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Despite the Availability of Other Insurance Funds, Only a Tortfeasor's Auto Liability Policy Must Be Exhausted Before an Insurer Must Pay Underinsured Motorist Benefits

In Wedemeyer v. Safeco Insurance Company of America, 2008 WL 660651, decided March 13, 2008, the Second Appellate District of the State of California held that only a third party tortfeasor’s automobile liability policy, not the tortfeasor’s business policy, must be exhausted before an insurer must pay under its underinsured motorist policy.

In Wedemeyer, Safeco issued a personal auto policy to Wedemeyer that included underinsured motorist coverage of $500,000 per accident. Bradley Groscost’s vehicle rear-ended Wedemeyer’s vehicle. Coast National Insurance Company insured Groscost and his vehicle and tendered to Wedemeyer its $15,000 policy limit.

Skyline Management employed Groscost and was insured by Hartford Insurance Company under a business policy, which included hired auto and non-owned auto liability coverage in the amount of $1 million.

Wedemeyer demanded that Safeco pay him $485,000, the difference between his underinsured motorist policy limits less the Coast policy limit. Safeco refused, insisting that Wedemeyer first exhaust the $1 million policy limits of Skyline’s Hartford policy. Wedemeyer ultimately settled, receiving $15,000 from Coast and $500,000 from Hartford. 

Wedemeyer sued Safeco. On appeal, Wedemeyer argued that the exhaustion rule applied only to auto liability policies, not other types of insurance policies. Thus, according to Wedemeyer, he was required to exhaust only the $15,000 Coast policy, and after doing so, Safeco was required to pay the additional $485,000 under his underinsured motorist coverage. 

The Court of Appeal agreed. Subdivision (p)(3) of California Insurance Code Section 11580.2 provides that underinsured motorist coverage “does not apply to any bodily injury until the limits of bodily injury liability policies applicable to all insured motor vehicles causing the injury have been exhausted by payment of judgments or settlements.” Although noting the term “bodily injury liability policies” is not defined in Section 11580.2, the Court interpreted the term in context and stated that it referred to the bodily injury provisions of a motor vehicle or auto liability policy. Viewing Section 11580.2 as a whole, the Court concluded that the California legislature intended Subdivision (p)(3) to require exhaustion of motor vehicle or automobile bodily injury liability policies only for uninsured motorist coverage to apply.

Therefore, even though the business policy issued to the tortfeasor’s employer provided applicable auto liability coverage, the insured did not have to exhaust that business policy before he was entitled to underinsured (or uninsured) motorist benefits under his own policy.
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