Hurley

RICHLI, Acting P.J.

Insurance Code section 11580.2, subdivision (p)(3), [1] provides that underinsured motorist coverage does not apply until the limits of any policy covering the underinsured vehicle "have been exhausted by payment of judgments or settlements...." The question presented in this case is whether a settlement for less than the policy limits satisfies the exhaustion requirement provided the insured agrees to credit the underinsurance carrier with the full policy limits as if they had been paid. We conclude that, under the plain terms of section 11580.2(p)(3), actual payment of the full policy limits is required.

In April 1991, Farmers Insurance Exchange issued a policy of automobile liability insurance to Luzestela Hurley. The policy provided underinsured motorist coverage in the amount of $250,000 per person, but stated Farmers would pay under that coverage "only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements."

Hurley sustained damages in an automobile accident in May 1991. The other driver, Sunjeon Datta, was driving a car rented from Dollar Rent-a-Car.…

We reluctantly concur with the opinion. We believe that the correct result in this case is to make the insurer of the injured party responsible for the difference between the policy limits of the under-insured vehicle and the injured party’s own policy, regardless of whether the insurer of the underinsured vehicle pays its full policy limits. The obvious purpose of Insurance Code section 11580.2, subdivision (p)(3) is to prevent the injured party from receiving a windfall in the form of a payment from both the underinsured party’s carrier and a payment in full by his own insurance carrier.

Allowing the injured party’s carrier a credit for the underinsured party’s policy limit achieves this purpose. So long as the carrier receives that credit it is in the same position whether or not its insured is paid the full amount of the offending party’s policy. Further, an interpretation allowing the injured party to accept partial payment from the underinsured party’s insurance carrier serves a number of beneficial objectives. It encourages settlement, reduces litigation, saves court time, and reduces the costs to both parties. Perhaps most important, it prevents the injured party from…

Insurance Code section 11580.2, subdivision (PX3), 1 provides that underinsured motorist coverage does not apply until the limits of any policy covering the underinsured vehicle “have been exhausted by payment of judgments or settlements . . . .” The question presented in this case is whether a settlement for less than the policy limits satisfies the exhaustion requirement provided the insured agrees to credit the underinsurance carrier with the full policy limits as if they had been paid. We conclude that, under the plain terms of section 11580.2(p)(3), actual payment of the full policy limits is required.

I

Factual and Procedural Background

In April 1991, Farmers Insurance Exchange issued a policy of automobile liability insurance to Luzestela Hurley. The policy provided underinsured motorist coverage in the amount of $250,000 per person, but stated Farmers would pay under that coverage “only after the limits of liability under any applicable bodily injury liability bonds or policies have been exhausted by payment of judgments or settlements.”

Hurley sustained damages in an automobile accident in May 1991. The other driver, Sunjeon Datta, was driving a car rented…