Public Policy Prevents Family Step-Down Clauses in South Carolina Auto Policies

There is a wide divergence of authority regarding the enforceability of family member step -down clauses in automobile liability policies. Automobile liability step down clauses reduce coverage for bodily injury to family members from the stated policy coverage reflected on the declarations page to the statutory minimum amount mandated by the State’s Financial Responsibility laws. See, e.g., Martin J. McMahon, Ann. Validity, Under Insurance Statutes, of Coverage Inclusion for Injury to or Death of Insured’s Family or Household Members, 52 A.L.R.4th 18 (1987 & Supp. 2014) (discussing how courts have considered the statutory schemes, case law and public policy pronouncements in their own jurisdictions in scrutinizing provisions attempting to reduce or eliminate coverage to family members). There is no true consensus regarding the enforceability of such provisions.

Recently, the South Carolina Supreme Court in Williams v. Government Employees Ins. Co. (GEICO), 762 S.E.2d 705, 2014 WL 4087958 (S.C. 2014) held that family step-down clauses in automobile policies are void as against public policy. In Williams, the named insured, husband and wife, were the sole occupants of their own insured vehicle when it was struck by a train. It was unknown which of the insureds was driving and which was riding as the passenger. The insurance policy issued by GEICO provided $100,000 per person and $300,000 per accident coverage as stated on the declarations page of the policy. However, the policy contained a family member step-down provision which reduced the amount of coverage available to one family member insured who was injured by another family member insured. The step-down clause reduced the $100,000/per person coverage down to the statutory minimum coverage amount of $15,000 prescribed by South Carolina’s Financial Responsibility Act.

Previously, the South Carolina Court of Appeals and Universal Underwriters Ins. Co. v. Metropolitan Prop. and Life Ins. Co., 298 S.C. 404, 380 S.E.2d 858 (Ct. App. 1989) had decided that an automobile insurance policy could contain a provision stepping-down coverage to minimum limits without offending public policy. That prior case precedent was reversed by the majority opinion of the South Carolina Supreme Court in Williams. The Court held that §38 77 142(C) (“any endorsement, provision, or rider attached to or included in any policy of insurance which purports or seeks to limit or reduce the coverage afforded by the provisions required by this section is void.”) S.C. CODE ANN. §38-77-142(C) (2002) prohibited the step-down.

The Supreme Court began its analysis by noting that the plain wording of §38-77-142 subsections (A) and (B) required policies for automobile liability insurance to contain a provision insuring the named insureds and permissive users against liability for damage incurred “within the coverage of the policy.” The Court found it significant that §38-77-142 indicated that insurers must provide liability insurance to insureds “within the coverage of the policy” and may not limit or reduce liability coverage in the policy below the amount provided in this section, meaning §38 77-142.

Reading the statute as a whole, the Court found that what was being referred to as the face amount of the coverage that was relevant under §38 77-142 was not the statutory minimum limits of liability coverage set forth in §38-77-140. The Court found that the South Carolina General Assembly, in considering §38 77-142 contemplated how automobile insurance was actually marketed. The General Assembly realized that the actual policy containing exclusions or limitations, was not provided to the insured contemporaneously with the entering of the insurance agreement.

As a result, the South Carolina General Assembly specifically included language in §38 77-142(C) prohibiting provisions in the policy that limited or reduced coverage. Thus, once the face amount of the coverage was agreed upon it could not be arbitrarily reduced or limited by conflicting policy provisions that effectively retracted the stated and agreed upon coverage amount. The Court concluded that it was against South Carolina’s public policy to utilize a family member step-down provision in automobile liability policies.