It is common for individuals who own a business to include their personal vehicles as assets of the business which are covered under the business insurance. It is not unusual for us to find that our client has a spouse who owns and operates a business, and the client’s personal vehicle is owned and insured by that business, even though the client does not work for the business.
A classic example is a wife who drives an SUV that is owned and insured by her husband’s construction business, although the wife does not work for the business. This makes sense for a couple of reasons.
- It shifts the cost of vehicle acquisition, maintenance, and insurance coverage from the personal accounts to a business account, conferring obvious financial benefits to the vehicle user; and
- it makes the higher liability limits often found in business policies available, affording greater protection to the family drivers.
When the children of the marriage become old enough to drive, the parents will often times purchase a separate policy for the young drivers, because of the negative impact of insuring them under the business policy. Typically, one or both of the parents are the owners of the young drivers’ vehicle(s), and are the named insured of the insurance policy obtained for the vehicle. Unfortunately, there is a pitfall associated with this approach to vehicle ownership and insurance, which is not appreciated by many people until it has reared its ugly head. The genesis of the problem is called a “step down clause”.
The New Jersey Supreme Court approved the use of a step down clause in an important decision known as Pinto v. New Jersey Mfgrs. Ins. Co. in 2005. A stepdown clause is a device that limits the exposure of an insurance policy by reducing the benefits available thereunder to the levels of another policy.
Here is how it works: John works for ABC Construction Company, and often drives an ABC truck which is insured by Alpha Insurance Company under a business vehicle policy with $500,000CSL liability and UM/UIM limits. John also owns his own vehicle, which is insured by Beta Insurance Company with $25,000/$50,000 liability and UM/UIM limits. John is seriously injured in a motor vehicle accident while driving the ABC truck and the offending driver has minimum insurance coverage of $15,000, which is insufficient to satisfy John’s claim. John makes a claim with Alpha Insurance Company as well as Beta insurance company for UIM benefits. There is a step down clause in the Alpha policy, which states that Alpha’s exposure to John’s claim is limited to the amount of coverage available to John under his own insurance policy, or a pro rata share of the difference between $25,000 and $15,000, or $10,000. Despite the fact that the Alpha policy contained $500,000 in UIM benefits, John is not eligible to make a claim against these larger limits because of the step down clause.
Let’s return to the example of the wife of the small business owner, and assume that she is injured in an accident while driving her SUV, which is owned and insured by her husband’s business. She has serious injuries, and the wrongdoer has minimum coverage, and she seeks UIM benefits under the business policy. A step down clause in the business policy limits its exposure to the limit of coverage available to her under the personal policy on her children’s vehicle, and she is unable to take advantage of the more substantial coverage available under the business policy.
The moral of this story is twofold: first, you should maintain high liability and UIM benefits on all policies which provide coverage to your family; second, you should make sure that you are actually entitled to the benefits you believe you are purchasing, either by reading the policy yourself, or obtaining an expert opinion on the coverage it offers. We have seen too many situations where seriously injured claimants are denied benefits that would more appropriately compensate them for their loss, due to step down clauses that the injured person did not know were present in the insurance policy.
John Sakson is a Shareholder and Co-Managing Direcotr of Stark & Stark’s in the firm’s Lawrenceville, New Jersey office, specializing in Accident & Personal Injury Law. For more information, please contact Mr. Sakson.