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 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.