Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

SEACOR owns and operates marine and aviation assets servicing the transportation and oil-and-gas industries worldwide. Commonwealth issued an all risk insurance policy to SEACOR for 2005. In October 2005, Hurricanes Katrina and Rita caused substantial damage to Seacor’s property. After filing a claim, Commonwealth honored the policy and issued several payments totaling more than $4 million dollars. SEACOR claimed that additional funds were due because Commonwealth applied the wrong deductible to the claim.

There were three types of deductibles in the policy:

(c) In respect of loss caused directly by the peril of Windstorm, as defined: $25,000…

(d) In respect of loss caused directly by the peril of a “Named Windstorm”, as defined, 3% of the total insurable values...subject to a minimum of $50,000 per occurrence

(e) In respect of loss caused directly by the peril of Flood, as defined: $25,000....

At the heart of the bad faith litigation filed by SEACOR against Commonwealth, was whether SEACOR’s damages were caused by windstorm, named windstorm or flood. SEACOR argued a Named Windstorm caused its losses. Commonwealth argued that a “multi-peril occurrence” caused the losses so the deductibles and liability limits for both flood and named windstorm applied. When evaluating the policy and arguments made by the parties, the district court determined that the flood liability limits and deductibles did not apply because the named windstorm's percentage-based deductible structure already included the possibility of greater damages and a correspondingly higher deductible. Accordingly, the Court ruled that only the limits and deductible for a named windstorm should be applied to SEACOR’s claim.

SEACOR also alleged that the claim was adjusted in bad faith because Commonwealth misinterpreted its own policy and, as a result, it should be liable for penalties based on applicable Louisiana statutes and precedent. However, SEACOR presented no evidence that Commonwealth acted arbitrarily or capriciously beyond its inconsistent reading of the provisions in policy. Noting that Commonwealth promptly paid Seacor over $4 million to cover undisputed damages and sought judicial assistance to resolve disputes regarding the policy deductible and liability limits, the Fifth Circuit Court of Appeals upheld summary judgment in favor of Commonwealth on the issue of bad faith.

ISO’s CP 00 30 06 95 and CP 00 30 10 00 (Business Income and Extra Expense Forms) state in relevant part:

3. Period of Restoration means the period of time that:

a. Begins:

(1) 72 hours after the time of direct physical loss or damage for Business Income coverage; or

(2) Immediately after the time of direct physical loss or damage for Extra Expense coverage;
Caused by or resulting from any covered cause of loss at the described premises; and

b. Ends on the earlier of:

(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and quality.

The FC&S Bulletin offers an example which is illustrative of the practical application of the “time deductible” in business income claims.

Business Income—Time Deductible

Q

An insured has had a partial business income loss and we are uncertain what to expect of the loss adjustment with the seventy-two hour time deductible now in our contract. The coverage is written with a monthly limit of $50,000 for the first month. As the loss is partial, is it the amount of actual loss for the first three days that is deducted, or is the deductible amount apportioned for the month? Furthermore, since the loss occurred on a Friday night and the insured does not operate on Saturday and Sunday, when does the seventy-two hour deductible begin? Is it seventy-two hours of normal operation that is deducted, or is our insured just lucky because the firm will really experience only the effect of a one-day deductible on this loss? Can you clarify this?
Dominican Republic Subscriber

A

According to the terms of the Insurance Services Office form for business income coverage (CP 00 30 06 95) recovery is keyed to a defined "period of restoration." For business income (not extra expense) that definition says the period does not begin until seventy-two hours "after the time of direct physical loss or damage." Thus, whether partial closure or complete shutdown occurs, there is no recovery of any business income loss during the first seventy-two hours. If there is no loss of business income during the period, or a reduced loss occurs because the business is normally closed during all or part of the time of the "period of restoration," the insured is lucky.
Extra expense is treated differently because the object is to do whatever is necessary to get the business up and running again. If by immediate action, such as hiring an emergency crew of workers and paying for express delivery of goods and materials, the period of interruption can be reduced, insured and insurer both benefit.

However, the term “time deductible” as referred to in this blog, is to be considered a waiting period and not a formal deductible that could conflict with certain policy language. Another FC&S Bulletin explains the formality:

Waiting Period Not the Same as a Deductible

Q

Our insured had a business income loss that resulted in a twenty-eight hour closure. The property deductibles section of the policy states that no deductible applies to business income and extra expense coverage. However, the policy also states that the business income coverage is only available during the period of restoration, which does not begin until twenty-four hours following the time of direct physical loss. We think these two provisions are in conflict. What are your thoughts?

