Take The Deductible From the Loss and Not the Coverage Limit
Do you ever read or see something, and a secondary issue pops up that just seems wrong? The topic of this post was not discussed anywhere in the briefing by fine attorneys, the trial judge, or the appellate judges of a case decided last week. 1 This one fact and issue about how deductibles are to be treated kept nagging at me. The court noted the following:
Century sought to recover the costs under its marine cargo insurance policy, which Lloyd’s of London underwrote. Lloyd’s agreed that the policy’s Extra Expense Clause covered up to $1 million of Century’s extra transportation expenses, but it claimed that the policy otherwise excluded losses due to delay. After paying its deductible, Century accepted $975,000 for its extra transportation costs and continued to seek coverage for the other costs.
Unless the extra transportation costs equaled exactly one million dollars, do you see the deductible and payment issue above? If not, I would suggest you read How Deductibles Impact Claims Payment—Sublimits and Absorbing the Deductible, and When Calculating Insurance Payments, Take the Deductible From the Repair Value and Not the Policy Limits. Regarding a general rule to be followed when applying deductibles, I have stated the following:
The general rule for determining loss payment where a deductible applies is:
Total amount of covered loss less deductible, subject to the policy limit. If the amount of the damage– minus the deductible– is greater than the policy limit, the insurance company’s liability is only the policy limit. The policy limit is the amount of coverage purchased.
Just to be certain that this case did not have some crazy policy language, I researched the trial court filings where the policy provides the following related to the deductible:
All claims for loss, damage or expense resulting from any one occurrence or series of occurrences arising out of one event, shall be adjusted as one claim, and from the amount of such adjusted claim there shall be deducted the sum of USD 100,000 (or equivalent in any other currencies) but USD 25,000 in respect of Extra Expense (or equivalent in any other currencies).
Notwithstanding the foregoing, claims recoverable under the American Institute Cargo Clauses (unamended), the American Institute War, the American Institute Strikes and General Average, Salvage, Extra Expense and Sue and Labour Charges shall be payable in full.
The Insured is granted the authority to issue Certificates of Insurance without reference to any deductible or deductibles incorporated under this insurance, for letter of credit purposes. Insurers to settle any recoverable claim in full but Insurers hereon to be reimbursed by the Insured for all claims, up to the amount of said deductible or deductibles, paid by the Insurers which fall within the applicable deductible or deductibles. It being further agreed that any additional costs incurred in respect of settlement of CPA claims to be borne by Insurers.
Again, the deductible is taken from the “loss” and “claim,” and nothing suggests that it is taken from the extra expense policy limit. Otherwise, the policy limit would be $975,000 and the insurer would never have exposure for $1 million.
The case has an intriguing analysis, which I will comment on tomorrow. However, as far as I can determine, the policyholder left $25,000 on the table. I wonder how many more of Lloyds’ customers have received a similar underpayment based on a misapplication of the deductible?
Thought For The Day
Attention to detail is not about perfection. It’s about excellence, about constant improvement.
—Chris Denny
1 Century Aluminum Co. v. Certain Underwriters at Lloyd’s, No. 23-5543, — F.4th —, 2024 WL 1460451 (6th Cir. Apr. 4, 2024).
