PIANJ supports ban on step-down clauses

Imagine paying for robust auto insurance coverage—only to learn too late that your policy quietly includes a loophole that guts your protection in certain common scenarios.  

That’s the harsh reality for too many New Jersey drivers, thanks to so-called step-down clauses buried in the fine print of many personal auto policies. PIANJ believes this practice is unfair, misleading, and ultimately, harmful to consumers, and that’s why the association strongly supports legislation to ban step-down clauses in New Jersey. 

What are step-down clauses? 

Step-down clauses—sometimes referred to as intra-family exclusions or household step-downs—reduce the liability coverage available under a personal auto policy in specific situations—often when a family member or other permissive driver is behind the wheel.  

These clauses can slash coverage limits down to the state minimum—currently just $25,000 per person and $50,000 per accident—even if the policyholder paid for far higher limits. 

In short, insureds may think they’re protected by $100,000—or even $250,000—in liability coverage, but a step-down clause can render that coverage essentially meaningless when a driver needs it most. 

Real-life examples 

These are not abstract legal issues—they’re real risks that impact real people. Consider the following situations: 

The home-for-the-weekend daughter: Consider the following case law, Polizzi v. Liberty Mutual, 2021. A father buys $100,000/$300,000 coverage and lists his daughter—a college student living on her own—as a named driver. She comes home for a weekend and she is involved in an accident. The insurer limits coverage to the state minimum, claiming she’s not a “resident relative.”  

The family-car trap: Let’s take another example, Dela Vega v. Travelers, 2022. A husband and wife were driving together when an accident occurred—and the husband was at fault for the accident. Despite their shared policy carrying $100,000 in liability coverage, the wife’s recovery was limited to just $15,000, the state minimum at the time. Why? Because of an intra-family step-down clause that reduced coverage for injuries to resident relatives.  

The designated-driver dilemma: A man responsibly gives his car keys to a sober friend after a night out. If an accident occurs, the friend is not covered under the man’s policy at full limits—even though the auto insurance should follow the car, not the driver. 

These scenarios expose a troubling reality: consumers can’t rely on their insurance to behave as expected. Even responsible policyholders trying to do the right thing are blindsided by these technical, counterintuitive exclusions. 

Why PIANJ supports a ban 

PIANJ believes step-down clauses: 

Undermine consumer expectations. Policyholders should receive the coverage they purchase, without surprise carve-outs that reduce limits behind the scenes. 

Create inequitable treatment. Why should children injured in their parents’ car receive less protection than a neighbor’s child who may be in the same seat? 

Punish responsible behavior. Listing a child on an insurance policy, encouraging designated drivers or helping a friend should not result in reduced insurance protection. 

Banning step-down clauses will ensure that New Jersey’s auto insurance system is fair, transparent, and consistent with public expectations. It reinforces the fundamental insurance principle that coverage follows the vehicle, not the identity or residence of the driver or passenger. 

What is PIANJ doing about it? 

PIANJ is leading the charge to end this unjust practice. For years, the association has worked tirelessly to educate lawmakers and regulators on the real-world impact of step-down clauses. PIANJ’s efforts include: 

• testifying before legislative committees, using real-life scenarios to humanize the issue and emphasize its urgency; 

• pushing for legislative reform to prohibit or restrict the use of step-down clauses in personal auto insurance policies; 

• collaborating with consumer advocacy groups to build a united front against coverage limitations that hurt New Jersey families; and 

• raising public awareness to empower consumers to review their policies and ask their agents tough questions about coverage limitations. 

Time for action 

Step-down clauses have no place in modern auto insurance policies. PIANJ urges lawmakers to support legislation to prohibit these hidden coverage reductions.  

Drivers should not need a law degree to understand what their insurance covers. They should be able to trust that the protection they pay for is the protection they’ll receive—no asterisks, no fine print exceptions. 

PIANJ is committed to advocating for this crucial reform and it will continue working with legislators, regulators and consumer advocates to ensure every New Jersey driver is treated fairly under their auto insurance policy.