Setoffs and Underinsured Motorist Insurance Policies

When an insured files a lawsuit against an insurance company, the insurance company can file a counter claim against the insured to reduce the amount of the insured’s claim by an amount that the insurance company claims that the insured owes to it. The amount owed can be unpaid premiums or funds received by the insured from other sources that would exceed the amount of the insured’s loss. This is called a setoff, an offset provision, or a benefit-set off provision. In the case of underinsured motorist coverage, the basic principle is that an insured person should not recover more merely because he or she is injured by an underinsured person and not an uninsured person.

An automobile insurance policy may contain a set-off clause, which provides that an insured cannot recover bodily injury benefits under both the liability coverage part and the underinsured motorist coverage part of the policy. When an insured fully recovers his or her losses under the liability provision of an automobile insurance policy, the insured could not then seek to recover under the underinsured motorist provision of the same policy.


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Some states have a collateral-source rule that prohibits the reduction of an insured’s damage award by the amount of underinsured motorist benefits. Those states contend that the amount paid by an insurance company to its insured for damage to a vehicle does not affect the amount that the insured should receive from the insurance company of the person who caused the insured’s loss.

Some states will not permit a setoff of workers compensation benefits from underinsured motorist benefits. Workers compensation is not liability insurance. Those states do not permit it to be considered in determining the amount of underinsured motorist coverage available to an insured.