Viewpiont: Idaho Supreme Court Finds Minimum Limit UIM Coverage Illusory

I had a conversation the other day that brought an Idaho Supreme Court decision from 2022 to my attention. If you’re interested, it’s Pena v. Viking Insurance Company of Wisconsin. This is a case about an injury sustained in an auto accident and it speaks to an issue in some states the centers on how Underinsured Motorists coverage is applied.

Since Uninsured Motorists and Underinsured Motorists (UM/UIM) coverage varies so wildly from state to state, we can’t deal with coverage from a countrywide perspective. This case is specific to Idaho. Rules, laws, and policies in your state are probably different. Therefore, when thinking about how this might affect coverage in your state, go back and read the policies that you’re dealing with.

The plaintiff was injured in an automobile accident where both drivers had elected to buy the state minimum required insurance limits. Not surprisingly, his injuries exceeded the other driver’s liability limit. Therefore, he contacted his insurance company to file a UIM claim. The company denied the claim for reasons that we will discuss later. Ultimately, the Idaho Supreme Court agreed with the plaintiff that the company should pay the UIM claim.

How does the policy read?

It’s normally helpful to read the full policy, but since I don’t have the full policy, I’m relying on the policy sections that are quoted in the court’s opinion, ISO endorsement, PP 14 23 12 15 Underinsured Motorists Coverage – Idaho, PP 04 02 06 98 Single Underinsured Motorists Limit, and ISO Personal Auto Policy, PP 00 01 01 05 (all ISO forms are the currently filed editions of those forms the time of the accident).

We start with looking at how the policy in question provided coverage for Underinsured Motorists coverage.

We will pay for damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an underinsured motor vehicle. The bodily injury must be caused by a car accident and result from the ownership, upkeep or use of an underinsured motor vehicle. (words in bold indicate defined terms within the policy)

That insuring agreement should look similar to what we would expect, but we still need to define an underinsured motor vehicle. This is not the entire definition, just what’s important for our purposes here.

Underinsured motor vehicle means a motor vehicle to which a bodily injury liability bond or policy applies at the time of the car accident providing bodily injury liability limits less than the limit of liability for this coverage.

Underinsured motor vehicle does not mean a vehicle… insured by a bodily injury liability bond or policy at the time of the car accident which provides bodily injury limits of liability less than the minimum bodily injury liability limits that comply with the financial responsibility law of the policy state.

What does all that mean?

In this case, the insured bought an auto liability policy that complied with the minimum requirements in the state of Idaho. So did the other party to the accident. If we read the policy, allowing for the terms that are defined within, and reading the rest according to a general understanding of the words and grammar that we’re reading, we might come up with the same understanding that the insurance company had. There’s no coverage.

The insured carried state minimum limits of insurance. The policy requires that the other vehicle have lower insurance limits to meet the definition of an underinsured motor vehicle, but an underinsured motor vehicle cannot be a vehicle without at least the state minimum limits. By definition, any vehicle that isn’t carrying the state minimum limit isn’t an underinsured motor vehicle, it’s an uninsured motor vehicle. It is therefore impossible for an insured with minimum limits to encounter an underinsured motor vehicle.

We can make the case that the insurance company made the correct decision. The policy language is clear and unambiguous. It complies with the statutory requirements, and it is the insured’s responsibility to read their policy to understand the terms and conditions of coverage.

So why did the Supreme Court disagree?

The insured ultimately sued their insurance company, stating that the company sold an illegal insurance policy because coverage was illusory. The company countered saying that it was not illusory. The district court agreed with the insurance company, so the insured appealed to the Supreme Court.

This goes to what is meant by illusory coverage. The insured contended that if a coverage can be sold that doesn’t apply to all customers, it is illusory. The insurance company countered that as long as coverage would apply to any customers, it is not illusory. The question remains, was this policy wording illusory, or not?

Courts in many cases are siding with the lower court and the insurance company on this issue, especially when dealing with commercial insurance customers. In this case, however, the Idaho Supreme Court sided with the consumer, concluding that there was no instance where this customer could recover the full limits of their UIM coverage, therefore making the coverage illusory.

This makes sense on the face because if this insured was involved in an accident with any insured in Idaho, the policy would never pay the full limit of insurance due to the definition of underinsured motor vehicle, coupled with an offset provision in the policy that allowed the insurance company to reduce any UIM payment by amounts recovered by the other driver’s liability policy, and the fact that the insured elected the state minimum limit of insurance.

One final thought

As an underwriter, and someone who reads insurance policies so that I can teach them to others, I can understand the company’s policy interpretation, and would likely agree in theory that it’s correct. Since the policy was written according to Idaho’s laws, which allowed for the offset provision, the insurance company had it right.

Yet, actions that are legal are not necessarily the right thing to do. In this case, we are dealing with two insureds who were likely just trying to save some money on their auto insurance and who likely didn’t read or understand their insurance policies when they bought them. This isn’t anything other than an informed opinion. Most people don’t ever read their insurance policies and a lot of people want to pay less for their insurance, me included.

The insurance company ought to have considered the impact of this decision before they were forced to defend their policy wording in court. It should be easy to foresee that there may be customers who would never have an underinsured motorist claim because they purchased the minimum limit required, and acted accordingly.

I offer a potential solution to the illusory UIM problem here. The company could have added a sentence to their offset provision that read something like this.

This reduction shall not apply if the limits of insurance for liability, uninsured motor vehicles, and underinsured motor vehicles is equal to the minimum limits that comply with the financial responsibility law of the policy state.

With that sentence, the company knows exactly what they can expect related to UIM losses for customers who purchase minimum policy limits. They would not have to calculate the cost to defend the policy wording in court and the costs of losing those cases. If that changes the loss ratio such that they can calculate the impact this change makes, then they can file a rating factor for it.

Did the court get this right? Did I get it right? Let me know what you think.

Wraight heads Insurance Journal’s Academy of Insurance. He began his insurance career as a commercial underwriter for an MGA, focusing on niche markets like fire departments, ambulance companies and home medical equipment dealers. He has written numerous articles for Insurance Journal and My New Markets and is the co-author of Risk-Proof Your Business – The Complete Guide to Smart Insurance Choices.