Generally, your insured will pay a deductible when a claim is made. The question of deductible reimbursement frequently surfaces when you successfully subrogate a loss against a third party and make a recovery on the claim payments. At that time, a determination is made as to what portion of the insured’s deductible should be reimbursed. In Illinois, the Insurance Code provides direction on deductible reimbursement while the Illinois Supreme Court clarifies how one distinguishes administrative expenses from incurred expenses.
The Illinois Supreme Court clarifies how you may separate administrative expenses from incurred expenses.
Section 143b of the Illinois Insurance Code states: “Any insurance carrier whose payment to its insured is reduced by a deductible amount under a policy providing collision coverage is subrogated to its insured’s entire collision loss claim including the deductible amount unless the deductible amount has been otherwise recovered by the insured but if the deductible amount has been recovered by the insured, it shall not be included in the subrogated loss claim and shall be excluded from the amount of loss pleaded. If the deductible amount is included in the subrogated loss claim the insurance carrier shall pay the full pro rata deductible share to its insured out of the net recovery on the subrogated claim. Administrative expenses of the insurance carrier cannot be deducted from the gross recovery, and only incurred expenses of the carrier, such as attorney’s fees, collection fees and adjuster’s fees, may be deducted therefrom to determine the net recovery. When the insurance carrier is recovering directly from a third party a claim by means of installments, the insured shall receive his full pro rata deductible share as soon as such amount is collected and before any part of such recovery is applied to any other use.” 215 ILCS 5/143b (West 2008)
Administrative expenses are a cost of doing business.
In the case of Morel v. Coronet, the Illinois Supreme Court provided some insight as to how you may separate administrative expenses from incurred expenses that are outside the purview of the pro rata recovery. In Morel, a disgruntled insured alleged the insurance company defendant violated section 143b of the Illinois Insurance Code by deducting administrative expenses as opposed to incurred expenses. The fee arrangement really muddied the waters in the eyes of the court as the law firm hired by the defendant insurer was being paid on an annual retainer fee. This fee arrangement created some uncertainty on how particular recoveries and fees were attributed to particular cases.
The court first highlighted the settlement with the third party tortfeasor as well as the payment made by the insurance company to the plaintiff. The law firm settled the plaintiff’s case with the third party who collided with the plaintiff, recovering $272.71, which was 80% of the original loss. The defendant insurer determined that an 80% pro rata share of the plaintiff’s $250.00 deductible was $200.00. The insurance company then forwarded a check to the plaintiff for $133.34, which was two-thirds the amount of the plaintiff’s pro rata $200.00 share. The defendant stated that it was withholding $66.66, one-third of the plaintiff’s share of his deductible, as payment of attorney fees which were incurred in the pursuit of the recovery.
Incurred expenses are out of pocket expenses that are related to a specific file.
Administrative costs, or costs of doing business, are not an incurred expense. The court provided an example of utility bills as an administrative cost that operates outside of a given claim just like the plaintiff’s. The court then defined an incurred expense as one specifically related to an individual case or claim, regardless of whether the insurer pays the cost individually or together with a number of other similar expenses.
What is important is that the insurer can relate the amount it withholds as an incurred expense – from the insured’s recovery – to a specific amount the insurer paid for that particular case. So, an insurer can withhold amounts as incurred from the pro rata recovery analysis only when it can, in good faith, support that the amount was in the pursuit of recovery for that particular case and outside the day to day costs of doing business.