Subtract Deductibles From Repair or Replacement Values—Not From Policy Limits

The Tennessee Insurance Litigation Blog has a post, Should a Deductible Be Subtracted in the Case of a Total Loss?, which raises a point that many adjusters seem to miss. I wrote about this topic in When Calculating Insurance Payments, Take the Deductible From the Repair Value and Not the Policy Limits and noted:

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 wrote that post because a Texas policyholder attorney wrongly applied the deductible to the policy limit. Policyholders would never obtain policy limits if this were the correct application of the deductable. It is completely illogical. For example, if a policy deductible was a hundred dollars and the policy limit was a hundred dollars, there would never be a payment on the policy.

Brandon McWherter added to the analysis by noting:

Under Tennessee’s valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs. In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases. My research reveals only one case addressing this precise issue, and that is Thurston Nat’l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976). In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas’ valued policy law. There is no logical reason why the same rule of law would not be true in Tennessee as well.

This very simple concept seems to be a recurrent issue. For those interested in the topic, I provided a citation for further reading:

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.