Under-insured Motorist Insurance, or UMI, is important to have.  And it also is inexpensive, since the odds are low you’ll ever use it.  Basic economics there.  Are you aware that if you are in an accident, your health insurance might step in and demand half of any settlement?  That it is such cruel work that they hire an external firm to do the dirty work.  This firm then pays a percentage in exchange for a cut of their “spoils”.  I’m not a lawyer, don’t speak for my employer or its customers.  That being said, I need people to know about this.

You need to review your health coverage.  And then if they happen to have one like Blue Shield then to either switch insurers or dramatically increase their UMI coverage.  And if you don’t have health insurance or can’t afford UMI, I feel for you – and that is a topic for another post some day.

What Can Happen

Imagine this hypothetical scenario.  You are out on vacation with a group of friends at an event.  Another driver gets confused as to where they are.  They don’t understand right of way and hit the vehicle you are riding in head on.  Between the two vehicles there were 6 passengers.  Injuries occur like broken backs, necks and traumatic brain injuries.  One passenger makes it to the ambulance but succumbs to their injuries before making it to the hospital.  A traumatic and awful experience for those involved as well as their families.   Not to mention the people first on the scene trying to help before the medics arrive.

You are fortunate to survive, and the driver of the vehicle you were in was responsible enough to carry $500,000 in coverage.  The other vehicle only had $35,000.  So low that it is increased to the minimum for the state you were in of $40,000.  To cover 5 people and the widow/kids of the 6th it isn’t enough.  You were fortunate enough to have a good insurance agent.  You had (wrongly) decided $250,000 of UMI would be adequate.  It is hard to imagine a scenario where you’d need more coverage.  Unfortunately you just landed in that situation.

How UMI Typically Works

Before I describe the cruel economics Blue Shield has put in the fine print, it is important to understand how UMI works.  Besides not being an attorney, I’m also not trained in the insurance industry and its laws.  From my understanding, your UMI policy does not get added onto settlements you receive.  Rather it is there to cover any shortfalls.  So if between the the two policies you and your wife are offered $75,000 for your loss of wages, pain and suffering and loss of consortium, you would have $175,000 left in your UMI to collect.  $250,000 policy less the $75,000 already paid out.

This is provided that ALL of the other polices award out all of their policy limits.  If the other company awards $39,999 of the $40,000 policy then in the eyes of your insurance the driver of the other vehicle was not under-insured and your policy does not come into effect.

Even though you end up without pay for 18 months because of this accident, have daily pain and injuries that will never fully recover, the UMI at least helps to cover some of the losses.  I’m not a CPA, so verify this with your tax advisers – but insurance settlements for pain and suffering are exempt from income tax.  From my research this does not apply to settlements that are for lost wages.  Another area to ask your CPA about.

Your Insurance Isn’t Insuring Just You

But you aren’t out of the woods yet.  Didn’t you remember?  That UMI policy you have been paying on for decades isn’t just for you.  In certain cases you are also covering your health insurance company.  For the sake of simple math, imagine you racked up $150,000 in medical bills.  It happens fast when you are air lifted to the hospital and spend weeks in ICU.

Some health insurance firms have it in the fine print that they are entitled to a share of any settlement you receive to cover their costs.  Even with California’s “Made Whole Doctrine” (more later) they still have a legal right to half of your settlements to cover their costs.  So that $250,000?  It could be reduced to $125,000.

The fine print also says that if you hire an attorney, the attorney’s fees do not count against the math for what you owe Blue Shield.

So no, your UMI insurance isn’t just for you.  You might be insuring Blue Shield also.  Shouldn’t they be insuring you?

About the author:  Eric Burns is not a lawyer.  Eric Burns is not an insurance agent.  Eric Burns is not a CPA.  He does not speak for his employer, and does not speak for its customers.