We have a friendly argument regarding the application of two deductibles for a single loss. We have a theft loss where damage was done to the building and personal property was stolen. Each coverage has its own deductible under form CP 00 10 06 95.

Some of us believe that two deductibles — one for the building and one for the personal property — should apply. Other coworkers believe that only one deductible should apply because it is only one occurrence. However, if this is the case, why do two deductibles apply under windstorm, which is also one occurrence?

The short answer is that not all deductible provisions are the same.

Taking the long route, the answer is found by first looking at the CP 00 10's deductible section. It provides examples of how to apply the deductible when more than one item of covered property is involved in the loss and when more than one limit of insurance applies. One of the examples states, “The deductible applies once per occurrence.”

Half of the friendly argument is settled right there. While separate limits may apply, the theft and the property damage constitute one occurrence, so only one deductible should be subtracted.

However, the Windstorm and Hail Percent Deductible endorsement, CP 03 21 06 95, specifically states that the deductible is calculated separately for the building and personal property in the building if both are lost or damaged. The other coworkers in the argument can be satisfied with that answer, too.

Where Does Deductible Fit?

Another problem arises in determining from what amount the deductible should be subtracted. The following question came from a subscriber who wasn't sure where the deductible fit, if at all:

Our insured had a leaky shower stall — the liner under the shower pan was installed incorrectly. The cost to remediate the resulting mold damage was $14,000, and water caused $1,700 in damage.

Under the HO 00 03 10 00, with mold endorsement HO 04 05 12 02, I believe the mold coverage would extend up to $10,000 and absorb the deductible in the uninsured portion of the mold loss. Would the $1,700 be covered and would the $500 deductible apply to that part of the loss?

Traditionally, adjusters apply the deductible to the actual amount of loss, which worked to the insured's advantage. In this instance, the total amount of the loss is $15,700. Using the traditional method, $500 would be subtracted from the total amount of $15,700. Then the $10,000 limit for the mold damage would apply, and the water damage would be covered in full.

However, the HO 00 03 10 00 contains a provision that does not follow the traditional method. The form says, “Subject to the policy limits that apply, we will pay only that part of the total of all loss payable under Section I that exceeds the deductible amount shown in the declarations.” Thus, the deductible would come off the amount actually payable, not the total amount of loss.

Read Forms Carefully

On some forms, such as the Garage Coverage form, deductibles may apply to only certain perils. A subscriber asked:

One of the auto dealers I represent carries specified perils coverage for auto physical damage on garage coverage form CA 00 05 10 01. He sustained a loss under this coverage section, so I want to be sure that the deductible is applied properly.

In reading the form, I believe that a deductible applies only to losses when it is caused by theft, mischief, or vandalism. However, this just doesn't seem right. How should the deductible be applied?

Although it may not seem right, that is exactly how the deductible is applied on the 2001 edition of this form. The physical damage coverage on the form differentiates between dealers and non-dealers in the application of the deductible. If the insured is a dealer, the deductible for either comprehensive or specified perils applies only to losses caused by theft, mischief, or vandalism.

On the other hand, if the insured is a non-dealer, the deductible on comprehensive coverage applies to all perils except fire or lightning.

Chicken or the Egg?

Another common question we receive is which comes first — the limit or the deductible? This question on a homeowners' policy illustrates the puzzlement:

One of my clients, who is insured on a HO 00 02 04 91, lost $7,200 worth of property in a burglary. There was $1,700 worth of jewelry and $5,500 of personal property taken. The policy deductible was $1,500. I believe that the deductible should be applied to the loss before the jewelry limitation of $1,000 is taken into consideration.

Using this logic, I believe the client should recover $5,700, which is the amount left if the deductible is applied to the loss before the jewelry limitation is considered. Is this correct?

The subscriber's logic is correct. Here, the deductible is applied first. The $1,500 deductible is allocated to the $1,700 jewelry loss, leaving a recovery amount of $200 for jewelry and $5,500 in personal property for a total loss payment of $5,700.

While the traditional method of subtracting the deductible from the actual amount of loss often makes the most sense, many deductible provisions break with tradition. When in doubt, read the policy.

Susan Massmann is assistant editor for the Fire, Casualty & Surety bulletins. She can be contacted at [email protected].