Motor Vehicle Insurer’s Right to Reimbursement of Indemnity Payments

The obligations of insurers to make payments under policies of motor vehicle insurance are based on the sometimes uncertain answers to questions about the extent of coverage and the liability of an insured to a party making a claim under the policy. An insurer may therefore face a difficult decision as to whether to make a payment in response to a third party’s demand for such payment under a policy, risking the possibility that the payment is uncalled for in light of some limitation in the coverage, or to deny such a request and risk a claim that the insurer’s failure to make the requested payment has made it liable to an insured for additional damages, such as the amount of a judgment in excess of the policy limits.

When an insurer makes a payment to a third party under such circumstances, and it is later determined that the insurer was not obligated by the terms of the policy to make such a payment, the question arises whether the insurer may seek reimbursement from its insured for the amount thus paid. Some jurisdictions, acknowledging the extent of the dilemma an insurer faces in such a situation, have permitted insurers to obtain reimbursement for such payments. Other jurisdictions take a less expansive approach to the issue, viewing the insurer’s dilemma as merely one of the risks of doing business in an environment in which insurers are bound to take the steps they think best to limit their exposure to liability from all angles, with consequences that sometimes work to the insurer’s benefit and sometimes do not.

The business of insurance in the United States, including that of motor vehicle insurance, has historically been governed by the separate laws of each state rather than by a single unified body of federal law. As a result, answers to questions about an insurer’s right to reimbursement of indemnity payments vary from state to state, and will be found in the state statutes regulating the business of insurance and in the decisions of courts dealing with issues of insurance law.