This article will examine recovery of policy limits in excess of the policy limits against bad faith insurance companies.
The (Oregon) Basics
An Oregon auto policy[1] comes with three types of coverage, (1) Liability, (2) UM/UIM, and (3) PIP.
1. Liability Coverage
This is auto insurance that pays for the other guy, if the wreck is your fault.
2. UM/UIM – “Uninsured” or “Underinsured” Motorist Coverage
This is auto insurance where your company pays for your own injuries because the person that caused the wreck either has no insurance, or does not have enough insurance.
3. PIP – “Personal Injury Protection”
PIP is no-fault insurance that pays for medical bills and, in some instances, lost wages. This insurance is not concerned with who caused the wreck, but only that the medical treatment (or lost wages) are the result of the wreck.
In Oregon the minimum policy limits are $25,000 per person, $50,000 per occurrence. This means that if there are more than two injured in the wreck, there is potentially $50,000 to split, but the most any one person can take is $25,000. If there is only one person injured, the limit they can potentially take is $25,000. This is commonly referred to as a 25/50 policy.
A 25/50 is the minimum one can have, but many people have much more. Other common coverages are $50/100, $100/300, $500/1 million or any number of other amounts.
Due to a change in Oregon law for insurance policies issued or renewed after January 1, 2016, the potential insurance coverage significantly increased. Now an injured party can potentially collect the liability coverage from the at-fault driver, and the full amount of the UIM coverage from their own policy. This is often referred to as “stacking.” In essence, the amount of UIM coverage is added to, or “stacked” on to the amount of liability coverage held by the at fault driver. This is a significant shift in the law, as the amount of UIM coverage used to be deducted from the amount an injured person could collect from the at-fault driver’s liability policy.
Collecting Above Policy Limits
Although insurers typically do not pay more than the policy limits, there is a way in which an injured person may collect above and beyond the policy limits if Insurance Company X participates in conduct that is considered “bad faith.” An example of bad faith is as follows:
Assume there is an auto wreck, Bad Driver is insured by Insurance Company X . Bad Driver crashes into Injured Person.
In this instance, Insurance Company X has a duty to Bad Driver because Bad Driver bought a policy from them. They have a contract with each other. Insurance Company X does not have a direct duty to Injured Person.
One of the duties that Insurance Company X has to Bad Driver is to settle a claim made by Injured Person against Bad Driver, so long as that claim is (1) reasonable, and (2) within the policy limits. Think of it this way, Bad Driver bought an insurance policy so they can sleep at night. If Bad Driver makes a mistake and causes a wreck, they don’t want someone coming after them and taking all of their assets and kicking them out of their house. Thus, Insurance Company X has to pay on Bad Driver’s behalf up to the limit of coverage that Bad Driver bought.
If Injured Party makes a reasonable claim against Bad Driver, for an amount up to the policy limits, then Insurance Company X has a duty to pay that claim and put it to rest so that Bad Driver can sleep easy knowing their personal assets are protected. What Insurance Company X cannot do is gamble with Bad Driver’s assets.
For example, say Insurance Company X refuses to settle a reasonable claim, within policy limits. Injured Party then goes to trial and gets a very large verdict against Bad Driver. Insurance Company X cannot then pay its policy limits to Injured Person and say “go get the rest of the money from Bad Driver’s personal assets.” This is bad faith. Anytime the insurance company puts its own interests above the interests of its customer in the handling of a claim, it’s bad faith. If Insurance Company X does this, then Bad Driver can turn around and sue Insurance Company X for potentially very large dollars and punitive damages for Insurance Company X breaching its duty.
In reality, what happens in that instance is that Injured Person would obtain the verdict above Bad Driver’s liability policy limits. This is commonly referred to as an “excess verdict.” Injured Person would then make an agreement with Bad Driver. Injured Person agrees not to try and collect the excess verdict, and Bad Driver “assigns” Injured Person his claim to sue Insurance Company X. Thus, Injured Person could then directly sue Insurance Company X.
Many times, however, rather than face this kind of suit, Insurance Company X will pay the excess verdict, which extinguishes the claim. Once Insurance Company X pays the entire amount of the excess verdict, Bad Driver can no longer be potentially harmed by the verdict and there is no basis for a lawsuit.
So, in essence, when Insurance Company X chooses not to make a settlement for a claim that is (1) reasonable, and (2) within policy limits, what they are doing is removing the ceiling on the amount of policy limits. At that point, in practical terms, there are no longer any policy limits. The claim is worth whatever a jury awards.
In conclusion, one may potentially collect above the policy limits if Insurance Company X does not agree to settle for a reasonable offer, within policy limits, and a jury later awards an excess verdict.
[1] This is not necessarily the same for commercial policies, motorcycle insurance, or self-insureds.
