If you are like most people, you never actually read your automobile insurance policy. Insurance policies aren’t exactly light reading. They contain many terms with specific legal meanings, and are generally confusing in the way they are written. This is by design. As Jack Ward’s character in “The Verdict” stated when talking about insurance companies: “wake up Frankie for Christ sakes, these people are sharks. How do you think they got all of that money…by doing good?” Most people mistakenly rely on their insurance agent to provide them with what they think they need, or in many cases, the minimum required by state law
Many liability or umbrella insurance policies however contain a provision few consumers know about. It is called a “step down” or “drop down” provision. It only applies in very limited circumstances, but can have huge ramifications when it does. This unpleasant surprise may result in you getting something much different (and less) than you expected. Let me explain.
Automobile insurance policies in Minnesota (and in most states) require that you carry certain coverage in minimum amounts required by state law. For example, in Minnesota, you are required to carry a minimum of $30,000 in liability coverage; $25,000 in uninsured and underinsured (UM/UIM) motorist coverage; and basic no-fault coverage. Many people however, (wisely, I might add) decide to purchase higher limits to protect themselves and their family. It is not unusual to find many responsible drivers who carry $50,000, $100,000 or even $250,000 in liability and UM/UIM coverage.
A “step down” provision in the insurance contract will seek to limit a family member from ever recovering this higher policy coverage, and provides that the most a family member can recover in specific situations is the minimum coverage required by law. In essence, this provision seeks to prevent family members from ever accessing this coverage, despite the fact that they paid for it. This is best illustrated by an example.
A husband and wife have an automobile policy, which contains $250,000 in liability coverage. The husband is driving the family vehicle and the wife is a passenger, when the husband runs a red light and a violent collision ensues. The wife is seriously injured and brings a personal injury claim against her husband for his negligence in causing her injuries. Both husband and wife believe there is coverage up to the policy limits of $250,000. Both are surprised to learn however that because of the “step down” provision, the wife is only entitled to recover the minimum limits required by Minnesota state law, which is $30,000.
In other words, in that situation, the coverage “steps” or “drops down” to the minimum coverage. The unfairness of this absurd situation is highlighted by the fact that if there were another unrelated passenger in the car who was also injured due to the husband’s negligence, that passenger would have access to coverage up to the policy limits of $250,000. The stated underlying policy for this distinction has been to “avoid collusion between family members.”
This provision has been challenged in Minnesota courts. The Plaintiffs claimed that such provisions are unenforceable because they are ambiguous and violate the “reasonable expectations” doctrine. They argued that the average consumer would reasonably expect that a family member would have the same coverage as a stranger. The Minnesota Supreme Court has yet to have a final say on the validity and enforceability of these draconian provisions. The lower Minnesota Court of Appeals however has ruled that these provisions are not ambiguous and do not violate the “reasonable expectations” doctrine. Until the Minnesota Supreme court decides to rule on the enforceability of these provisions, they are enforceable according to the Court of Appeals.
There are also other scenarios where “step down” provisions apply. The purpose of this blog is to make you aware of the provision, examine your own policy, and have a discussion with your insurance agent to make sure there are no unpleasant surprises in your policy. If your policy contains this clause, you may want to shop around for auto insurance that does not contain this absurd limitation on coverage.