Warning: If Your No-Fault Policy Has A Step-Down Clause, You Should Switch Insurance Companies

Michigan’s No-Fault Act requires drivers to purchase auto insurance. When buying this mandated insurance, most people probably think their policy will not only cover their injuries in an accident, but also any injuries suffered by family members riding with them in the vehicle.

But unfortunately, that is not always the case. Here’s why.

Some Michigan no-fault insurers include what is called a “step-down clause” (also known as an “intra-family limitation clause”) in their auto insurance policies. A step-down clause is a dangerous creature. Why? Because it only lets relatives of the insured, who are injured while riding with the insured, recover the state-mandated minimum of $20,000 in liability coverage, no matter how much coverage was actually purchased.

A step-down clause in a Michigan auto insurance policy might look like this:

“Part I – Bodily Injury and Property Damage Liability Exclusions: … excludes coverage for bodily injury or property damage to you or a resident relative. This exclusion applies only to damages in excess of the minimum limit mandated by the motor vehicle financial responsibility law of Michigan ….”

Or it may look like this:

Coverage under this Part I, … 12. bodily injury to you or a relative. This exclusion applies only to damages in excess of the minimum limit mandated by the motor vehicle financial responsibility law of Michigan.”

Real-World Implications

How does a step-down clause actually work? Consider this scenario.

A driver has $250,000 in coverage on her Chevy Suburban and the policy includes a step-down clause. The insured is driving the Suburban with her young daughter and her daughter’s best friend in the vehicle. The insured causes a collision and both girls suffer serious injuries. A reasonable assumption would be that both girls can make a liability claim up to the insured’s $250,000 policy limits.

However, that’s not what happens when a policy includes a step-down clause. Instead, the step-down clause limits the insurance company’s liability to the insured’s daughter, capping it at $20,000. Meanwhile, the daughter’s best friend – who’s unrelated to the insured – can make a claim up to the insured’s $250,000 policy limits.

No, you did not read that wrong. The friend of the insured’s daughter is entitled to more coverage than the insured’s own daughter. This doesn’t seem fair, does it? After all, both girls were seriously injured and neither did anything to cause or contribute to the accident.

Here at Christensen Law, we believe step-down clauses are unfair to Michigan consumers. That is why we would like to see them abolished.

Which Insurers Use Step-Down Clauses?

No-fault insurance companies use step-down clauses because they claim the provisions help prevent insurance fraud. However, this rationale doesn’t make much sense because standard no-fault policies already include fraudulent claim provisions and committing insurance fraud is a crime (see MCL 500.4511(1)).

In Michigan, the following insurance companies currently use step-down clauses in their standard no-fault policies:

  • USAA
  • Progressive
  • GEICO
  • Farm Bureau
  • AAA
  • Grange

If you have auto insurance with any of these above-mentioned companies, you should seriously consider changing insurance carriers.

As it currently stands, the following insurance companies do not include a step-down clause in their standard no-fault policies:

  • Liberty Mutual
  • State Farm
  • Auto-Owners/Home-Owners
  • Citizens
  • Allstate

Keep in mind that the insurance companies using step-down clauses in their policies are not doing anything illegal. In recent years, the state’s appellate courts have upheld the use of step-down clauses, no matter how unfair they are to Michigan consumers.

For example, in Ruzak v USAA Ins Agency, Inc, the plaintiff was seriously injured when her husband lost control of their vehicle and struck a tree. The plaintiff’s husband had $300,000 in liability coverage with defendant-USAA Insurance. The plaintiff filed a claim under her husband’s policy, but the claim was denied because the policy included a step-down clause that only permitted $20,000 in coverage for claims made by “family residing in the covered person’s household.”

The plaintiff in Ruzak filed a lawsuit for breach of contract, fraud and misrepresentation. The trial court ruled in favor of the plaintiff, calling defendant-USAA’s step-down clause “repugnant, reprehensible and unconscionable.” But on appeal, the Court of Appeals disagreed and said:

[T]here was no evidence that clearly demonstrated that the contested provision transgresses the law. While plaintiff argues that the contested provision is void because it entirely eliminates liability coverage for bodily injury suffered by a family member of the insured, this argument lacks merit. Family members have the statutory minimum coverage because the policy is written in conformity with the residual liability coverage provisions of MCL 500.3131 and MCL 500.3009(1). … The contested provision is also not unconscionable. While the trial court peppered its written opinion with use of the language of unconscionability, it never provided an analysis with respect to the defense of unconscionability. … Under a fair appraisal of the circumstances, [the insured] was free to accept the policy terms or reject them and to obtain automobile insurance through another provider. Thus, we conclude that procedural unconscionability was not present.”

In addition to the appellate courts upholding step-down provisions, it should be noted that the Michigan Insurance Commissioner has also done nothing to stop insurers from using step-down clauses.

Until the Michigan appellate courts or the Insurance Commissioner decide to eliminate the use of these reprehensible clauses, here’s what consumers can do:

  • Tell friends, family and coworkers about step-down clauses and the dangers they present.
  • Ask people you know to carefully examine their auto insurance policies to see if they include a step-down clause and, if they do, encourage them to change insurers.

If you are uncertain whether your auto policy includes a step-down clause, you should contact your insurance agent for assistance. Unfortunately, many agents are unaware of step-down clauses and what they do, and so they may be unable to answer your questions.

If your insurance agent cannot adequately address your step-down clause concerns, the Detroit car accident attorneys at Christensen Law can help. Contact us today with your questions.

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