The Underinsured Motorist Offset: The Policy Controls

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One issue frequently faced in personal injury cases is the effect of payments made by an underinsured motorist or her liability insurance carrier upon our injured client’s claim against her own underinsured motorist coverage.

Underinsured motorist carriers are quick to argue that any payment from the underinsured tortfeasor or his insurer is to be deducted from the uninsured motorist limits, without regard to the damages suffered by the insured. A closer look at the case law shows that things are not so clear-cut.

Cobb v. Allstate involved the following offset language from an underinsured motorist policy:

“Damages payable will be reduced by all amounts paid by the owner or operator of any uninsured auto or anyone else responsible. This includes all sums paid under the bodily injury liability coverage of this or any other auto policy.”

While there is an offset, there is a good argument that this language contemplates that the reduction will be made from the insured’s damages as opposed to her UM limits.

The Law Court has suggested that in some circumstances the offset is from the UM limits, rather than the total damages, but it has not so held in the context of the Cobb policy language.

The Court’s statement that 24-A M.R.S.A. § 2902(4) “requires that an underinsurer’s obligation be reduced by the amount of any payment received from a tortfeasor,” is not inconsistent with the application of the offset from damages rather than from the UM limits. Moreover, the uninsured motorist statute, 24-A M.R.S.A. § 2902(4), specifically makes the offset subject to the terms of the policy.

While the Court in Connolly v. Royal Globe Insurance Co., did hold that the offset was to be from the combined limits of the two UM policies rather than from the insured’s total damages, the Court does not cite or rely upon any policy language. Rather, the Court referred only to the UM statute and appeared to hold only that the statute does notrequire that the offset be made from the insured’s damages. However, there remains a possibility of arguing, on the basis of the actual policy language and the case law interpreting similar language, that the Allstate UM policy interpreted in Cobb contemplates an offset from damages rather than limits. The Allstate policy language is, at the very least, ambiguous on that point.

The Law Court’s most recent decision, in Jipson v. Liberty Mutual Fire Ins. Co., supports the notion that the policy language controls. There, the Court, relying, in part, on Connolly, held that the UM statute did not require that the offset due the UM carrier for liability payments be made from the insured’s damages, but held instead that it was to be made from the UM limit.

The Law Court addressed Jipson’s argument that the specific language of the UM policy at issue was ambiguous as to whether it provided for an offset from damages or limits and therefore the interpretation favoring the insured should be adopted. The policy language in Jipson was:

“Any amounts otherwise payable for damages under this coverage shall be reduced by all sums… paid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible.”

Rejecting the argument that the phrase “amounts otherwise payable as damages” was susceptible to the interpretation that the offset was to be from damages, the Court stated:

“The phrase ‘under this coverage’ explains, modifies, limits and controls the phrase ‘amounts otherwise payable for damages.’ The policy is not reasonably susceptible to any interpretation other than that the offset be taken from the $100,000 coverage limit, e.g. ‘the amounts otherwise payable for damages under this coverage,’ and is therefore unambiguous.”

The UM policy language quoted in Cobb is missing the critical modifying phrase “under this coverage” or any equivalent language. Thus, the argument that the policy language favors an offset from damages rather than from limits, or that it is at least ambiguous on this point, is left open by Jipson.

It is thus imperative that in any case where the client’s damages exceed the available coverage, the language of the UM policy be closely examined.