LIMITATIONS OF UNINSURED MOTORIST/UNDERINSURED MOTORIST (UM/UIM) COVERAGE

Please be aware of the limitations of your Uninsured Motorist/Underinsured Motorist (UM/UIM) coverage. If you suffer a loss with an Uninsured or Underinsured Motorist, the total payment you receive will be limited to the greater of either your UM/UIM limit or the other party's liability coverage limit, subject to other policy provisions. If you have any questions about your coverage, please contact us at [insert contact info].

Required Exclusion

This Automobile Insurance Policy excludes UIM coverage in the event of a loss from a motor vehicle accident in which the total reimbursement you receive from other parties' insurance policies is equal to or in excess of the UM/UIM coverage provided by this Policy. This exclusion is in accordance with New Mexico law, as set forth in Crutcher v. Liberty Mut. Ins. Co., decided on October 4, 2021.

A link to the bulletin can be found here.

A summary of the case is as follows: 

Crutcher v. Liberty Mut. Ins. Co., 2021 N.M. LEXIS 45 (N.M. 2021)

Who? Policyholder (Crutcher) sued multiple insurance companies after his claim was denied following a wreck with someone who carried a minimum limits auto policy. 

Why? Crutcher had a policy with First National Insurance Company of America that included the statutory minimum of both liability insurance and UM/UIM coverage (25/50). Two years later, the policy was later transferred to Safeco. 

After the policy transfer, Crutcher was hit by a driver who didn't stop at a traffic signal; that driver also carried a 25/50 minimum limits policy, through USAA. Crutcher's injuries amounted to more than $50k. USAA paid $25k (policy limit). Crutcher filed with Safeco, assuming he would receive remaining balance for injuries. Safeco denied the claim. Crutcher believed it was the operation of the offset rule from Schmick v. State Farm, 704 P.2d 1092 (N.M. 1985), where UIM coverage is viewed as an additional coverage; in Schmick, the New Mexico Supreme Court said "where the most an insured can receive is the amount of underinsurance purchased for [the insured's] benefit, that amount must be offset by available liability proceeds." However, Safeco said it had denied the claim because the other driver "did not meet the definition of an uninsured motorist pursuant to the statute because the total limits of liability insurance were equal to Mr. Crutcher's UM/UIM coverage limits." 

Crutcher filed a class action lawsuit on behalf of people who found themselves in similar situations related to UM/UIM coverage. After the defendant insurers removed the case to the U.S. District Court for the District of New Mexico, the District Court certified this question to the New Mexico Supreme Court: Is UIM coverage at the minimum level illusory? If so, can insurers charge a premium for it? 

What the Court Said: The UM/UIM statutes in New Mexico require drivers to carry 25/50 liability limits and UIM coverage. Policyholders can buy higher-than-minimum limits for UIM coverage, but only if they buy higher-than-minimum liability coverage. 

There are two theories within the purview of UIM coverage: gap theory (which the New Mexico legislature had adopted) and floating layer theory. The floating layer theory states that a policy of underinsurance will fully compensate the insured, even if the grand total paid ends up being more than the underinsurance.

Gap theory, on the other hand, holds that in the event another driver's minimum coverage is less than the amount of coverage purchased by the insured, then the insured's own underinsurance will pay the amount needed to ensure the policyholder receives up to the amount of underinsurance actually purchased. 

In 1985, the New Mexico Supreme Court had decided Schmick v. State Farm, 704 P.2d 1092 (N.M. 1985), where they adopted the "offset rule" of underinsurance. This rule viewed UIM as a supplement, "where the most an insured can receive is the amount of underinsurance purchased for [the insured's] benefit, that amount must be offset by available liability proceeds." The Schmick Court even set out a formula for determining the benefits to be paid by underinsurance: Benefits = Tortfeasor's liability coverage – Insured's UM coverage.

The problem with this formula, as in Crutcher's case, is this: if both parties have minimum limits policies, it will be nearly impossible for an injured driver to be paid by her own insurer. 

There was some discussion over the use of "illusory" in the context of Crutcher's allegations. Illusory is typically found in contract law, used to describe an empty promise that leaves the satisfaction of a contract to the person who made the offer in the first place. In this case, and other previous cases, the plaintiffs had used illusory "as a synonym for the word 'deceptive.'" In this context, the Court reasoned that Crutcher was alleging that the disclosures and representations made by the Insurer concerning the policy at the time of purchase had been deceptive; Crutcher did not challenge this reasoning.  

Defendant's Arguments: Safeco offered two defenses: (1) policyholders still received coverage for accidents with uninsured drivers, which was in line with state case law and legislation, and (2) Crutcher's coverage was not illusory because he had received benefits "under a combined UM/UIM coverage." 

The Court disagreed with Safeco's contention that alignment with case law and statutes offered any measure of protection from claims of misrepresentation. It was a matter of well-established case law that consumers, having little to no knowledge of the mechanics concerning UM/UIM coverage, could not be expected to know the limits of such coverage absent information from the insurer. The Crutcher Court refused point-blank to saddle consumers with this additional responsibility.

In addressing Safeco's second argument, the Court agreed that consumers would receive uninsured motorist coverage. However, this part was only half the equation. Even if an insurer gave a full disclosure of uninsured motorist coverage, the underinsured motorist coverage would remain unknown. The case had already shown the possibility that a driver with a minimum limits policy who has an accident may never be considered an underinsured motorist by statute. But, as the New Mexico legislature had formally adopted the gap theory of UM/UIM coverage, the Court was bound by it. Even though the policy was not technically illusory because it provided coverage for accidents with uninsured motorists, the Court agreed with Crutcher that it was still misleading to consumers unless the snafu with UIM coverage had been adequately explained. 

What the Court Ultimately Decided: The policyholder has the responsibility to determine how much coverage she wants, but this responsibility is conditioned on the policyholder knowing what kind of coverage she is buying. While UIM coverage at the minimum level is not illusory, it can be misleading to consumers, who have limited knowledge of insurance law. Since the coverage is not illusory, an insurer may charge a premium, but the burden is on the insurer to ensure that a consumer has been adequately and properly informed of this unique feature to UIM coverage before purchasing the policy.