You've tried subtracting them from the covered loss. You'veapplied them to the total loss. You've even taken more than one forthe same loss.

What are you really supposed to do with those peskydeductibles?

The FC&S staff has received many questions about the properway to apply a deductible. We agree, sometimes it is just plainconfusing.

One area of puzzlement results from trying to apply onesection's policy language to another part of the policy or to acompletely different form. For instance, one FC&S subscribersubmitted the following question:

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

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

The short answer is that not all deductible provisions are thesame.

Taking the long route, the answer is found by first looking atthe CP 00 10's deductible section. It provides examples of how toapply the deductible when more than one item of covered property isinvolved in the loss and when more than one limit of insuranceapplies. One of the examples states, “The deductible applies onceper occurrence.”

Half of the friendly argument is settled right there. Whileseparate limits may apply, the theft and the property damageconstitute one occurrence, so only one deductible should besubtracted.

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

Where Does Deductible Fit?

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

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

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 absorbthe deductible in the uninsured portion of the mold loss. Would the$1,700 be covered and would the $500 deductible apply to that partof the loss?

Traditionally, adjusters apply the deductible to the actualamount of loss, which worked to the insured's advantage. In thisinstance, the total amount of the loss is $15,700. Using thetraditional method, $500 would be subtracted from the total amountof $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 notfollow the traditional method. The form says, “Subject to thepolicy limits that apply, we will pay only that part of the totalof all loss payable under Section I that exceeds the deductibleamount shown in the declarations.” Thus, the deductible would comeoff the amount actually payable, not the total amount of loss.

Read Forms Carefully

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

One of the auto dealers I represent carries specified perilscoverage for auto physical damage on garage coverage form CA 00 0510 01. He sustained a loss under this coverage section, so I wantto be sure that the deductible is applied properly.

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

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

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

Chicken or the Egg?

Another common question we receive is which comes first — thelimit or the deductible? This question on a homeowners' policyillustrates 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 ofjewelry and $5,500 of personal property taken. The policydeductible was $1,500. I believe that the deductible should beapplied to the loss before the jewelry limitation of $1,000 istaken 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 lossbefore the jewelry limitation is considered. Is this correct?

The subscriber's logic is correct. Here, the deductible isapplied first. The $1,500 deductible is allocated to the $1,700jewelry 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 fromthe actual amount of loss often makes the most sense, manydeductible provisions break with tradition. When in doubt, read thepolicy.

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