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What comes first in a Transport Liability Policy – Limit or Deductible?


Jagan - June 25, 2020 - 0 comments

  1. This question cropped up in a claim under a Transport Liability Policy in which the claimed amounts exceeded the limits provided in the policy. In this instance, the policy provided for a substantial deductible and therefore it was important to ascertain whether the deductible should be applied first followed by the limits or vice versa.
  2. The default position must be that once the claim is ascertainedi  under the policy, the deductible must be applied to work out the reimbursement available to the Insured. There may however be some losses for which the policy would allow for recovery without application of the deductible such as Total Loss and Costs to defend the claim. The question to be asked is therefore what is the ascertained claim?
  3. Definitions:
    1. Deductible is the first portion of the claim borne by the Insured themselves. There is an inverse relationship between the deductible and the premium i.e. the higher the deductible, the lower the premium. However, the law of diminishing returns would apply at some point such that increase in the Deductibles may not have commiserate effect in the reduction of premiums.
    2. The Limit of Liability is either mentioned in the policy or the schedule to the policy and would indicate the maximum extent of the insurers liability for any one loss or in the aggregate. The policy may provide for a general limit or a specific limit applicable to various covers provided under the policy.
  4. As most of the Transport Liability Policies incorporate English Law and Practice, the UK Marine Insurance Act 1906 (“MIA 1906”) would apply.
    1. S 74 of the MIA 1906 deals with Liabilities to third parties and states “Where the assured has effected an insurance in express terms against any liability to a third party, the measure of indemnity, subject to any express provision in the policy, is the amount paid or payable by him to such third party in respect of such liability”.
    2. S 55 (1) of the MIA 1906 deals with Included and Excluded losses and states “Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against” (words underlined by us for emphasis).

          We therefore submit that the contractual provisions provided in the insurance contract will be the basis of cover subject to them being not in conflict with any of the mandatoryii provisions of the MIA 1906. Accordingly, to ascertain whether the deductible should be first applied to the gross claim or the ascertained claim, one must look at the wordings of the Insurance contract i.e. the policy and the schedule.

  5. Unfortunately, there are no standard market wordings available for Transport Liability Insurance (Freight Forwarders, Non-Vessel Operating Common Carriers, Logistics Service Providers, etc.). Instead, most of the Insurers issue their own manuscript wordings for the cover they provide.
    1. We consider TT Club’s wordings (Transport and Logistics Operators 2020 wordings) below.
      Clause 16.5 of G 2 – General Terms of TT Club 2020 Wordings states “Where a deductible applies to a claim, we will reduce the claim by subtracting the deductible, and pay the claim, as reduced, subject to any applicable limit.” In the circumstances, if similar wordings exist other policies, the deductible must be first applied to the gross claim and subsequently the limits under the policy considered. 
      It does appear to us that these wordings provide a concessioniii  to the Insured’s and it may be due to the fact that generally, the deductible amountsivare not significant and will not have a great bearing on the eventual pay-outs.
    2. We have also considered wordings of other policiesv and note that some of them provide for the claim to be ascertained first i.e. if the claim exceeds the limits provided in the policy, the ascertained claim would be the limit and subsequently the deductible would be applied to determine the amounts reimbursable.
    3. To remedy the differences seen in the various policy wordingsvi, it would be best to seek the development of market wordings for this class of business.
  6. To conclude:
    1. It will all depend on the wordings of the specific policy to decide on whether the Limit or the Deductible would be first applied to determine the amounts claimable under the policy.
    2. If there are no specific provisions in the policy, then the Limits should be first applied to ascertain the claim and subsequently the Deductible should be applied to determine the amounts reimbursable / payable. 
    3. In the majority of the claims, the effect of the deductible on the claimed amounts would be insignificant. However, where high deductibles are involved, given the difference in the policy wordings, it would be appropriate to relook at the policy wordings.
    4. It is time to seek market wordings for Transport Liability covers so that the cover provided is easily understood.

i.  If a claim exceeds the limits provided under the policy, it is submitted that the ascertained claim would be the limit under the policy as this is what the Insurers have agreed to cover.  The other way to look at is that the claim up to the limit is the first layer being covered by insurer and any claim above the limit is the second layer which is self-insured or insured with other insurers. Accordingly, any claim under the policy would be restricted to the first layer and to which the deductible would be applied.
ii. One of the features of the MIA 1906 is that it is predominantly non- mandatory in nature. Aside from a small number of provisions reflecting public policy, the Act comprises default rules, applicable only in the absence of contrary intention. This has been discussed in an Article by Prof Howard Bennett – The Marine Insurance Act 1906 – Reflections on a Centenary and which can be viewed at https://journalsonline.academypublishing.org.sg/Journals/Singapore-Academy-of-Law-Journal-Special-Issue/e-Archive/ctl/eFirstSALPDFJournalView/mid/513/ArticleId/388/Citation/JournalsOnlinePDF
iii. The ITIC 2017 wordings, also managed by Thomas Miller, and which provides cover for Marine Professional Indemnity states in Rule 1.61 that “A claim payable under this insurance will be subject to the applicable limit of liability less the applicable deductible”.
iv. We understand that the normal deductibles are generally in the region of USD 2,500 any one incident or occurrence.
v. See Vero Policy wordings available at https://www.vero.co.nz/documents/marine/integrated-transit-liability-policy-wording.pdf & Zurich Policy wordings available at https://www.zurich.com.au/content/dam/new_zealand/marine_insurance/freight-forwarders-liability/freight-forwarders-liability-policy.pdf
vi. The other major difference is the Trigger to the policy i.e. some policies provide cover on “Loss Occurrence” and some provide cover on “Claims Made” basis.

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