Some auto insurance carriers write policies that on their face or on their declarations page provide a certain dollar amount of coverage, but then reduce that coverage in the body of the policy for family members of the policy owner through “drop down” clauses. Sometimes, the actual dollar amount of this lower coverage isn’t even stated in the policy, just that the coverage drops down to “the amount required by law,” so the only dollar amount the policy holder sees appears to be much higher than the real “drop down” amount.
How does this work? Here’s an example from an actual court case concerning a household exclusion clause in automobile insurance: A father bought an auto insurance policy from American Family to cover his son, John, who lived in Minnesota. While Minnesota law requires every auto insurance policy to include minimum $30/$60,000 liability coverage (paid if the insured person hurts someone else), John’s father bought a policy that offered even more protection: $1 million liability coverage. John was driving with his wife, Kathi, in 2006 when they were both killed in an automobile accident caused by John. When Kathi’s survivors sued for wrongful death, they learned the American Family policy had a “drop down” policy provision, which stated that if the person hurt or killed lives with the person driving the car, the coverage is no longer $1 million, but only the minimum amount “required by law” by that state – in Minnesota, that is just $30,000.
The Eighth Circuit Court of Appeals ruled the “drop down” exclusion is enforceable. See the excerpt below for the household exclusion language of the policy that was at issue in this case, Babinski v. American Family Insurance Group, 569 F.3d 349 (8th Cir. 2009).
The Policy requires [the liability carrier] to “pay compensatory damages an insured person is legally liable for because of bodily injury” and defines “[i]nsured person” as including “[a]ny person using your insured car.” (J.A. 35 (emphases omitted).) The Policy lists 13 exclusions from liability coverage, including this household drop-down exclusion:
This coverage does not apply to ․
10. Bodily injury to:
a. Any person injured while operating your insured car;
b. You or any person related to you and residing in your household; or
c. Any person related to the operator and residing in the household of the operator.
This exclusion applies only to the extent the limits of liability of this policy exceed the limits of liability required by law.
Babinski v. American Family Insurance Group, 569 F.3d 349 (8th Cir. 2009)
These “drop down” or “step down” provisions may also apply in uninsured/underinsured motorist (UM/UIM) coverages. While you may purchase and pay for a policy with $300,000 in coverage for UM/UIM, you may find you have just $25/$50,000 in coverage in certain situations involving resident family members.
Minnesota sets a minimum of $25/$50,000 UM/UIM auto insurance coverage. UM/UIM coverage protects a driver who is hurt in a car crash because of the negligent actions of another driver who doesn’t have enough insurance, or who has no insurance at all. A victim who has purchased additional protection looks to his or her own UM/UIM coverage to pay out up to the limits of that coverage, to the extent that liability payments are insufficient to compensate for his or her injuries.
But what if a woman who has purchased a policy with higher UM/UIM coverages is T-boned by an uninsured pickup truck driver while driving her children to soccer practice? A policy that has a “drop down” UM/UIM provision drops the coverage for the children to the state-required minimum coverage of $25/$50,000, which is woefully inadequate in a serious car crash.
After a crash is not the time to discover your insurance policy has a “drop down” provision. Read your policy carefully and change it if you find language similar to that in the excerpt above.
If you’ve been injured in a car accident, call our office today. We’ve recovered more than $125 million for victims and we’re ready to assist you.
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