When can corporations get away with not reimbursing their carriers for liability deductibles after settlements are made? Not too often, according to courts that have addressed the question.

A review of case law indicates that corporate insureds may refuse to reimburse their carriers for liability deductible payments even though their policies clearly include such deductibles. When that happens, the courts may be asked to referee.

First-party property deductibles work in a pretty clear-cut fashion, with the insurer subtracting the amount of the deductible from the settlement check. There's no need for the business/insured to reimburse the insurance company.

Liability deductibles, on the other hand, operate differently. Since payment goes to a third party, the insurance company typically advances the deductible amount and then recovers it from the insured–or tries to.

That's what happened in Boral Industries Inc. v. Continental Casualty Co. In this case, Boral alleged that Continental Casualty had acted in bad faith by settling a claim for less than the deductible amount and then seeking reimbursement. Boral said the policy did not provide coverage for the underlying claim. Continental counterclaimed to recover the settlement.

In deciding the case, the 11th circuit affirmed the appeals court decision that Boral was obligated to reimburse the insurer. The policy in question had an “unfettered right to settle claims,” according to the court. When interpreting the right to settle and deductible provisions of the Continental policy, the court added that Boral, as a “sophisticated corporate entity,” had the opportunity to negotiate for insurance without such a settlement provision. Once Boral turned in the claim, Continental had the right to settle and then seek reimbursement for the deductible.

Taking this a step further, if the settlement had exceeded the deductible, Continental may have been able to recoup not only the deductible, but the entire settlement amount–even if the policy in fact did not provide the applicable coverage.

The idea that a carrier may be able to collect not only the deductible but the entire settlement amount is borne out in New Hampshire Insurance Co. v. Ridout Roofing Company Inc., a California appeals case.

In Ridout, the commercial general liability insurer had paid 11 separate claims under the policy. Some were simple claims while others were lawsuits.

Ridout turned the claims over to New Hampshire, which accepted them under reservations of rights. New Hampshire paid more than $155,000 on the 11 claims. Of that amount, deductibles represented nearly $51,000. After each settlement, New Hampshire sought reimbursement for the $5,000 per occurrence deductible–or the settlement amount if less than $5,000.

Ridout determined it did not owe the money because the policy did not cover the claims it had filed. The reason was that damage to third parties was not alleged and therefore was not covered.

The Ridout court explained that case law differs somewhat on whether an insurer is liable to an insured for settling cases within policy limits when, by doing so, the settlement harms the insured.

The rulings depend upon the type of damage caused to the insured and “the precise policy terms.” In this instance, Ridout was obligated to reimburse New Hampshire for the deductibles.

A similar situation presented itself in American Home Assurance Co. v. Hermann's Warehouse Corp.

Here, again, the court weighed the issue of whether an insurer could use the insured's money–via the deductible–to make claims go away, against the possibility that a carrier might put the insured's assets at risk by refusing to settle a claim–and by doing so, risk a judgment in excess of policy limits.

In siding with the carrier, the court noted once again that Hermann had “bargained away whatever rights might otherwise be created” by the seeming conflict between insurer and insured in a liability deductible situation.

The court offered the advice that good business sense might dictate that an insurance company keep a business in the loop during settlement proceedings. That advice, however, did not rise to a requirement that the insurer obtain the business/insured's consent to settlement. The carrier had the right to settle once the claims were submitted and, subsequently, to recoup the deductible amounts paid.

These and other such cases illustrate several concepts.

First off, many courts take the stance that corporations can negotiate their insurance policy terms before they buy. So, if a deductible is included alongside a provision granting the carrier's right to settle, courts likely will infer the business knew what it was doing when agreeing to both conditions.

Allegations of bad faith after claims are settled and the carrier is looking for deductible reimbursement likely will not be met kindly in many courtrooms, especially when the business is a sophisticated corporate entity that should have known what it was buying.

On the other hand, businesses may be caught in the middle when frivolous claims arise but defense is needed.

Policy terms and conditions require that insureds notify their carriers and turn over such claims in a timely fashion. Failure to do so could result in a denial of the claim at a later date because of late notice. But if the insured does notify the insurer, it runs the risk of having to reimburse the carrier that settled the claim–even if, in fact, no coverage existed under the policy.

Businesses cannot expect their deductibles will be forgiven when their carriers settle claims, even if they feel the settlement wasn't warranted and the claim should have been fought.

This conflict may be unavoidable for businesses that either choose–or are more or less forced–to assume deductibles on their liability policies. They should operate as sophisticated corporate entities and at least raise the question of their involvement in settlements before the policy is written with a deductible and claims are filed.

Special Reports /

Check Fine Print When Setting Deductible Or Risk Losing Control Over Settlements

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