Alabama Supreme Court Clarifies Rights of Insurance Carriers in Underinsured Motorist Cases

The Alabama Supreme Court recently issued an opinion confirming underinsured motorist insurance carriers who advance the tortfeasor’s liability policy limits do not have to file a direct action against the tortfeasor to protect their right of reimbursement.


The case of Ex parte Allstate Property and Casualty Insurance Company actually involved three matters that resulted from separate automobile accidents between either an Allstate or GEICO insured with underinsured motorist (“UIM”) coverage and allegedly underinsured tortfeasors. In each case, the insurer advanced the UIM coverage limits to its insured and opted out of the underlying litigation. In each case, the underinsured tortfeasor filed a motion seeking enforcement of the original settlement offer and his or her dismissal from the action. The insurers objected, arguing that although the statute of limitations may have run on their right to maintain a direct action against the tortfeasor for recovery of amounts made to their insured, they had other means to seek reimbursement if the insured obtained amounts from the tortfeasor in excess of the liability policy. The trial court in each case ordered the parties to effectuate the settlement and dismiss the tortfeasor. The insurers petitioned for writs of mandamus, and the Alabama Supreme Court consolidated the cases since the issues presented were identical.


The Court noted that in Lambert v. State Farm Mutual Automobile Insurance Co., 576 So.2d 160 (Ala. 1991), it addressed the “twilight zone” that an insured is placed in when the UIM carrier does not consent to settle or wants to protect its subrogation rights. The Court held that if the UIM carrier wants to protect its subrogation rights, it must, before the tortfeasor is released by the carrier’s insured, advance to its insured an amount equal to the tortfeasor’s settlement offer. The Lambert court stated that these guidelines protect the UIM carrier’s subrogation rights against the tortfeasor as well as protect the carrier against the possibility of collusion between its insured and the tortfeasor’s liability insurer at the UIM carrier’s expense. The Court further noted that as it had recently explained in Pennsylvania National Mutual Casualty Insurance Co. v. Bradford, 164 So.3d 537 (Ala. 2014), the insurer does not need to file a direct action against the tortfeasor to protect its rights of reimbursement, but it may obtain reimbursement from the insured’s recovery against the tortfeasor. The Court explained that by advancing the tortfeasor’s policy limits to its insured, the insurer becomes the beneficial owner of “the case” against the tortfeasor and, as such, has the right to control the prosecution of that case. Thus, it was of no consequence that the time for filing a direct action by the insurer against the tortfeasor had expired. The insurers were therefore entitled to the relief sought.


In many situations, a UIM carrier does not have sufficient information about the nature or extent of the insured’s claimed injuries to properly evaluate their potential exposure until after the two-year statute of limitations for tort claims has already passed.  More importantly, the UIM carrier typically has not sustained a loss by actually making any payments within that time period, so applying the statute of limitations for direct actions created somewhat inequitable results.  This decision is a win for UIM carriers because it provides them a more fair opportunity to fully assess their exposure, particularly when the insurer wishes to protect its right to seek recovery for UIM payments made in excess of the tortfeasor’s liability limits.