Last winter, I got a call from an IIABNY member who had a commercial client with flood damage from Tropical Storm Irene. This client, despite not being in a flood zone, had purchased both private flood insurance (an endorsement to a Package policy) and coverage from the National Flood Insurance Program. This turned out to be a very good decision. However, the Package carrier was claiming that the client should pay "stacked" deductibles; that is, the private insurance deductible should be added to the NFIP deductible. Since both of these deductibles were quite large, the member wanted to know if this was true. The following is the text of my email back to him.
Answer: Following up on our phone conversation yesterday, I disagree with the Package carrier’s contention that two deductibles should apply to your client’s flood loss.
The NFIP General Property Form states:
C. Other Insurance
1. If a loss covered by this policy is also covered by other insurance that includes flood coverage not issued under the Act, we will not pay more than the amount of insurance that you are entitled to for lost, damaged, or destroyed property insured under this policy subject to the following:
a. We will pay only the proportion of the loss that the amount of insurance that applies under this policy bears to the total amount of insurance covering the loss, unless C.1.b. or c. immediately below applies.
b. If the other policy has a provision stating that it is excess insurance, this policy will be primary.
c. This policy will be primary (but subject to its own deductible) up to the deductible in the other flood policy (except another policy as described in C.1.b. above). When the other deductible amount is reached, this policy will participate in the same proportion that the amount of insurance under this policy bears to the total amount of both policies, for the remainder of the loss.
The ISO Commercial Property Conditions endorsement (CP 00 90 07 88) states:
G. OTHER INSURANCE
1. You may have other insurance subject to the same plan, terms, conditions and provisions as the insurance under this Coverage Part. If you do, we will pay our share of the covered loss or damage. Our share is the proportion that the applicable Limit of Insurance under this Coverage Part bears to the Limits of Insurance of all insurance covering on the same basis.
2. If there is other insurance covering the same loss or damage, other than that described in 1. above, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.
The Deductible provision in the ISO Building and Personal Property Coverage Form (CP 00 10 06 07) states:
In any one occurrence of loss or damage (hereinafter referred to as loss), we will first reduce the amount of loss if required by the Coinsurance Condition or the Agreed Value Optional Coverage. If the adjusted amount of loss is less than or equal to the Deductible, we will not pay for that loss. If the adjusted amount of loss exceeds the Deductible, we will then subtract the Deductible from the adjusted amount of loss, and will pay the resulting amount or the Limit of Insurance, whichever is less.
The NFIP’s coverage is directly dependent on the private flood coverage. If the Package policy says that its flood coverage is excess, then NFIP is primary, but only up to the amount of the Package policy’s deductible. Once it meets that deductible, coverage switches to pro-rata. To illustrate, assume an NFIP policy with a $100,000 limit and a $10,000 deductible, and a commercial package policy that covers flood with a $500,000 limit and a $25,000 deductible. The insured suffers a loss valued at $250,000. Based on the terms in the NFIP policy, here’s how the two carriers should share the loss: The insured pays the first $10,000 (the NFIP deductible) and NFIP pays the next $25,000 (the Package policy deductible). The remaining amount of the loss is $215,000 ($250,000 minus $35,000.) The combined flood limit equals $600,000 ($100,000 NFIP, $500,000 Package), so NFIP pays 1/6 of the balance and the Package pays 5/6. Using this formula, the final loss sharing looks like this:
|NFIP||$60,833 ($25,000 plus [$215,000 multiplied by 1/6])|
|Package||$179,167 ($215,000 multiplied by 5/6)|
In this example, the Package carrier pays only $179,167, whereas it would have paid $225,000 if there was no NFIP policy. I forget the dollar amounts of your claim situation, but the math is the same. In any case, I believe that only one deductible applies – the NFIP policy deductible. As an aside, it seems to me that the neatest solution to this is to make the Package deductible equal to the NFIP limit, assuming that the Package carrier will offer that.