Can auto insurers reduce coverage when one spouse injures another in an accident? Liberty Mutual Insurance Company v. Shores Explained

In Liberty Mutual Insurance Company v. Shores, the Utah Court of Appeals addressed whether auto insurers can invoke step-down provisions to reduce coverage when one named insured injures another named insured in an accident.

Background and Facts

Burdene and Unior Shores, an elderly retired couple, purchased auto insurance from Liberty Mutual after receiving direct mail solicitations targeting military retirees. Both spouses were named insureds under a policy with $100,000/$300,000 bodily injury liability coverage. However, the policy contained a step-down provision that limited coverage to statutory minimums when one insured injured another. When Mr. Shores negligently caused an accident that severely injured his wife, Liberty Mutual invoked the step-down provision to limit Mrs. Shores’s recovery to $25,000 rather than the full $100,000 policy limit.

Key Legal Issues

The court addressed two primary issues: (1) whether the step-down provision violated Utah law, and (2) whether Mrs. Shores could pursue a bad faith claim against Liberty Mutual as a named insured seeking coverage for injuries caused by her co-insured spouse.

Court’s Analysis and Holding

The court ruled that the step-down provision violated Utah Code section 31A-22-303(1)(a)(iv)(B), which specifically prohibits reducing available coverage when a named insured or household family member causes an accident injuring another covered person. The court examined the statute’s legislative history, noting that the 2005 amendment clarified existing law to prevent insurance companies from stepping down coverage in intra-family accidents. However, the court affirmed dismissal of Mrs. Shores’s bad faith claim, following Sperry v. Sperry in holding that she was a third-party claimant in this context, not a first-party insured owed a duty of good faith.

Practice Implications

This decision provides crucial guidance for practitioners challenging auto insurance step-down provisions in Utah. The court’s analysis of Utah Code section 31A-22-303(1)(a)(iv)(B) establishes that insurers cannot reduce coverage for accidents between household members, even when both are named insureds. However, the ruling also confirms that named insureds pursuing claims based on a co-insured’s negligence are considered third-party claimants for bad faith purposes, limiting their remedies against the insurer.