When Hurricane Floyd hit the Carolinas, this hotel suffered severe damage. Although the amount of the loss is currently in appraisal, it will be about $5 million; out of that $5 million, $1.3 million is uncovered damage to exterior property. Of the remaining $3.7 million, the insurer says only about $800,000 is covered.

Our problem with the insurer is the way in which the adjuster is attempting to apply the deductible. He says that it applies to the amount of the covered loss. Thus, the insurer says that the deductible of $353,193 applies to the $800,000 that is payable.

We believe that this application of the deductible is wrong and we would appreciate your thoughts.

Tennessee Subscriber

A

The deductible in a commercial property policy applies to the amount of the loss — not to the amount of the insurable loss; not to the limit of liability; not to any special sub-limit of liability. It applies to the total amount of the loss, as respects the insured.

The deductible is applied to the total amount of the loss, which is $5 million, leaving $4,646,807 payable. However, that amount is further limited by the exclusion of damage to certain types of exterior property. Thus, the $1.3 million in uncovered hail damage is taken from that, leaving a final amount payable of $3,346,807.

Even if the insurer were correct in stating that only $800,000 is payable, the deductible still applies to the amount of the loss—$5 million. Thus, if the insurer prevails in appraisal and the amount payable is reduced to $800,000, the insurer will still owe the full $800,000: amount of loss ($5 million); less the deductible ($353,193) for an initial amount payable of $4,646,807; less the $1.3 million in uncovered hail damage (leaving $3,346,807); less $2,546,807 that the insurer claims is not covered (leaving a total amount payable of $800,000). No further deductions would be taken.

An example: a standard limitation in the CP 10 30 is $2,500 for the theft of “patterns, dies, molds and forms.” Let's say that a thief breaks into a machine shop covered by a CP 00 10 and CP 10 30. The deductible is $1,000.

The thief takes $4,000 worth of “patterns, dies, molds and forms.” The $1,000 deductible first applies to the loss, leaving $3,000 payable. However, that amount is further limited to $2,500 by the above provision. This insured is owed $2,500 by his insurer.

Look at it another way. In the above example if the deductible of $1,000 were applied to the sub-limit of $2,500, the insured could collect only $1,500. If this were the case, the policy would never pay its full limits.