In a very important decision yesterday (May 21, 2015) by the Colorado Court of Appeals, the court decided that exhaustion clauses in uninsured/underinsured motorist policies are void and unenforceable under Colorado law. Most all auto policies in Colorado that provide underinsured motorist coverage include a clause stating that an insured cannot make a claim for underinsured motorist benefits if he or she accepts less than the at fault driver’s policy limits. That is what Farmers did to its policyholder, Steffan Tubbs. However, relying on Colorado’s uninsured/underinsured (UM/UIM) motorist coverage statute (C.R.S. 10-4-609), the Colorado Court of Appeals said no, such clauses cannot be enforced because they are contrary to that statute.
If an insurance company denies coverage for underinsured motorist (UIM) benefits relying on an exhaustion clause, that company is acting in bad faith and the policyholder may be entitled to sue the insurance company for bad faith damages as well as double damages and attorneys fees and costs under C.R.S. 10-3-1115 and 10-3-1116.
Tubbs v. Farmers Insurance Exchange, 2015COA70, decided by the Colorado Court of Appeals May 21, 2015.