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 of the 15 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

Step-down clauses are legal because both insurance commissioners and state appellate courts allow them. 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 the end, 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
• Idaho
• Illinois
• 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, you can call your state’s department of insurance and/or insurance commissioner.

A step-down clause in an auto insurance policy reduces liability coverage limits in certain situations, typically when someone other than the named insured is driving the vehicle. This means coverage may “step down” from the policy’s higher limits to the state minimums, potentially leaving the driver responsible for significant out-of-pocket costs after an accident.

Because car insurance companies apply step-down clauses differently, drivers should review their policies carefully to understand when and how their coverage could be reduced.