March 6, 2015 – Elasticity clauses in insurance policies mandate that the policy must conform to the law of the state in which the policy is issued, accounting for any conflicts with state law. For Rhiannan Wolf, though, the elasticity clause doesn’t help her.
Wolf renewed her auto insurance policy in 2009, before the effective date of Wisconsin’s “Truth in Auto Law,” which created greater protections for persons injured by underinsured drivers. She was injured after the law’s effective date, but argued that the elasticity clause required her policy to conform to the “Truth in Auto Law.”
But in Wolf v. American Family Mutual Ins. Co., 2014AP1522-FT (March 4, 2015), a three-judge panel for the District II Court of Appeals ruled that the elasticity clause could not be applied, since Wolf renewed the policy before the law’s effective date.
“Wolf’s policy could not ‘conflict’ with a law that only applied to renewed or issued policies after November 1, 2009, which hers was not,” wrote Chief Appeals Court Judge Richard Brown for the panel, which recommended the opinion for publication.
Wolf was injured as a vehicle passenger in December 2009, five weeks after the “Truth in Auto Law” took effect. Under the driver’s underinsured motorist policy with American Family Insurance, Wolf received a policy limit of $250,000.
In 2012, Wolf sued the driver and American Family for additional damages. Her own policy with American Family had contained a “reducing” clause, which curtailed the amount owed to Wolf by amounts received from other sources.
Wolf’s underinsured policy limit was the same as the drivers. Thus, the reducing clause reduced Wolf’s coverage by the full amount, $250,000. But under the Truth in Auto Law, reducing clauses were illegal. She said her policy had to conform to the new law, under the elasticity clause requiring policies to conform to state law. The panel disagreed.
“The elasticity clause was designed to automatically change a policy term in place on the policy’s effective date that conflicts with a law promulgated and made effective during the policy period,” Judge Brown wrote. “But we do not have that situation here.”
The elasticity clause would only apply if, on the date Wolf renewed her policy, the policy conflicted with current state law, the panel explained. When Wolf renewed her policy, the Truth in Auto Law did not exist. Thus, the reducing clause could not conflict with it.
Note: A law enacted in 2011 repealed the Truth in Auto Law. Thus, insurers can include “reducing” clauses in auto insurance policies.