Underinsured motorist (UIM) coverage is first-party coverage designed to compensate an insured for injuries caused by a motorist with inadequate liability insurance. UIM claims sound in contract, not tort, but are nevertheless intertwined with tort claims arising from motor vehicle accidents. This complicating interplay has led to three judicial approaches for determining when a UIM claim accrues: a majority of jurisdictions hold that UIM claims accrue when the insurer denies a claim for benefits; a minority holds that UIM claims accrue on the date of the accident; and a number of other jurisdictions have adopted a middle ground, holding that UIM claims accrue when the insured settles with or receives a judgment that exhausts the tortfeasor’s liability insurance limits.
An issue of first impression for the Kentucky courts, the Court of Appeals recently adopted the majority approach, finding that it is most consistent with Kentucky’s treatment of UIM claims as contract claims. Hensley v. State Farm Mutual Automobile Insurance Company, No. 2013-CA-000006-MR (August 15, 2014) (to be published).
On August 7, 2009, the plaintiff, Amberee Hensley, was involved in a motor vehicle accident with Awet Beyene. In February 2010, Beyene’s liability insurer accepted liability and tendered its policy limits to Hensley, who then began negotiating with her UIM carrier, State Farm, for UIM benefits. Hensley made a formal demand for benefits on November 4, 2011, which was denied, and she filed suit against State Farm on January 24, 2012.
State Farm moved to dismiss Hensley’s UIM claim, arguing that it was barred by the policy at issue, which stated that all lawsuits against the insurer must be brought within two years from the date of the accident. Because the accident occurred on August 7, 2009, State Farm argued, the claim should have been brought no later than August 7, 2011. The trial court granted State Farm’s motion to dismiss, and Hensley appealed.
The Court of Appeals reversed, first acknowledging that UIM claims sound in contract, not tort, and that the statute of limitations for contract claims is either 15 years (for contracts entered into before July 14, 2014) or ten years (for contracts entered into after July 15, 2014).
Next addressing when a UIM claim actually accrues, the Court looked at how other jurisdictions had resolved the issue and found three different approaches. The Court adopted the majority approach – that a UIM claim accrues when the insurer denies the claim for benefits – because it was most consistent with Kentucky’s treatment of UIM claims as contract claims “separate and apart from tort claims.” And contract claims do not accrue, the Court explained, until there has been a breach. Accordingly, Hensley’s UIM claim accrued on November 4, 2011, when State Farm denied her claim for benefits.
Finally, the Court of Appeals looked to KRS § 304.14-370, a section within Kentucky’s Motor Vehicle Reparations Act that stated that no insurance contract could limit the limitations period of an insured’s claim against a “foreign insurer” to less than one year “from the time when the cause of action accrues.” In other words, insurers formed under the laws of any state other than Kentucky cannot limit the period of time in which to file a direct action against the insurer to less than one year. Because Hensley filed her UIM claim against State Farm in January 2012, well within one year after State Farm denied her request for benefits in November 2011, the Court of Appeals held that the claim was timely.
For all the confusion that surrounds contract and tort claims in the automobile accident context and the interplay between Kentucky common law and the Motor Vehicle Reparations Act, Hensley provides an unmistakably clear holding for all insurers and insureds: in Kentucky, UIM claims do not accrue until the insurer denies the claim for benefits, and absent any policy limitation to the contrary, insureds will have at least 10, if not 15, years in which to file suit. But even if the policy limits the time within which to file a direct action, that time generally cannot be less than one year from the date the claim accrued – that is, from the date the UIM claim was denied.
If you have any questions regarding the Hensley decision, or any other general casualty or insurance-related issues, please call one of our General Casualty/Excess & Surplus Risks Practice Group attorneys.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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