Step-Down Clauses in Insurance Coverage Policies Explained

By on June 19th, 2013

Posted in Truck & Bus Accident

I’ve previously written blogs about “step-down” provisions often included in automobile insurance policies.   Such a provision is usually included in the “fine print” section of the policy.  It applies to injured claimants who are a named insured under another policy.  The step-down clause steps the available uninsured and underinsured motorist coverage down to the policy limits of the injured person’s own policy.  For example, if John Doe has a personal automobile insurance policy with uninsured/underinsured coverage in the amount of $15,000 but is injured in a car crash while driving a dump truck owned by his employer, he is limited to his own $15,000 policy if the offending driver is uninsured or also has a limited policy.  This is true even if John Doe is catastrophically injured and the dump truck carries $5,000,000 in coverage.  A step-down clause on the dump truck’s coverage will step down the available benefits to John Doe’s $15,000 policy.

There are very few exceptions to the application of step down clauses.  I would like to share one that I recently came across.  My client was driving a truck insured by her employer for $500,000 in uninsured/underinsured motorist benefits.  My client was severely injured through no fault of her own and underwent shoulder and spine surgery as a result of the accident.  The negligent driver had a minimal liability policy with $15,000 in coverage.  My client had the same policy.   Once the $15,000 was turned over, we could not seek compensation from her personal policy because she had no more than $15,000 in coverage.  Accordingly, we made a claim under the employer’s underinsured motorist benefits.  The employer approved the settlement with the negligent driver and waived its subrogation rights against him.  Months later, the employer’s insurance company denied coverage based on a step down provision.

I successfully opposed this denial based on a 2009 Appellate Division decision entitled Boritz v. NJM, 406 N.J. Super. 640 (App. Div. 2009).  There, the Court held that an insurance company cannot assert a step-down clause after it confirms the underinsured policy limits to plaintiff’s counsel and granted approval of the underlying settlement (“Longworth approval”) without advising the injured party of the potential set-off provided by the step-down provision.  In other words, once the company grants the requisite “Longworth approval” of the underlying settlement, permitting the injured person to give up the right to pursue the negligent driver personally, it is too late for the company to investigate coverage and assert the step-down clause.

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