Does a loss in excess of a sublimit have any impact on the amount owed on an insurance claim? The Big I Virtual University is a tremendous information resource about insurance coverage for insurance agents. Insurance claims executives should learn from those underwriting and selling the polices before making wrong claims denials.

Here is a 2009 discussion from the Virtual University on this topic of sublimits and deductibles:

It’s clear in the policy that the deductible is applied to the insured’s LOSS, not the sublimit (see faculty comments below). I don’t recall ever seeing any standard HO or auto policy with sublimits where the sublimit is applied to the loss before the deductible.

Consider an HO policy with a $200 sublimit for money and a $250 deductible. Let’s say the insured keeps $500 in petty cash on hand and it’s destroyed in a fire. The proper way to adjust this loss is to appy the deductible to the loss so that, in the absence of a sublimit, the insured loss is $250 ($500 loss minus $250 deductible). THEN the sublimit is applied so that the insured receives the full $200 sublimit and must pay the $50 uninsured portion out of pocket.

Following the logic of the adjuster and his supervisor in your auto loss, in the HO loss cited above, the insured receives nothing. The adjuster would claim that the $200 sublimit is applied to the $500 loss to get an insured loss of $200…applying the $250 deductible at that stage results in a payment of nothing to the insured. Since $250 is the minimum deductible under most HO programs, it makes no sense at all to have a sublimit in the policy of $200, knowing that the insured can never collect a penny on loss to that type of property. It’s just common sense.

The same approach is commonly applied to unscheduled jewelry losses under an HO policy. Let’s say a ring is stolen valued at $2,500. The sublimit is $1,500 and the deductible is $250. The insured would receive $1,500…a $2,500 loss minus the $250 deductible is $2,250, so applying the sublimit gives the insured a $1,500 recovery.

…

The policy clearly and unambiguously states that the deductible applies to the insured’s loss, not the special limit. I’ve NEVER seen a homeowners or auto policy of any carrier where the deductible is applied to a special sublimit. This is basic licensing school stuff…do you by any chance live in a state where there are no educational requirements for adjuster licensing or CE? Let us know if the company continues to take this position.

The FC&S warns that it is important to read the policy form carefully to determine how the deductible applies to sublimits:

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.”1

Under most first party property forms, the amount of the total loss of covered property is generally subject to a deductible. The company will pay the total loss of covered property less the deductible amount subject to a policy limit. If the policy limit is less that the total loss less the deductible, the insurance company pays the policy limit, and many adjusters call this scenario “absorbing the deductible.”

I have previously written about the concept of the deductible being absorbed because the total loss is greater than the policy limit in, When Calculating Insurance Payments, Take The Deductible From The Repair Value And Not The Policy Limits, and Subtract Deductibles From Repair Or Replacement Values—Not From Policy Limits.

When faced with sublimits, subject to the language in a form, it is helpful to generally think of a sublimit as a specialized amount of coverage for a particular loss that is within the amount of the total loss.

Deductibles are often overlooked until a loss happens. Always remember how sublimits of loss should be measured in total because they can often be used in a measure which will “absorb” part or all of the deductible.

Thought For The Day

All you need in this life is ignorance and confidence, and then success is sure.
—Mark Twain
_______________________________________________________
1 Susan Massmann. Applying Those Tricky Deductibles. Property Casualty360º. Sept. 29, 2006. Available online at: https://www.propertycasualty360.com/2006/09/29/applying-those-tricky-deductibles/?slreturn=20210625180954