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Underlying Policy Need Not Be Exhausted For Insured To Claim UIM Benefits

Almost universally, Underinsured Motorist policies require that the insured exhaust the underlying liability policy before he or she can make claim for the Underinsured Motorist benefits.  In the cases of Mann v. Farmers Ins. Exchange, 108 Nev. 648, 836 P.2d 620 (1992) and Shaw v. Continental Ins. Co., 108 Nev. 928, 840 P.2d 592 (1992) the Nevada Supreme Court considered the question of whether such provisions were enforceable.

Nevada UM/UIM, Nevada Coverage Law, Nevada Bad Faith Law, Mills & Associates Nevada Insurance and Coverage Lawyers, Las Vegas Insurance and Coverage Lawyers 702-240-6060 In the Mann case, the Plaintiff was injured in an accident between her and a police cruiser.  Plaintiff Mann settled with the police for $35,000, $15,000 shy of the $50,000 statutory cap available to her.

In the Shaw case, the Plaintiff settled for $750,000, a full $250,000 short of the $1,000,000 underlying liability limit.

Both policies had a similar exhaustion clause.  The Farmer’s exclusion read:  “[w]e will pay under this coverage only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted by payments of judgments or settlements.”

Because plaintiffs did not exhaust the underlying coverage, the carriers denied that they had any obligation under the UIM coverage.  The Nevada Supreme Court disagreed and held that a “exhaustion clauses” violated public policy where they required the insured to exhaust the opposing driver’s liability limits prior to permitting the insured to pursue underinsured motorist benefits under her policy.

The basis for the Court decision, NRS 687B.145(2) which obligates carriers to offer UM / UIM coverage and the insured must affirmatively decline the same.  The court read this to say that the legislature intended that Nevada citizens have access to uninsured and underinsured motorists benefits. The Court further stated that an insured should not be required to forego settlement prospects and be forced to trial pursuant to the underlying policy simply to qualify for coverage under his of her own insurance policy.

In the Shaw case, the court explained as follows:

The [insured] Shaws, out of financial necessity, settled for an amount less than [the tortfeasor] Stafford’s policy limit. NRS 687B.145(2), strictly construed in favor of the insured, requires Continental to pay benefits for any damages exceeding $1,000,000.00. In Mann, we recognized the inequitable burden placed upon insureds who are forced to “forego all settlement offers and go to trial in order to obtain (or attempt to obtain) compensation up to the tortfeasor’s policy limit—just to qualify for [UIM] benefits under his or her own policy.” Mann, 108 Nev. at 650, 836 P.2d at 621 (1992). The Third Circuit Court of Appeals has noted the following: “we do not perceive how, in most cases, underinsured endorsement carriers actually will be prejudiced if they receive credit for the full limits of the tortfeasor’s policy.” Aetna Cas. & Sur. Co. v. Farrell, 855 F.2d 146, 150 (3rd Cir. 1988). We agree.

In other words, the Underinsured Motorist carrier cannot deny the claim based upon the insured’s failure to exhaust the liability policy.  However, the carrier can claim as a credit against any UIM award, the full value of the underlying liability policy limits.  In the Shaw case, the UIM carrier was able to claim a credit of the full $1,000,000 liability limit even though the Plaintiff had only collected $750,000 in a settlement with that liability carrier.

Since the Mann decision, the Nevada Supreme Court has re-examined the issue of whether a government-owned vehicle was considered “underinsured” for purposes of coverage.  See White v. Continental Ins. Co., 119 Nev. 114, 65 P.3d 1090 (2003).  However, the Court has never backed down from its position that an exhaustion clause was against public policy.

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