Glossary
Underinsured motorist coverage, defined
The part of an auto policy that pays the policyholder's own injury claim when the at-fault driver has liability insurance but not enough of it. It fills the gap between the other driver's limit and the policyholder's actual loss, up to the amount purchased.
In practice
How the gap is measured varies by state and it changes the answer a lot. Under a difference-of-limits rule the coverage pays only the amount by which the policyholder's limit exceeds the at-fault driver's; under an add-on rule it pays on top of whatever the other driver paid. Arizona uses the add-on approach, and the Department of Insurance and Financial Institutions can confirm how it applies to a given claim. It is bought with uninsured motorist coverage and usually at the same limits as the policyholder's own liability. Carriers must offer it in most states and a rejection has to be in writing. A claim under it is a claim against the policyholder's own carrier, so the carrier can contest the value of the injury; keep the same records as for a liability claim.
A worked example
Suppose a driver is hit by someone carrying $25,000 of bodily injury liability, and the injuries are worth $90,000. The at-fault carrier pays its $25,000. With $100,000 of this coverage under an add-on rule, the driver's own carrier pays the $65,000 balance. Under a difference-of-limits rule it would pay $75,000 at most, which still covers the balance here, but with $50,000 of coverage it would pay only $25,000. Hypothetical figures.
Applies to: Auto Insurance