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Caution: Watch Your “Step-Down”

“Step-Down” provisions in insurance policies are becoming more and more common.  When I speak about a “Step-Down” provision, I am talking about policy language that purports to reduce a higher policy limit to the amount of the Financial Responsibility limit allowed by state law.

Banana peel fall From an underwriting standpoint, “Step-Down” provisions make sense.  Let’s say a carrier wants to “Step-Down” the liability coverage for drivers who are permitted users of the vehicle but are not rated drivers on the policy, like the named insured and identified members of the household.  Those rated drivers and their driving history has been looked at and considered in setting the premiums on the policy.  But if the car is loaned by insured to a third-party who is not a rated driver, the underwriters would not have had an opportunity to examine that permitted driver’s experience and history.  This “Step-Down” can theoretically be done on liability coverage, UM/UIM coverage, or any other coverage on the policy.

In spite of the fact that “Step-Down” provisions can theoretically be written, the concept has met with mixed results in the courts.  In California for example, such provisions were rejected because often they are not “sufficiently conspicuous, plain and clear to be enforceable.”  See Haynes v. Farmers Ins. Exchange, 13 Cal. Rptr. 3d 68 (2004).  See also Home Ins. Co. v. Zurich Ins., 116 Cal. Rptr. 2d 583 (2002), Haynes v. Farmers Ins. Exchange, 115 Cal. Rptr. 2d 747 (2002) and Thompson v. Mercury Cas. Co., 100 Cal. Rptr. 2d 596 (2000).

However, the Utah Supreme Court, interpreting Idaho law approved such a provision.
See American Nat. Fire v. Farmers, 927 P.2d 186 (1996).  In Illinois, “Step-Down” provisions have been better received than in California.  In the case of State Farm v. Illinois Farmers, 875 N.E.2d 1096 (2007), the court said that neither statutes nor case law prohibited a Step-Down limit.  Indiana apparently also approves of these types of “Step-Down” down provisions as found in Ind. Farmers Mut. Ins. Group v. Blaskie, 727 N.E.2d 13 (Ind. Ct. App. 2000).

In the State of Kansas, the provision was also enforced in the case of Brooks v. Bennett, 26 P.3d 73 (2001).  In the State of Missouri, such provisions were not allowed.  See Farmers Ins. v. Pierrousakos, 255 F.3d 639 (2001); Windsor Ins. Co. v. Lucas, 24 S.W.3d 151 (2000) and Farmers Ins. Co. v. Pierrou, 49 F. Supp. 2d 1148 (1999).

New Jersey accepted a liability “Step-Down” in the case of Seabridge v. Discount Auto, 923 A.2d 307 (2007).  However, Oregon found such provisions to be unenforceable.  Medyanikov v. Continental Ins., 31 P.3d 495 (2001).

The State of South Dakota did not appear to be against such “Step-Down” provisions except for the fact that this particular one was insufficiently conspicuous.  See Mid Century Ins. v. Lyon, 562 N.W.2d 888 (1997).

Under Utah law however, such “Step-Down” provisions were disallowed.  See Liberty Mutual v. Shores, 147 P.3d 456 (2006); Progressive Casualty Ins. v. Dalglie, 52 P.3d 1142 (2002).

Nevada has not tested the viability of such a provision.  However, it’s my prediction that Nevada would allow “Step-Downs” under the right conditions.  The Nevada Supreme Court has used “Step-Downs” in the past as a compromise position where a particular exclusion is found to be unenforceable.  For example, where a household exclusion would not be enforced, the court agreed to give it some enforcement by allowing the “Step-Down” from what would be a bigger policy to a smaller one.  Estate of Neal v. Farmers Ins. Exch., 93 Nev. 348, 566 P.2d 81 (1977).

I would advise any company that wants to introduce such language into its policy that it does so using language that has been approved by at least one other state and that the language be placed in the policy so that it is conspicuous, plain and clear.  Perhaps the provision could be added in an endorsement using all caps, larger typeface and bold font.  Maybe there also needs to be an asterisk on the declarations page that calls attention to the effect of the “Step-Down” language.  Or perhaps the declarations page needs to be modified altogether.

I predict however, that under the right circumstances, the Nevada Supreme Court will have to approve this type of economically justifiable provision.

Mills & Associates Coverage Lawyers 702-240-6060

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