The Deductible In Insurance Policies

Law Talk

Contractors utilize insurance in a number of ways. They purchase insurance to shift the risk from themselves to the insurance carrier. The insurance policy, is a contract between the buyer of insurance (contractor) and the insurance company (seller of insurance). It is like any other contract but sometimes the manner in which it is read may make a difference. However, this case does not deal with that. This deals with how the insurance deductible might work.

Most insurance policies have a deductible. That means that a portion of the loss will be deducted from the insurance company's requirement to pay the loss. That is to say that if the loss is $10,000.00, and the deductible is $1,000.00, then the insurance company will only pay $9,000.00 ($10,000.00 minus $1,000.00). The theory behind the deductible in insurance policies is that it reduces the premium paid to the insurance company and requires the contractor to bare the risk of loss in the amount of the deductible. That means that the contractor will pay a portion of the loss while the insurance company will pay a greater portion of the loss.

This is exactly the issue that transpired in a case called Cheviot Vista Homeowners Association v. State Farm Fire & Casualty Co.

The Cheviot Vista Homeowners Association (HOA) purchased insurance from State Farm Fire & Casualty Co. It was a Condominium Association Policy with an endorsement for earthquake coverage to the Homeowners Association. That is to say that earthquake was specifically included as one of the things that was part of the insurance policy. The condominium complex was damaged by the Northridge earthquake. This particular policy had a limit of coverage for damage caused by earthquake in the amount of $2,612,398.00. There was a 10% deductible. That meant that the HOA would pay the first $261,239.00 of earthquake damage.

After State Farm went and looked at the damages, and had its expert's review what the repairs would cost, it was determined by State Farm that the loss did not exceed the deductible. Indeed, prior to the insurance claim coming about, many of the homeowners indicated that their damages were "superficial cosmetic damage." Therefore, State Farm was required to pay nothing with respect to the amount of damages in that the damages were estimated at about $113,000.00, well below the $261,000.00 deductible. The $113,000.00 included $97,000.00 worth of depreciation.

The trial court held that the HOA would receive nothing and the Appellate Court agreed.