originally lower than, or have been reduced by payment of claims arising from the same accident to, an amount less than the limit of liability stated in the underinsured coverage of the insured’s policy. Section 1952.106 says UIM shall apply to “… all sums which he is shall be legally entitled to recover as damages … and reduced by the amount recovered or recoverable from the insurer of the underinsured motor vehicle.”
This appeals court pointed out that the trial court having sustained special exceptions, the allegations of damages in excess of the amount of Harrison’s coverage of $25,000, must be true. Thus, at the time of settlement, Harrison was an underinsured motorist. To hold as State Farm urged, that Olivas’s settlement constitutes a judicial admission that Harrison’s liability insurance was more than sufficient to compensate for all damages would discourage not encourage settlement of claims.
The court then said, “Where, as here, the claim greatly exceeds the available coverage, we find no reason to require that payment be delayed while awaiting payment by the liability carrier.”
There are pitfalls to doing what was done in this case that did not exist at the time this case arose. Changes in the law regarding UIM coverage have to be taken into account. There are also other strategies for maximizing the chance for a favorable outcome. it is important to see an experienced Insurance Law Attorney in these types of claims.