Uninsured/Underinsured Motorists Insurance: A Commercial Automobile Perspective

December 1996
Executive Summary

Mechanisms for protecting insureds against the financial risk of injury caused by financially irresponsible motorists have undergone continual change to evolve into the current Uninsured/Underinsured Motorists (UM/UIM) insurance coverages for both personal and commercial automobile policies. Such coverages are continually being amended as a result of the substantial volume of insurance litigation and legislative changes introduced each year. For example, by 1991, about one-half of the automobile appellate court decisions involved UM/UIM coverage.

The basic problem of continually changing coverage provisions is compounded for commercial auto insurers, because the basic differences between personal and commercial automobile insurance largely have been unaddressed by both the legislative and judicial systems, leaving commercial auto insurers to incorporate personal auto requirements into commercial auto policies.

In 1992, Insurance Services Office, Inc., (ISO) published a study entitled Uninsured/ Underinsured Motorists Insurance: A Perspective as part of its ISO Insurance Issues Series. The objective of the 1992 study was to help insurers, regulators and the public better understand UM and UIM issues so as to make more informed decisions.

Several analyses were provided in the 1992 study, most of which related to personal automobile insurance. This 1996 research study emphasizes UM/UIM issues for commercial automobile insurance. The study provides a summary of key court cases and state law changes since 1992 (see Appendices A and B) and presents an analysis of factors affecting UM/UIM costs.

In particular, this study looks at the most troublesome changing requirements for UM/UIM insurance, which have resulted in a patchwork quilt of requirements that differ from state to state. The study also considers the wide range of costs for UM/UIM insurance resulting from these state-by-state differences.

Stacking of limits is one of the most widely litigated issues in court cases involving UM and UIM coverages. Stacking allows extra compensation by adding the policy limits of other automobiles, either on the same policy or from other policies covering the insured, and enables the insured to recover up to the sum of these limits.

Judicial decisions have not been consistent with respect to stacking; and, in particular, the courts have been largely silent on the applicability of their decisions to commercial auto. Stacking can be particularly problematic for commercial auto insurers since policies can cover fleets of vehicles. When intrapolicy stacking applies, the limits are multiplied by the number of vehicles on the policy, and the potential award can be many multiples of the original policy limit.

States vary on how they apply stacking. Some states require stacking, while others permit insurers to provide unstacked coverage. Some states require both interpolicy and intrapolicy stacking, while a few states allow the insured to choose between stacked and unstacked coverage. Court decisions, which rarely distinguish between personal and commercial UM/UIM coverages, have contributed to the variety of approaches from state to state. The result: currently 10 jurisdictions require both interpolicy and intrapolicy stacking, and another eight require interpolicy stacking only. In the remaining states, either stacking does not apply, or the courts have not addressed the issue.

Other significant issues for commercial auto insurers include:

The variation in state laws that allow or do not allow the insured to reject UM/UIM insurance.
Phantom-vehicle coverage that is activated in some states when there is no evidence of contact between two cars, such as when a motorist runs an insured's automobile off the road.
Whether a state has an effective no-fault law — an important aspect when developing UM/UIM rates. No-fault coverage can drive the average UM/UIM claim size higher and claim frequency lower, as many small claims are covered under the no-fault coverage.
The difficulty in determining who is an insured under UM/UIM coverage. Some courts have held that a spouse of a sole shareholder of a corporation is entitled to UM benefits, since he or she is a family member. In addition, courts in various states do not agree on the applicability of UM/UIM coverages to the insured's employees.
Whether an insurer can protect its subrogation rights for UIM claims by employing a matching offer provision.
The rapidity with which UM/UIM laws continue to change. In the first nine months of 1996, seven states changed their UM/UIM laws.
Difficulty in pricing UM/UIM coverages due to the wide differences in state laws that preclude a countrywide database and the frequency of law changes affecting these coverages.

The wide variation in UM/UIM coverages (and resultant loss costs) reflects the disparity among state laws — each of which is unique. Continually changing laws and court interpretations have resulted in costly and complex coverages that are difficult to understand and complicated for insurers to price.