Understanding How Uninsured and Underinsured Motorist Insurance Coverage Works

From Insurance for Dummies by Jack Hungelmann

When you’re injured in a car accident caused by the other driver, you can legally sue the other driver in most states to collect the fair value of your injury. If that driver has auto liability coverage, his policy pays you on his behalf, up to the liability policy limit he purchased. The economic value of your injury equals your out-of-pocket expenses plus compensation for your pain and suffering. But what if the other driver has no insurance at all? Or what if the insurance limit he has is less than the value of your injury? You can get a legal judgment against him and try to collect from him personally. But that can be an expensive, long, drawn-out process. Plus if he’s not worth very much and has a limited income, you may not collect very much at all.
Fortunately, your own car insurance policy can solve the problem, if you buy Uninsured Motorists and Underinsured Motorists coverage:

• Uninsured Motorists: When the other driver is unidentified ( hit and run) or has no liability insurance at all
• Underinsured Motorists: When the other driver has less auto liability coverage than you and the economic value of your injury exceeds the other driver’s liability limit

I see these two coverages as a form of reverse liability in that you collect some or all of the economic value of your injuries caused by another driver from your own insurance company, almost as if they were the other driver’s insurer. In short, Uninsured and Underinsured coverage make up the gap between the other driver’s liability coverage and the amount of liability coverage he would have needed to pay your claim in full.

How do the two coverages work? Say you’re injured in a car accident by another driver who runs a stop sign. The economic value of your injury is $450,000. Further, assume that you bought $500,000 of both Uninsured and Underinsured Motorists coverage under your own auto policy. For an under-insured motorist, first, you collect for your injury from the other driver’s insurance in the amount of the other driver’s liability limit, say $100,000. Then, you collect the balance of $350,000 from your own insurance company under your Underinsured Motorists coverage. Had the other driver been without any insurance, you would have collected all $450,000 under your Uninsured Motorists coverage.