Number of Deductibles Being Applied in Dispute
April 1, 2014
This insurance coverage dispute arose out of property damage to a condominium. Water damage occurred to nearly thirty units in the condominium, and the insurer assessed a deductible for each unit damaged plus one for the common areas. The insurer commenced this declaratory judgment action seeking a determination as to the number of deductibles and total amount owed under the insurance contract. This case is Zurich American Ins. Co. v. Newmech Companies, Inc., 2014 WL 241760,Civ. No. 12–1568 (RHK/JSM), Jan. 22, 2014.
NewMech was retained to design and install domestic water lines for a condo. Two years after the completion of the work, certain piping connections separated, causing water damage to both common areas and individual condo units. NewMech had an insurance policy with Zurich American, and the insurer settled the claims.
The policy provided for a $25,000 property damage deductible per claim, and Zurich informed the insured that it would be treating the damage to each condo unit as a separate claim and the damage to the common areas as another claim. The insurer then sought reimbursement from NewMech for a total of $349,000. NewMech refused to pay and maintained that it had submitted only one claim to Zurich for damage to the condo and therefore, only one deductible of $25,000 should apply. Zurich then filed this declaratory judgment action.
NewMech first asserted the Zurich is precluded from recovering any deductible under Minnesota's voluntary payment doctrine because it voluntarily paid the full cost of repairs to the condo when it was under no legal obligation to do so. Under the terms of the policy, Zurich was legally obligated to pay only damages in excess of any deductible and so NewMech argued, the payment for the entire amount of the repairs, not just the amount in excess of the deductible was voluntary and so, under the state doctrine, the insurer is barred from now seeking to recover that voluntary payment.
Zurich asserted that the payment was not voluntary and thus, the doctrine does not apply. This was so because the insurer paid while reserving its right to seek reimbursement from NewMech.
The United States District Court, Minnesota, found that the policy included the following statement: “We (the insurer) may pay any part or all of the deductible amount to effect settlement of any claim and upon notification of the action taken, you (the insured) shall promptly reimburse us for such part of the deductible amount as has been paid by us.” The court concluded that since this clause was part of the policy, it was enforceable. The insurer offered conclusive evidence that the clause was intended to be part of the policy, and the court found there was no reasonable dispute as to this point. Zurich was allowed to seek reimbursement from NewMech for the deductible.
NewMech also asserted that the clause pertaining to the deductible on a per claim basis was ambiguous and should be construed against Zurich. The court said that, based on the language of the policy, a claim has only one meaning: a claim against the insured by a single owner of property damaged as a result of an occurrence. This interpretation was supported by the policy's description of a “per claim basis” as opposed to its description of a “per occurrence basis.” The policy states a per claim deductible will apply to all damages sustained by any one person because of property damage. Thus, the court said, the policy defines a claim in relation to the third party whose property is damaged, not in relation to the insured. The court noted that if the word “claim” were interpreted as NewMech suggests, the choice between a per claim and a per occurrence deductible would be meaningless as long as the insured submitted one aggregated request for benefits after an occurrence.
In summary, the court found that the language of the policy was unambiguous and each individual owner of property damaged by the water leaks has a separate claim to which NewMech's $25,000 deductible applies. Zurich's motion was granted.
Editor's Note: The policy in question here contained the option for the insured to choose a deductible on a per claim basis or a per occurrence basis. The per claim basis stated that the deductible applied “to all damages sustained by any one person because of property damage as the result of any one occurrence.” The per occurrence basis stated that the deductible applied “to all damages because of property damage as the result of any one occurrence.” The insured chose the per claim basis.
The U.S. District Court saw the deductible language as clear and unambiguous. The claims were made by individuals and so, the deductible applied separately to each one.