Ohio Subscriber

A

The deductibles section of the policy refers to the monetary deductible amount that the insured agrees to pay in the event of a covered loss. The twenty-four hours prior to the beginning of the period of restoration for the business income loss is a waiting period during which the coverage does not apply. Because the waiting period is not a deductible, the two provisions are not in conflict.

One wrongful adjustment method that occurs from time to time is the practice of taking the deductible from the policy limit. For insurers, this is a way to never pay the policy limit. When this occurs, the underwriter essentially charges unearned premium for the amount of the deductible, and the policyholder never has a chance to fully recover under the policy. Sometimes the practice occurs out of ignorance. Some just take advantage of the unknowing policyholder.

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.

I wrote that post because a Texas policyholder attorney wrongly applied the deductible to the policy limit. Policyholders would never obtain policy limits if this were the correct application of the deductable. It is completely illogical. For example, if a policy deductible was a hundred dollars and the policy limit was a hundred dollars, there would never be a payment on the policy.

Brandon McWherter added to the analysis by noting:

Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs. In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases. My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976). In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law. There is no logical reason why the same rule of law would not be true in Tennessee as well.

This very simple concept seems to be a recurrent issue. For those interested in the topic, I provided a citation for further reading:

This is often referred to as “absorbing a deductible.” For all adjusters studying this, and those that want to point out that they have been wronged, there is an excellent discussion in Property Loss Adjusting (Insurance Institute of America 3rd Ed 2004), section 2.17.

The enforceability of these hurricane deductibles and the penalty for failure to comply with Florida’s statutory requirements is currently pending before the Florida Supreme Court. Florida Statute §627.701(4)(a) states:

Any policy that contains a separate hurricane deductible must on its face include in boldfaced type no smaller than 18 points the following statement: ‘THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU.’

In Chalfonte Condo. Apartment Assoc., Inc. v. QBE Insurance Corp., 561 F.3d 1267 (11th Cir. 2009), the Eleventh Circuit Court of Appeals certified two questions to the Florida Supreme Court concerning the statute. The questions certified are:

1. May an insured bring a claim against an insurer for failure to comply with the language and type-size requirements established by Florida Statute §627.701(4)(a)?
2. Does an insurer's failure to comply with the language and type-size requirements established by Florida Statute §627.701(4)(a) render a noncompliant hurricane deductible provision in an insurance policy void and unenforceable?

The Eleventh Circuit Court of Appeals noted in Chalfonte that resolution of both of these issues requires a determination of how the Florida Legislature intended courts to handle violations of §627.701(4)(a) in the absence of a specific remedy within the Statute’s plain language. The Statute does not contain a penalty or remedy for an insurance carrier’s failure to comply with the hurricane deductible boldfaced type and font requirements.

The Florida Supreme Court has not yet answered these questions, among others in the case. The appropriate penalty for an insurer’s failure to comply with §627.701(4)(a) will be very important since condominium association and commercial policyholders with large hurricane deductibles may have been required to sustain and pay millions of dollars in damages before being entitled to any payment. Would they be entitled to the money withheld for the very large hurricane deductible, or a portion of it, as the penalty? We will keep you posted when the Supreme Court answers these questions.

It is particularly important for policyholders to be aware of this protection during active hurricane seasons. According to predictions, this will be one.

Specifically, Florida Statute §627.701(5)(a) states:

The hurricane deductible of any personal lines residential property insurance policy issued or renewed on or after May 1, 2005, shall be applied as follows:

1. The hurricane deductible shall apply on an annual basis to all covered hurricane losses that occur during the calendar year for losses that are covered under one or more policies issued by the same insurer…
…
3. If there was a hurricane loss for a prior hurricane or hurricanes during the calendar year, the insurer may apply a deductible to a subsequent hurricane which is the greater of the remaining amount of the hurricane deductible or the amount of the deductible that applies to perils other than a hurricane. Insurers may require policyholders to report hurricane losses that are below the hurricane deductible or to maintain receipts or other records of such hurricane losses in order to apply such losses to subsequent hurricane claims.

