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By: Jeffrey C. Smith

Mr. Smith is a Shareholder with the firm of Rosen, Cook, Davis, Shattuck & Oldshue, PA. where he practices in the area of Civil Litigation. Mr. Smith received both his Undergraduate and Law Degrees from the University of Alabama, and he is Board Certified by the National Board of Trial Advocacy as a Civil Trial Advocate. The following is an edited version of Mr. Smith's 2006 AIM CLE lecture on this subject.

Uninsured/Underinsured motorist coverage provides an additional source of compensation for an injured plaintiff when the tortfeasor either has no insurance, or the limits of his or her insurance are inadequate to fully compensate the insured plaintiff. There are numerous issues that arise when dealing with a UM/UIM claim that must be addressed on a case by case basis. One should fully research the issues of coverage, the limits of available coverage including "stacking" issues before attempting to settle with the tortfeasor. Once you have satisfied yourself as to the available policy limits of the tortfeasor, and have thoroughly researched the coverage and stacking issues in the case, then and only then, are you ready to settle with the tortfeasor.

When the tortfeasor's carrier extends an offer of settlement, you need to be very careful to follow the proper procedures so as not to impair the uninsured/underinsured motorist carrier's rights as this may preclude your ability to make the UM/UIM claim. The UM/UIM carrier has a contractual and equitable right of subrogation when it pays benefits to its insured. Aetna Casualty & Surety Co. v. Turner, 662 So. 2d 237 (Ala. 1995). The uninsured/underinsured motorist carrier is not entitled to subrogation against the underlying tortfeasor's policy limits as those are properly payable to injured party. Id. However, the UM/UIM carrier is entitled to subrogation for the excess which it pays above and beyond the tortfeasor's policy limits. Id. at 238. Therefore, the tortfeasor may be exposed to the claims of the uninsured/underinsured motorist carrier after their own insurance carrier exhausts its policy limits in attempting to settle the claim on behalf of their insured tortfeasor. This is why insurance defense counsel must also be very careful to make certain any potential settlement with an injured plaintiff also includes a waiver of subrogation by the UM/UIM carrier whenever possible.

The procedure the injured plaintiff must follow in dealing with his or her own UM/UIM carrier is as follows: In order to preserve the UM/UIM claim, injured plaintiffs must obtain consent from their uninsured/underinsured motorist carrier before agreeing to a settlement directly with a tortfeasor or the tortfeasor's liability carrier. The UM/UIM carrier is not entitled to unreasonably withhold its consent for the insured to accept the underlying coverage from the tortfeasor. United Services Automobile Ass'n v. Allen, 519 So. 2d 506, 508 (Ala. 1988). However, there are certain procedural steps that one must take.

The proper procedure, set out by the Supreme Court in Lambert v. State Farm Mutual Automobile Insurance Co., 576 So. 2d 160, 167 (Ala. 1991), should be followed when attempting to settle a case involving uninsured motorist coverage. The Court set forth the following procedures:

"(1) The insured, or the insured's counsel, should give notice to the underinsured motorist insurance carrier of the claim under the policy for underinsurance benefits as soon as it appears that the insured's damages may exceed the tortfeasor's limit of liability coverage.

"(2) If the tortfeasor's liability insurance carrier and the insured enter into negotiations that ultimately lead to a proposed compromise or settlement of the insured's claim against the tortfeasor and if the settlement would release the tortfeasor from all liability, then the insured, before agreeing to the settlement, should immediately notify the underinsured motorist insurance carrier of the proposed settlement and the terms of any proposed release.

"(3) At the time the insured informs the underinsured motorist insurance carrier of the tortfeasor's intent to settle, the insured should also inform the carrier as to whether the insured will seek underinsured motorist benefits in addition to the benefits payable under the settlement proposal, so that the carrier can determine whether it will refuse to consent to the settlement, will waive its right of subrogation against the tortfeasor, or will deny any obligation to pay underinsured motorist benefits. If the insured gives the underinsured motorist insurance carrier notice of the claim for underinsured motorist benefits, as may be provided for in the policy, the carrier should immediately begin investigating the claim, should conclude such investigation within a reasonable time, and should notify its insured of the action it proposes with regard to the claim for underinsured motorist benefits.

"(4) The insured should not settle with the tortfeasor without first allowing the underinsured motorist insurance carrier a reasonable time within which to investigate the insured's claim and to notify its insured of its proposed action.

"(5) If the uninsured motorist insurance carrier refuses to consent to a settlement by its insured with the tortfeasor, or if the carrier denies the claim of its insured without a good faith investigation into its merits, or if the carrier does not conduct its investigation in a reasonable time, the carrier would, by any of those actions, waive any right to subrogation against the tortfeasor or the tortfeasor's insurer.

"(6) If the underinsured motorist insurance carrier wants to protect its subrogation rights it must, within a reasonable time, and, in any event before the tortfeasor is released by the carrier's insured, advance to its insured an amount equal to the tortfeasor's settlement offer."

It is important that the plaintiff's attorney follow these procedures before reaching a settlement. You must provide the notice so as not to impair the insurer's subrogation rights, or you will be placing in jeopardy your rights to uninsured/underinsured motorist coverage, and possibly a duty to indemnify the original tortfeasor for the subrogation claim of insurer if the release you execute contains indemnification language. Most standard releases contain indemnification language whereby the defendant agrees to indemnify the tortfeasor for any subrogation claims that the plaintiff has not made the tortfeasor aware of prior to settlement. See Auto Owners Insurance Co. v. Hudson, 547 So. 2d 467 (Ala. 1989).

What if you are attempting to settle with the tortfeasor's insurance company for less than the policy limits? It is no longer necessary to exhaust the underlying carrier's policy limits in order to preserve an uninsured/underinsured insurance claim. State Farm Mutual Automobile Insurance Co. v. Scott, 707 So. 2d 238 (Ala. Civ. App. 1997). There the court held that an exclusion of the policy that is more restrictive than the underinsured motorist statute is void and unenforceable. Id. at 242. The actual uninsured/underinsured motorist statute does not require exhaustion of liability coverage. However, the underinsured motorist carrier will get credit for the full amount of liability coverage which would have been available to the potential plaintiff prior to paying a claim.

In the Scott case the driver had $300,000 in insurance coverage available. There were other passengers that had previously settled leaving only $97,500 in available insurance coverage for the plaintiff's claim. She accepted $77,500 from the driver's insurance carrier and proceeded against State Farm under two separate policies that insured her for underinsured motorist coverage. State Farm was given credit for the full amount of liability coverage available which was $97,500, as opposed to the $77,500 that the plaintiff accepted. The case proceeded to trial and the jury returned a verdict in favor of the plaintiff in the amount of $159,500 as a measure for total damages. Therefore, State Farm received credit for $97,500 and paid the balance on the verdict. Therefore, the underinsured motorist carrier will be entitled to a set-off of the full amount of insurance available for the plaintiff's claim in the event that the plaintiff settles for less than the tortfeasor's underlying policy limits. See also Guess v. Allstate Insurance Co., 717 So. 2d 389 (Ala. Civ. App. 1998). This should also be considered well in advance of settling the underlying claim.

As you can see the settlement of an UM/UIM claim is not as simple as it might seem on the surface. There are numerous issues that must be carefully thought through before entering a settlement to protect the interests of both the injured plaintiff and the individual tortfeasor. By following these procedures you can be assured that you have complied with the terms of the UM/UIM policy, and avoid a potential malpractice claim for failing to follow these procedures.