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Insurers Not Allowed To Collect Deductibles In Subrogation Suits

In order to save money, many businesses increase their insurance deductible.  It reduces premiums and works well if you don't have a claim for several years.  The idea is to save the premium reductions and offset the higher deductible if a claim arises.  It obviously doesn't work well if you have a claim right away.

There's another twist to be aware of now, however, thanks to this recent court of appeal decision, Pacific Gas & Electric v. American Guarantee and Liability Insurance Company.  If you deal closely with your insurance, then you've likely heard of "subrogation."  Among other things, it's the method insurance companies use to recover payments to their insureds when someone other than their insured caused the loss.  After they fork over a claim payment, the insurer sues the party that caused the loss.  Insurance policies typically give the right of subrogation to the insurer when the insurer pays a claim. 

Let's cover the facts.  PG&E caused an industrial power failure, which resulted in a fire that caused damage to telephone equipment belonging to Pac-West Telecom.  Pac-West's insurer, American Guarantee and Liability Insurance Company, a Zurich subsidiary, paid Pac-West's $67,000 loss, and then sued PG&E. 

PG&E fought back and argued that while American Guarantee could recover the money it paid to Pac-West, it was not entitled to sue to recover Pac-West's deductible.  That normally might not be a big deal to most businesses, but Pac-West had a large deductible:  $50,000.

The appellate court agreed and PG&E ended up paying only the $17,000 above Pac-West's deductible to American Guarantee. 

The moral of the story?  After your insurer pays your claim, the matter isn't finished.  If your insurer is going to sue the party that caused your loss, you need to join in that lawsuit in order to recover your deductible.  Your insurance carrier can't recover that money for you.

Posted by J. Craig Williams on Wednesday, October 25, 2006

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