November 25, 2009
A crash course in UIM auto coverage
By ANDREW BERGH
Special to the Journal

Today's lesson in underinsured motorist coverage comes to us courtesy of Brown-Day v. Allstate. But in this case from the Hoosier State, the self-proclaimed “Good Hands” people instead got their hands slapped for trying to have it both ways.

After she was seriously hurt in a two-car crash in mid-June 2004, Marijeanne Brown-Day sued the other driver for damages in Marion County Superior Court. As it turned out, the defendant, Michelle Lobdell, who was admittedly at fault for the collision, only had $50,000 in liability insurance. Although she later settled with Lobdell for the $50,000 limit, Brown-Day reserved the right to pursue an underinsured motorist claim against her own insurer, Allstate Insurance Co.

Time for a short diversion.

Under Washington law, if you buy liability insurance for your car, then you also buy underinsured motorist (UIM) coverage unless you expressly reject it in writing. The limit of your UIM coverage always matches the amount of your liability coverage. (The lone exception would be where you request a smaller amount or waive UIM coverage altogether.) For example, if you have, say, $50,000 in liability coverage, then you also have $50,000 in UIM coverage. This coverage protects you in two situations: where the at-fault driver either has no liability insurance at all, or insufficient liability coverage to fully compensate you for your injuries and damages.

In her case, Brown-Day happened to have $100,000 in UIM coverage with Allstate. So in late October 2006, she filed an amended complaint naming Allstate as the defendant, alleging that she had purchased $100,000 in UIM benefits from her insurer and that she had suffered damages exceeding the $50,000 limit of Lobdell's policy. A short time later, without any opposition from Allstate, she dismissed Lobdell from the lawsuit.

But in early 2009, over two years later, Allstate filed a motion to identify Lobdell as the sole defendant for purposes of trial. This substitution was necessary, said the insurer, to prevent the “substantial unfair prejudice” that would ensue if the jury knew UIM benefits were available to cover Brown-Day's damages. In return, Allstate agreed to pay any judgment against Lobdell, subject to the $100,000 limit.

Siding with Allstate, the trial court granted its motion and ordered that Lobdell be identified as the “sole designated defendant” for purposes of trial. Moreover, the court said Brown-Day couldn't mention or refer to the fact that she had a policy with Allstate, that she had $100,000 in UIM benefits, or that she was pursuing a UIM claim.

Since these rulings totally changed the dynamics of the trial, Brown-Day applied — successfully — for immediate review by an Indiana appeals court. And just three weeks ago, the appeals court spoke.

The outcome? Let's just say the Good Hands people might be wringing their hands.

Like most (if not all) states, Indiana says proof of liability insurance can't be used to establish liability. For example, if Lobdell had instead denied fault, evidence that she had liability insurance would've been inadmissible to prove that she was negligent.

According to Allstate, this evidentiary rule should be broadly applied.

The concern, said the company, is that a jury could award “over-inflated damages” if it knows an insurer's “deeper pockets” are the source of payment. Brown-Day, on the other hand, argued that excluding all reference to insurance can't be justified in a “modern society” where insurance coverage is so “prevalent.”

By a 3-0 vote, the appeals court agreed with the insured.

For one thing, the court criticized Allstate for standing by, allowing Lobdell to be dismissed with prejudice, and for then trying to use her identity years later.

But more importantly, the court noted that by pursuing UIM benefits, Brown-Day sought to enforce her contract with Allstate. Although her claim involved the amount of damages caused by somebody else (i.e., Lobdell), it was Allstate, said the court, who issued the insurance policy and was the “sole entity” potentially liable for paying UIM benefits.

In sum, Allstate was the “real party in interest.” It therefore didn't matter, said the appeals court, whether greater damages might be awarded against a deep-pocket insurance company. Moreover, by substituting Lobdell as the defendant to shield Allstate's identity, the lower court had improperly created a “fictitious persona” that wasn't contemplated by the evidentiary rule barring evidence of insurance.

Though often poorly understood, UIM coverage is one of the best benefits of your car insurance policy.

But ideally, this crash course will suffice and you'll never need to experience the real thing.