Step-Down Clauses in Car Insurance

Not all car insurance policies contain step-down clauses, but you should know if yours does.

What It Is

A step-down clause, or step-down provision, is a part of a car insurance policy that prohibits an injured family member of a driver from collecting the full amount of bodily injury liability coverage the driver has selected on their policy. They can collect up to the state’s minimum liability coverage only.

How It Works

Let’s say you live in Michigan, one the 13 states where step-down clauses are legal. If you got into an accident with a family member in the car and you have a step-down clause, the family member could collect up to $50,000 in bodily injury liability coverage, the minimum coverage in Michigan, even if your limit is $500,000. Still, you and any other non-family member in the car could collect up to your limit of $500,000.

Why They Exist

According to car insurance companies, step-down clauses exist to prevent fraudulent claims. However, in Michigan, fraudulent claims are already illegal under MCL 500.4511(1) and punishable by the following:

• Imprisonment up to four years
• A fine of up to $50,000
• Restitution fees¹

Car insurance policies also prohibit fraudulent claims explicitly. Plus, if a provider thinks a claim is fraudulent, it can dispute the claim. Many traffic and personal injury lawyers say that step-down clauses are unjust and solely a way for insurance companies to avoid paying claims and collect increased profits. Tom Sinas, a personal injury attorney based in Grand Rapids, Michigan, called step-down clauses “repugnant and reprehensive … one of the frightening and dangerous insurance laws in our state.”

While an insurance policy with a step-down clause may be cheaper, you will end up paying more if a family member gets injured in an accident that occurs while you’re driving. In sum, finding cheaper car insurance isn’t worth it if your policy includes a step-down clause.

Where They’re Legal

Step-down clauses are legal in the following states:

• Arizona
• California
• Florida
• Indiana
• Michigan
• Missouri
• Nevada
• New Jersey
• New York
• Ohio
• Pennsylvania
• South Carolina
• Utah

However, some states explicitly prohibit step-down clauses:

• Wisconsin
• Utah
• Kentucky²

To protest step-down clauses, call your state’s department of insurance. See below for the contact information.

To put it simply, step-down clauses are legal because both insurance commissioners and state appellate courts allow them.

Take the 2004 case of Ruzak v. USAA, for example. A woman was injured when her husband fell asleep behind the wheel and hit a tree with her in the passenger seat. Even though he had $300,000 worth of liability coverage, his wife was only covered up to $20,000, the minimum liability coverage at the time. Unfortunately, the Michigan State Court of Appeals said the step-down clause was legal, as did the Supreme Court when the woman appealed the case.³

However, many groups work tirelessly to end step-down clauses, saying they are unfair, so the tides could eventually change.

Be careful when buying insurance from any of the following companies, as they allow step-down clauses:

• AAA
• Farm Bureau
• GEICO
• Grange⁴
• Progressive
• USAA⁵

Don’t sign up for a policy without reading it thoroughly, or having a lawyer read it thoroughly for you. Step-down clauses are one of the many perils you could face from an auto insurance company. To learn more about car insurance coverages, read about liability coverage, mechanical coverage, and uninsured and underinsured motorist coverage.