The 2010 Amendment to the Virginia UM/UIM Statute

May 18th, 2010
By: Bancroft McGavin Horvath & Judkins

The Virginia General Assembly added a new section to the Virginia UM/UIM statute, Va. Code Section 38.2-2206 during its most recent session which was designed to create a mechanism to allow liability carriers to shift the costs of the defense to the UIM carrier if certain criteria is met. First, the liability insurer must make an “irrevocable” offer in writing to pay its bodily injury or property damage limits; second, written notice must be given to the UIM carrier; third, to be effective, the UIM carrier who gets the notice must have been served in accordance with the statute; fourth, 60 days after the written notice is provided to the UIM carrier, the liability insurer is relieved of defense costs incurred thereafter, which includes expenses and “reasonable and necessary” attorney’s fees; fifth, the UIM carrier must reimburse the liability insurer for costs to defend to the date the UIM carrier offers its limits, or presumably settles. The amended statute requires that the liability carrier retains the duty to defend. It also states that in the event of either a jury verdict returned in an amount equal to or less than the total liability coverage available for payment or a dispositive ruling dismissing plaintiff’s complaint the new subsection of the statute does not apply. So, how will this new statute impact the insurance industry?

It remains to be seen. The statute passed through the General Assembly very quickly and already is open to varied interpretation.  This is evidenced by our recent attendance at the Virginia Association of Defense Attorneys Spring Series Seminar in May where even insurance industry representatives and defense attorneys could not agree on the meaning and interpretation of the newly added section.  What does “irrevocable” offer mean? When are the liability insurer’s defense costs paid?  How does this impact subrogation rights?

The newly amended section is completely silent on the issue of subrogation. The liability carrier still has the primary duty to defend and it may be very troublesome to the liability carrier and its defense attorney to make an “irrevocable” offer of liability limits when there is no agreement from the UIM carrier to waive subrogation. To make such offer without it being contingent on a waiver of subrogation exposes the insured/defendant to potential excess exposure.   Certainly, “irrevocable” offer can’t mean offering the policy limits without conditioning such offer on a complete waiver of subrogation.   But if that is what it means,  what incentive does the UIM carrier have to waive subrogation? To do so, encourages the liability insurer’s invocation of this statute,  and the  headache of how to deal with the possibility of an uncooperative defendant. The UIM carrier is not in privity with the defendant and doesn’t have breach of contract defenses to raise if cooperation issues occur.    This statute raises more questions than it answers.  While it is expected that certain conflicts in interpretation will arise, since the statute requires that the UIM carrier reimburse the liability carrier for defense costs, the most logical way to proceed is business as usual. Thus, the liability insurer should continue to pay its counsel and then pursue reimbursement of those fees and expenses if the case settles or the exception isn’t triggered. The liability insurer and UIM insurer can then determine what reimbursement is appropriate based on the language of the statute.   The recoverable attorneys fees are only thoses “reasonable and necessary.”  Open lines of communication regarding case assessment and policy limits should also occur early on between insurers, especially since most insurers will experience being on either side of this coin.

If the liability insurer wants to exercise its rights under this new section of the statute, the liability insurer should send a letter in accordance with the statute to the UIM carrier and state that it is offering its policy limits conditioned upon a full release and waiver of subrogation as to its insured.  This starts the 60 day clock and the UIM carrier will need to make some quick decisions about whether to (1) resolve the case;  (2) continue litigation with waiver of subrogation and coordinate defense with liability carrier to mitigate defense costs; or (3) continue litigation with no waiver of subrogation and if defense costs cannot be coordinated face potential exposure for payment of liability insurer’s defense costs. Please contact Steve Bancroft or Melissa Katz for further discussion.  This statute goes into effect on July 1, 2010.

Disclaimer

This blog and the information provided has been prepared by Bancroft, McGavin, Horvath & Judkins, P.C. (“BMHJ”) for information purposes only and is not intended nor to be construed as legal advice. This blog may contain the opinions of the members and associates of this firm on various legal issues and is not legal advice. Read More