If more than one hurricane makes landfall during a calendar year, the storms can obviously have significant impact on residential property claimants in Florida. This happened in 2004 and 2005, where more than one storm affected the same areas of the state and numerous policyholders had more than one hurricane claim for those calendar years. According to Florida Statute §627.701(5)(a), if the insurance carrier applies the full hurricane deductible to the loss from the first hurricane during the calendar year, the insurer will only be able to apply the “other perils” deductible to a subsequent hurricane claim during the same calendar year.

This can be a significant difference between a percentage hurricane deductible and the “other perils” deductible, which is likely $500 or $1,000. Policyholders should keep records of repair expenses incurred following hurricane incidents to demonstrate their repair and mitigation efforts.

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.

I am writing this because of a recent Texas Appellate insurance case, Bruton v. Underwriters at Lloyd's, London, 2009-TX-0407.431, 2009 Tex. App. LEXIS 2189 (Tex. App. April 2, 2009).

Our firm's computerized legal research supplier, LexisNexis, summarized the case as follows:

“The insured's trailer damaged, and a claim was reported to the insurer. It was determined that the trailer was totaled due to the amount of damage, and it was placed up for salvage bids and sold. However, the insured wanted the trailer back. He filed a lawsuit against the insurer and others. Judgment was entered for the insured in an amount less than what he sought, and this appeal followed. In reversing, the appellate court determined that the trial court erred by holding that the insurer obtained equitable title to the trailer upon tendering payment of the policy limits. Although the insurance policy unambiguously provided the insurer with the right to take possession of the property, the policy failed to mention when that right attached. There was nothing in the policy that would have put the insured on notice that once the insurer tendered him a check, he would have lost all rights to his property. Because the appellate court was to resolve any ambiguity in favor of the insured, the insurer did not have the right to sell the trailer until the insured had negotiated a check and executed a power of attorney.”

This scenario interested me because we commonly encounter situations where insurers try to take salvage when they are not entitled. Commercial insurance policies typically allow the insurer to take salvage on personal property when they pay the full agreed value of the article. The situation is different if the insurer does not pay full value, where the policy does not allow for salvage, or where the policy limits for property is less than the value.

I almost fell out of my chair when I read how the parties in Bruton calculated a policy limit case. It is simply wrong, although that was never an issue in the case; when issues are not raised, judges have no reason to question them. These facts relate to the deductible issue:

“Bruton…bought a…trailer in August 1999 for $12,500 [This amount reflects a subtraction from the total price of $ 19,300 for the trade-in value of a 1969 Hobbs trailer]. Soon thereafter, he purchased a $10,000 insurance policy for the trailer from Underwriters. Around October 17, 2001, the trailer tipped over. Bruton reported a claim to Underwriters and advised them that certain repairs were necessary for the trailer to dump again.

The adjuster, employed by Marshall Contractors, Inc, determined that the cost to repair the trailer would be approximately $14,600. Based upon this estimate, Marshall Contractors, Inc. declared the vehicle totaled and through its agent, Rocky Engblad, placed the trailer up for salvage bids.

On October 31, 2001, Bruton received payment in full under the policy in the amount of $9,000 [$10,000 (policy amount) - $1,000 (deductible)].”

The policyholder should have insured the trailer for $19,300, assuming this was the fair purchase price and the trade-in was fair. At a minimum, assuming the trade-in had no value, the insurable value should have been $12,500.

The repair value of $14,600 is the basis to then determine whether the repair costs exceed the value of the trailer. The facts are not clear regarding the value of the trailer at the time of the loss. Generally, the insurer pays the lower of the cost to repair or the value of the damaged article less the deductible—subject to the policy limit.

In this case, the Court is wrong to indicate that Bruton received “payment in full under the policy.” He received $1,000 less than the amount available under the policy. He should have been paid $10,000, the policy limits, so long as the repair costs and the value at the time of the accident were greater than $11,000.

This is often referred to as “absorbing a deductible.” For all adjusters studying this, and those that want to point out that they have been wronged, there is an excellent discussion in Property Loss Adjusting (Insurance Institute of America 3rd Ed 2004), section 2.17.

I wonder if Bruton’s attorney knows that his client may have been shorted $1,000? What if it were a large commercial loss with a million dollar deductible? If you are a policyholder with a complex loss, consult somebody who knows what they are doing.