Step-Down Provisions in Automobile Insurance Policies issued in South Carolina Deemed Unenforceable in Recent South Carolina Supreme Court Decision

Written by: Joseph D. “Trey” Thompson, III

In the recent case of Nationwide Mut. Fire Ins. Co. v. Walls, Opinion No. 28012, filed March 10, 2021, the South Carolina Supreme Court in a declaratory judgment action essentially eliminated an automobile liability insurer’s effort to enforce a “step-down” provision in an automobile liability insurance policy. Generally speaking, the decision will largely prohibit automobile insurers from writing and enforcing “step-down provisions” in South Carolina.

In its simplest form, the underlying case involved the use of an insured vehicle by a permissive driver, who while running from police at speeds in excess of 100 mph, crashed the vehicle causing significant injuries to multiple passengers and a death.  Nationwide insured the vehicle and attempted to reduce its exposure by relying on “flight-from-law enforcement” and “committing a felony” provisions in the applicable policy.[1] However, instead of excluding coverage for those acts, the Nationwide policy simply reduced, or stepped-down, the applicable liability coverage from the stated $100,000 per person and $300,000 per occurrence limits to South Carolina’s mandatory minimum liability coverage limits of $25,000 per person and $50,000 per occurrence.

Nationwide paid the undisputed per occurrence coverage limit ($50,000) and then initiated the declaratory judgment action to enforce the step-down provisions. The trial court concluded that the step-down provisions were unconscionable and void as against public policy. Nationwide then appealed to the South Carolina Court of Appeals which reversed the trial court and held, among other things, that insurers were permitted to place reasonable restrictions on coverage above the legal limits. The Court of Appeals noted that the provisions were neither arbitrary nor capricious and that the statutory mandatory minimum coverage provided protection to innocent passengers in a vehicle evading law enforcement.

In reversing the Court of Appeals, the Supreme Court acknowledged that a majority of courts across the country have upheld similar policy exclusions as not being violative of public policy.[2] However, the Supreme Court focused on state statutes and prior case law to invalidate the provisions. While the dissent accused the majority of legislating from the bench and “judicial slight of hand”, the majority held that its decision was controlled by statute and that the South Carolina legislature could, if it deemed fit, codify such exclusions like other state legislatures have done.[3]

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In the final analysis, the Supreme Court’s most recent decision will likely render unenforceable most every step-down provision contained in an automobile liability policy issued in the State of South Carolina.

[1] The driver was charged with reckless homicide and he entered an Alford plea which, under South Carolina law, is a guilty plea accompanied by an assertion of innocence. In short, the driver voluntarily and knowingly consented to the imposition of a prison sentence while refusing to admit he engaged in the acts constituting the crime.

[2] The very first sentence of a strongly-worded dissent noted that: “Today, counter to every other jurisdiction in the country, a majority of this Court holds that a clear provision in an insurance policy – one which reduces coverage to the statutory minimum where an insured causes damage while fleeing a law enforcement officer – is unenforceable.” (Emphasis added).

[3] For example, Arkansas Code § 23-89-205(1)-(2) specifically provides that an insurer may include an intentional act exclusion, a felony exclusion, and an evasion-from-law enforcement exclusion.