North Dakota Law Upholds Insureds Step-Down Clauses

The Supreme Court of North Dakota in Nodak Mutual Ins. Co. v. Bahr-Renner, 2014 WL 656868 (N.D., Feb. 20, 2014), recently considered whether a step-down provision in an automobile liability policy violated North Dakota’s financial responsibility law. The step-down clause in question provided that any defined family member was not subject to the lower step-down policy limits but was entitled to the same amount of coverage as the named insured. Thus, for named insureds and additional insureds who qualified as family members, the policy limits identified on the declarations page were applicable. However, for permissive users the policy limits were reduced by the step-down to the limits required by North Dakota’s financial responsibility law.

The claimants made several arguments for why the step-down provision violated North Dakota law. First, they argued that the step-down endorsement violated NDCC §26.1-40-16, because the statute required the named insureds written acquiescence for a coverage reduction endorsement and the named insured did not sign any written documentation regarding the endorsement or otherwise acquiesce in it. Second, the claimants argued there was insufficient notice of the step-down provision because it was buried in an 8-page endorsement in the policy and that the step-down provision should have been a separate standalone endorsement. Third, the claimants argued that the step-down provision was invalid because it did not state specifically the reduced bodily injury policy limits of $25,000 per person/$50,000 per accident, but merely stated the amount of coverage was “limited to the statutory financial responsibility limits.” The North Dakota Supreme Court rejected these arguments.

Addressing the statutory argument, the Court noted that the first sentence of §26.1-40-16 required a written agreement with the insured before individuals or a class of individuals could be excluded from coverage. However, the second and third sentences of the statute addressed restrictive endorsements containing step-down provisions which the Court noted were a different subject matter than exclusions from coverage and the statute did not mention the requirement of a written agreement in the second or third sentences. Therefore, the Court concluded that NDCC §26.1-40-16 did not require a “written agreement” or other form of an insured’s acquiescence to be valid.

Addressing the argument that the step-down provision should have been a separate stand alone endorsement, the Court noted that the step-down provision was contained in a restrictive endorsement as required by NDCC §26.1-40-16, and that the endorsement was titled in large print: “THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. AMENDMENT OF POLICY PROVISIONS – NORTH DAKOTA.” Therefore, the step-down provision appeared on the second page of the endorsement. Based upon this information, the Court concluded that the endorsement provided sufficient notice to an insured of the importance of its provisions.

Finally, addressing the claimant’s argument that the step-down provision needed to state the specific dollar values of the policy limits as opposed to a generic reference to the statutory financial responsibility limits in order to be enforceable, the Court noted that the majority of courts in the United States had upheld the validity of step-down provisions that referred to statutory minimums without stating the specific dollar amount of coverage. (citing Krause v. Krause, 589 N.W.2d 721, 726-27 (Iowa 1999); Brooks v. Bennett, 29 Kan.App.2d 308, 26 P.3d 73, 75 (2001); Stearman v. State Farm Mut. Auto. Ins. Co., 381 Md. 436, 849 A.2d 539, 541 (2004); M. Caner, Annot., Validity And Operation Of Step-Down Provisions Of Automobile Liability Policy Reducing Coverage For Permissive Users, 29 A.L.R. 5th 469 §5 (1995), and cases collected therein.)