June 25, 2020
By: Richard Lee Stavins

Automobile insurance policies contain lots of coverages. The most important coverage that most insureds know nothing about is the underinsured motorist provision. As a result of not knowing about this coverage, many people are inadequately insured, even though they may believe they have “full coverage.”

Here’s how underinsured motorist insurance coverage works. Let’s say that while driving your car you carefully stop for a red light, the driver behind you is texting away, and he crashes into the rear end of your car. As a result, you sustain a serious injury, are hospitalized, and never fully recover. Your medical bills are north of $75,000. You sue the person who hit you, win the case, and are awarded $250,000 compensation.

But, like thousands of motorists, the person who hit you has the minimum amount of liability insurance coverage allowed by law in Illinois — $25,000. This means that no matter how much damage he does to you, his insurance carrier is liable only up to $25,000 and not one cent more. Yes, this person is personally liable for the excess above $25,000 (another $225,000 in our example), but that excess is fully dischargeable in bankruptcy, and, even if he doesn’t file bankruptcy, anybody who buys the minimum amount of liability coverage probably does not have $225,000 lying around for you to take. The chances of your ever recovering the excess are close to zero.

This is where the underinsured motorist provision of your own insurance comes into play — if you were smart enough to read this article and buy an adequate amount of underinsured motorist insurance coverage before you had the accident. When the person who injures you does not have a sufficient amount of liability insurance to compensate you, in effect, your own underinsured motorist insurance coverage becomes the liability insurance coverage of that person, to compensate you. The formula is: your underinsured motorist insurance coverage minus the person’s liability coverage equals the amount available to fill the gap between his coverage and the fair compensation.

You will need to bring a separate proceeding against your own insurer, but the important thing is that the deep pocket of your insurance is there for you.

Assume in our example that your own insurance policy provides $500,000 of underinsured motorist insurance coverage. Again, the fair compensation to you is $250,000, and the person who hit you only had $25,000 of liability insurance, leaving a $225,000 gap ($250,000 – 25,000 = $225,000). The purpose of underinsured motorist insurance is to fill that $225,000 gap. Accordingly, so long as your own auto insurance policy provides more than the gap — $225,000 in underinsured motorist coverage in our example — it will fill the gap. You have a source — your own insurer — from which to recover the $225,000 gap.

BUT–and it’s a big but — if you have inadequate underinsured motorist insurance coverage, the gap will not be filled. Suppose your underinsured motorist insurance coverage is $100,000. That’s $75,000 more than the underinsured driver’s liability insurance; the gap is $75,000. Your effective underinsured motorist coverage in our example is then $75,000. Fair compensation was $250,000; the person’s liability insurance coverage provided you with $25,000; your own underinsured motorist coverage provided you with $75,000; the total you received was $100,000; and that leaves a $150,000 shortfall ($250,000 – 100,000 = $150,000). You have no viable remedy for ever collecting the $150,000 — other than chasing the underinsured person forever, until he files bankruptcy, which he will.

The problem was that you only had $100,000 of underinsured motorist coverage. That problem would have been solved by buying lots of underinsured motorist coverage — $250,000 (or more) in our example. Of course, after the accident it’s too late.

What’s an adequate amount of underinsured motorist insurance coverage? Absolute minimum: $500,000. More if you can afford it. The premium for this coverage is relatively low, compared to other coverages like liability coverage. There is a catch, however. (There’s always a catch, isn’t there?) By law, insurance companies do not have to sell you underinsured motorist insurance coverage in an amount greater than the amount of your liability insurance coverage, and they usually won’t. So, to be able to buy that $500,000 of underinsured motorist coverage, you will need to buy $500,000 of liability coverage, and that can be expensive. But depending on whom you are involved in an accident with, it’s definitely worth it.