“Elasticity Clauses” – What Are They?

March 11, 2015

Many insurance policies contain an “elasticity clause.” This is a provision which mandates the insurance policy must conform to the law of the state where it is issued. There has been little litigation in Wisconsin concerning elasticity clauses until just recently. Litigation that does arise generally occurs in the following factual context:

A policy is issued. Subsequent to the issuance date, the legislature enacts a statute that requires specified coverages beneficial to the policyholders be included within the policy. The statute provides that it is effective as to policies issued on and after a specified date. The policyholder is injured before the policy renews. The injured policyholder claims he or she is entitled to the statutory-mandated additional benefits, because the elasticity clause mandates the policy in question conform to the law of the state where it is issued. Since the law had been amended to require the additional coverage, the elasticity clause conforms the policy to the amended law.

Recently, the Wisconsin Court of Appeals issued a decision, recommended for publication, which deals with the applicability of an elasticity clause in the state. This will be the first published Wisconsin decision dealing with this type of clause.

In Wolf v. American Family Mutual Ins. Co. (2014 AP 1522-FT), the Court was confronted with the following facts: The Wisconsin legislature enacted the “Truth in Auto Law,” which was in effect for the period November 1, 2009, to its repeal on November 1, 2011. During this timeframe, the law prohibited reducing clauses and created broader protections for underinsured motorist coverage. This law specifically stated that it applied prospectively. It affected insurance policies issued or renewed on or after November 1, 2009. The plaintiff in the case had procured a policy of insurance that was in effect prior to November 1, 2011. That policy contained an “elasticity clause,” which mandated the insurance policy conform to the law of the state of Wisconsin, where it was issued.

The policy was renewed, but before the effective date of the amendment. Subsequent to the effective date of the amendment, the plaintiff was injured in a car accident while she rode as a passenger in an automobile driven by a third party. The carrier in question provided automobile liability coverage for both the plaintiff, as well as the operator of the vehicle. Both policies had underinsured coverages of $250,000. The injured plaintiff received $250,000 from the carrier who had written a policy on the driver. The injured plaintiff then made a claim under her policy issued with the same carrier for underinsured motorist coverage. That carrier refused to make payment because the policy had a reducing clause which curtailed the coverage owed to the plaintiff by the amount she received under the carrier’s policy covering the negligent driver.

There was no dispute the injured plaintiff would not receive underinsured motorist coverage under her policy because of the specific policy exclusions. However, the Truth in Auto Law, once enacted, created a broader definition of underinsured motorist motor vehicles and also prohibited reducing clauses like the one that was at issue in the plaintiff’s policy. Had the Truth in Auto Law applied to the subject policy, the injured plaintiff would have received the underinsured benefits.

Therefore, the question presented to the Court was whether or not the “elasticity clause” appearing in the plaintiff’s automobile policy, in essence, required that the policy conform to the law which would be effective at some time subsequent to the renewal of the subject policy.

In resolving this issue, the Court of Appeals relied upon an unpublished decision of the Court that had been issued in 2014. That unpublished decision dealt with an almost identical fact situation. After discussing that case, the Court of Appeals held that an insurance policy cannot be in conflict with a statute that does not apply to the policy in question. The elasticity clause specifically provided only terms “in conflict with” statutes of the state would change and conform the policy to those laws. Because the Truth in Auto Law specifically stated it applied to insurance policies issued after a specified date, the statutory changes the law made did not apply to the subject policy. Therefore, the policy was not in conflict with the Truth in Auto Law. That was the reasoning adopted by the Court of Appeals.

Accordingly, the law in Wisconsin is now relatively clear. Elasticity clauses are enforceable. These clauses do not immediately implement legislative changes which are not “in conflict with” the terms of the policy where the legislative changes are not effective until a policy is renewed or issued.

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