Step-Down or Step-On? When is Your Coverage Not Really Your Coverage?, 0121 SCBJ, SC Lawyer, January 2022, #32

AuthorBy Constance Anastopoulo
PositionVol. 33 Issue 4 Pg. 32

Step-Down or Step-On? When is Your Coverage Not Really Your Coverage?

No. Vol. 33 Issue 4 Pg. 32

South Carolina BAR Journal

January, 2022

Step-Down or Step-On?

When is Your Coverage Not Really Your Coverage?

By Constance Anastopoulo

On July 11, 2008, Sharmin Walls, Randi Harper, and Christopher Timms were passengers in Walls’ Chevrolet Lumina, and Korey May-field was the driver.1 A South Carolina Highway Patrol trooper activated his blue light. Mayfeld accelerated and then led the trooper on a highspeed chase, involving speeds over 100 miles per hour. Walls, Harper, and Timms begged Mayfield to slow down, but he refused. Mayfield crashed the car, killed Timms, and seriously injured Wallsand Harper. Mayfeld, paralyzed from the single car collision, entered a plea to reckless homicide.2

Nationwide automobile insurance policy included bodily injury and property damage liability and uninsured motorist coverage with limits of $100,000 per person and $300,000 per occurrence.3 Thus, Walls, Harper, and Timms could each recover up to $100,000 while still remaining within the policy’s $300,000 per accident limit.

However, Nationwide did not pay Walls’ claim per the policy limits.4 The Nationwide policy provided, in part: B. This coverage does not apply, with regard to any amounts above the minimum limits required by the South Carolina Financial Responsibility Law as of the date of the loss, to: ...

6. Bodily injury or property damage caused by: a) you;

b) a relative; or

c) anyone else while operating your auto;

(1) while committing a felony; or

(2) while feeing a law enforcement officer.[5]

Nationwide asserted that these provisions obligated it to pay only the statutory minimum as provided by section 38-77-140,6 not the liability limits stated in the policy.7 Thus, Nationwide paid only $50,000 in total to the injured passengers. Nationwide fled suit and requested that the court declare that the passengers were not entitled to recover more than $50,000, combined.8 Walls answered and denied that the policy’s fight-from-law enforcement and felony provisions applied.9

The circuit court ruled that Mayfield was a non-permissive use and that the provisions at issue were unconscionable and violated public policy.10 The circuit court found that Walls’, Harper’s, and Timms’ estates were entitled to recover $100,000 per person.11 In the alternative, the circuit court found that Mayfield’s attempt to elude the police rendered the vehicle uninsured such that the innocent passengers should be entitled to re cover under the policy’s uninsured motorist provisions.12

In reversing the circuit court, the South Carolina Court of Appeals distinguished the family step-down provision in Williams v. Government Employees Insurance Co. (GEICO)13 from the Nationwide felony step-down provisions, reasoning that Nationwide’s “step-down provision was not triggered by the party’s relationship to the insured, but rather the conduct of the drive r.” 14 The Court of Appeals did not find it material that Walls, the insured, did not commit the felony.15 The Court of Appeals further held that insurers could place reasonable restrictions on coverage above the minimum limits, therefore allowing insurers to apply different rules to insureds who purchased statutory minimum policies and those who chose coverage in excess of the statutory minimum.16 Walls appealed.

What are step-down provisions?

To understand the importance of the Walls decision, you must understand what a “step-down” provision is, how it operates when applied, the historical context that gave rise to this two-tier system, and how this history dictates the decision in Walls. A step-down provision seeks to reduce the coverage limits for a particular class of individuals to the limits of the financial responsibility of the law of the state in which the accident occurs rather than the limits reflected in the policy Declarations.[17]In other words, when an insurer includes and applies a step-down provision in an insurance policy, regardless of the policy limit for which the insured contracted and paid a premium, the provision allows the insurer to reduce the policy limit to the statutory minimum, which in South Carolina is currently $25,000, based upon the definition of the particular class of individual. In South Carolina, the conflict arises when the “particular class of individual” to whom the step-down provision applies is a statutorily defined “insured,” especially permissive users.18

Step-down provisions in insurance contracts emerged in response to state omnibus clause definitions that required mandatory coverage for statutorily defined insureds, including permissive users.19 Insurers attempted to limit their liability exposure in automobile policies for coverage for permissive users for whom the insurer did not know the driving record or have an opportunity to evaluate the risk. When applied to automobile accidents involving permissive users, a step-down provision in an automobile liability policy reduces the amount of liability coverage generally for a non-relative insured to the minimum amount required by law. The step-down provision would apply despite the named insureds purchase of liability coverage in excess of the statutory minimum.20

As insurers’ concerns and fears grew around expanded omnibus coverage, insurers incorporated a two-tier or step-down provision clause in insurance policies.21 This allowed insurers to lower the coverage for permissive users based on certain classifications. “The vast majority of courts recognize that two-tier or step-down coverage is not illegal per se.”22 But, courts continue to wrestle with the tension between the permissibility of step-down provisions in consideration of contract law principles that allow parties the freedom to contract versus the intent and public policy goals of motor vehicle financial responsibility acts that require automobile liability and other coverages. South Carolina courts have held that liability insurance serves the public purpose of protecting the innocent victims of motor-vehicle collisions.23 Given this recognized public policy goal, courts have considered (1) does allowing an insurer to include and apply a step-down provision serve innocent victims and (2) how does this idea correspond to the principle of freedom to contract?

Pre-Walls decisions on step-down provisions in South Carolina

The South Carolina Supreme Court previously addressed these questions in considering whether step-down provisions applied to statutorily defined insureds. Under South Carolina’s omnibus statute, “insured” is defined to include (1) the named insured; (2) the resident spouse and resident relatives of any named insured; (3) permissive users; and (4) guests in the covered vehicle.24 In Williams v. GEICO, the court analyzed a step-down provision that applied to resident relatives.25 A husband and wife, both named insureds, were killed in a car accident when a train struck their vehicle.26 The couple had an automobile insurance policy with GEICO that included liability limits of $100,000 per person and $300,000 per accident for bodily injury, and $50,000 per accident for property damage.27 The GEICO policy included a step-down provision that reduced coverage to the statutory minimum limits when an insured’s relative sustained bodily injury.28 Pursuant to this provision, GEICO sought to pay the then-statutory minimum of $15,000 rather than the full policy limits.29 The insureds’ estates fled suit seeking a declaration regarding the policy limits.30 The South Carolina Supreme Court held that insurers have the right to “limit their liability and to impose conditions on their obligations provided they are not in contravention of public...

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