Any regular reader of our newsletter, or attendee of our seminars, has heard the repeated importance about having enough underinsured motorist coverage (UIM) to protect yourself if you’re injured in an auto collision. UIM coverage provides a pot of money to compensate you for injuries sustained in a crash if the at-fault driver does not have enough insurance to fully compensate you for your injuries. In other words, once the at‑fault liability insurer pays its policy limit, your own insurance company steps into their shoes with its underinsured motorist coverage to pay you for any remaining uncompensated damages.
Unlike liability coverage or uninsured motorist coverage, a Wisconsin driver is not required by law to have underinsured motorist coverage. However, if accepted (and you should), the lowest limit that can be provided is $50,000 per person / $100,000 per accident. Considering the extremely low cost of UIM coverage, we strongly encourage that drivers get as high of limits as possible. For example, my personal auto policy has $500,000 per person UIM coverage and it costs $26 per year. Having sufficient UIM coverage is especially important in light of the fact that whatever your UIM policy limit, whether it is $50,000 or $500,000, is a dollar amount that you will never be able to recover the amount from your insurance company.
Current Wisconsin law allows insurers to define underinsured motorist by a “limits to limits” comparison. The result is you will only be eligible for UIM coverage if your UIM policy limit is greater than the at-fault liability policy limit. Similarly, current Wisconsin law allows insurers to reduce what it has to pay under its UIM coverage by whatever is recovered from the at-fault driver and his or her insurance company, often called a “reducing clause.” This combination means no Wisconsin driver can actually recover the dollar amount of the UIM he or she purchased.
Hopefully, an example will help. Joe is severely injured in a car wreck. The at-fault driver has a $100,000 liability policy limit that the insurance company pays out to Joe. This payment from the liability insurer does not fully compensate Joe for his injuries, and he turns to his own insurance company, with whom he has a $100,000 UIM policy. Unfortunately, because both the liability insurance and UIM insurance have the same limit, $100,000, it means that there isn’t actually any underinsured motorist coverage available to Joe. Because of the limits to limits comparison, only when the UIM policy limit is higher than the liability policy limit would Joe’s UIM coverage kick in.
To illustrate the reducing clause, lets change the above example to say that Joe has $250,000 in UIM coverage. The at-fault insurance company still pays its $100,000 to Joe. Now, because the $250,000 UIM limit is higher than the $100,000 liability limit, Joe is entitled to UIM coverage under his policy. However, he is not entitled to $250,000 in UIM; instead he is only entitled to $150,000 because of the reducing clause ($250,000 - $100,000 = $150,000).
Regardless of what your policy says the UIM limit is, by virtue of the limits to limits comparison definition of underinsured motorist and reducing clauses, no Wisconsin driver actually knows how much UIM he or she will have available until after the accident and after he or she knows how much liability insurance the at-fault driver has. As such, when you hear me or my colleagues harping about having plenty of UIM coverage, it is because if you have low limits of UIM, there is a good chance you will never get to use it, and if you do end up using it, it will always be less than the dollar amount you purchased.