Not Quite So Limited: Are Sublimits Sure to Limit Your Level of Coverage?

A critical component of any insurance policy is of course its limit, which is usually the most an insurance company must pay for a loss. But many property insurance policies include “sublimits” that provide a lower limit for particular losses.

Identifying the sublimits in a policy is usually straightforward since they typically appear in a list or chart in the policy’s declarations section. Sublimits generally fall into one of two types: (1) sublimits that apply to particular perils, like flood, Named Storm or earthquake; and (2) sublimits that apply to a type of damage or cost, like debris removal or preservation of property. There are many different perils and costs that a policy may sublimit, and sublimits appear in many types of policies (including, for example, sublimits for coverage for wage and hour claims under an employment liability policy). However, this blog will focus on property policy sublimits. Because many property policies include sublimits that apply to storm-related losses, they may particularly be an issue for companies damaged by hurricanes like 2017’s Harvey, Irma, Jose and Maria.

If your company experiences losses that may fall under a sublimit, is the sublimit amount the most you can recover? Not necessarily. Depending on the language in your company’s policy, there are several reasons that a sublimit may not cap your company’s recovery, including these:

1. A sublimit may only apply to certain damages. Sublimits should only apply to losses that fall within their plain terms. You should review a sublimit’s wording and the definitions of any defined terms carefully before concluding that it applies to a given loss. If the language is ambiguous, courts will usually construe it in favor of coverage. As an example, one court found that a sublimit for “damage to and removal of any tree, plant or shrub” did not apply to the insured’s costs to repair a golf course’s landscaping damaged by a fallen tree. Another court found that a sublimit for “debris removal” did not apply to costs of demolition and engineering that were required before the debris could be removed, because they were not incurred during “removal.”
2. Additional coverages and coverage extensions may be added to sublimits. Some policies may allow stacking of one or more coverages on top of a sublimit. For example, if a policy has a sublimit for “flood” and also additional coverages for losses like debris removal, service interruption or civil authority, the insured may be able to recover for damages falling within those coverages in addition to other flood losses under the flood sublimit. Note that additional coverages and coverage extensions often have their own sublimits. Some policies include terms specifying how limits relate to each other, such as saying the additional coverages’ sublimits “shall be considered sublimits within the applicable covered peril sublimits.” Companies should look for “anti-stacking” language in their property policies—or its absence–to fully understand their policy limits. They should also look for language within the sublimits themselves, which may indicate that some limits are not stackable—and thus, by their silence, that others are.
3. Where limits conflict, the larger limit may apply. If losses could fall within two or more coverages, the limit most favorable to the policyholder should apply. For example, many policies include both flood and “Named Storm” coverage. If an insured sustains flood damage because of a Named Storm and the two coverages have different limits, which limit applies? If, based on the policy’s definitions and terms, the loss could be placed in either category, then the larger of the two limits should apply.

Sublimits may look simple on their face, but the way they work with each other and with different policy terms can be complex. Companies should carefully review their policies before a loss to determine whether their sublimits meet their likely needs. After a loss, companies should carefully evaluate all sublimits to see whether and to what extent they limit coverage. Before agreeing to accept a sublimit amount as your full recovery, consider speaking with coverage counsel. You don’t want to cap your own insurance by assuming that a sublimit amount is all you can recover when additional coverage limits may be available.