The Maintenance Deductible in Practice. Paul Stanley QC. The words maintenance deductible do not appear anywhere in

Transcription

1 The Maintenance Deductible in Practice Paul Stanley QC I. What is the Maintenance Deductible? The words maintenance deductible do not appear anywhere in the Bermuda Form. They are used as jargon to describe, loosely, the combined effect of other provisions; critically those dealing with expected or intended injury, damage, or liability. The scheme is as follows: As is usual with any liability insurance policy coverage is not afforded for intended injury, and this exclusion extends to expected injury. For the purposes of this paper, we can focus on expected injury. The terms in which expectation is described or defined, however make it clear that for an integrated occurrence there can be expectation where the insured expected some level or rate of injury. There can also be expectation where the insured (subjectively) expected nothing, but where it had a historical experience of a certain level or rate of injury, which is then deemed expected or intended. As a carve out from this, even if some injury (or some level or rate of injury) was expected, coverage is offered where the injury is fundamentally different in

2 nature or where the level or rate of injury is vastly greater in order of magnitude. The idea of the maintenance deductible, then, is that there may be a slice of injury that is expected as part of the ordinary features of the insured s business, and which is excluded from coverage a sort of automatic but unexpressed deductible amounting to the liability-insurance version of wear and tear. It is only if the loss vastly exceeds this that there will be coverage. The concept makes sense intuitively. Unfortunately it gives rise to very difficult problems in practice. II. Problem 1: Rates of What, Exactly? The maintenance deductible idea invites one to compare (a) an expected rate of something, with (b) the actual rate of something. It seems obvious that this exercise can only make sense if the something being compared is the same. The policy seems quite clear about what the relevant something is at the expectation stage it is a rate of actual or alleged personal injury (or property damage, or advertising liability); it is also clear that if the insured has historically experienced a level or rate of actual or alleged property damage, then that is expected or intended. This seems clear enough so far as actual injury is concerned. But what does it mean to expect (or experience) alleged injury? In practical terms, it means claims. 2

3 So we are playing with four numbers: the expected (or historically experienced) rate of actual injury (call that EI for expected (actual) injury ); the expected rate of alleged injury a/k/a claims (call that EC for expected claims ); the actual rate of actual injury (call that AI); and the actual rate of alleged injury or claims (call that AC). The problem is that there is no consistent relationship between EI and EC, or between AI and AC. A common pattern is this: Hypothetical 1 The insured markets a product knowing that it sometimes causes injury (e.g. a rare side effect) but believing that it has adequately warned of this, and expecting no significant claims. It is alleged, however, that the warning is inadequate (perhaps because the side effect is more common than the warning discloses), and numerous claims are made. This gives rise to a number of problems, of which two are prominent: It seems to be generally accepted that the insured has coverage if AC > EI. But how will that ever be 3

4 established? What assumptions should one make about the relationship between claims and actual injury? Can the insured seek to show (if it dares!) that AI > EI, even though AC < EI? If so, what is the extent of coverage? It is controversial whether the insured has coverage if AC > EC, even though AI = EI. Is it enough for the insured to show that its expectations were exceeded on one dimension? The text is not clear. III. Problem 2: vastly greater in order of magnitude In order to claim coverage under the proviso, the insured must show either that injury is fundamentally different in nature or vastly greater in order of magnitude compared to the expectation. What does this mean? Should orders of magnitude be interpreted mathematically? The text could theoretically support a mathematical reading, but most arbitration tribunals fight shy of it (rightly). Even so, this leaves a large measure of uncertainty. A second and much harder problem is whether one should be concerned only with numbers, and not with any other aspect of the matter, such as the severity of injuries or the amount of damages awarded. What is meant by level or rate? If I expect 10 claims which I will settle at an average cost of $10,000 per claim, but I get 10 claims of which the first goes to trial and gets a freak verdict of $10 million, following which 4

5 I settle the others for a total of $5 million, is this really no more than the level or rate that was expected? Different views are possible, and the language and purpose of the clause point in different directions (see also section V below). IV. Problem 3: Timing Expectation is tested at two points. First (easily) at inception. Secondly, and with much greater difficulty, at the time of any action concerning the consequences thereof, i.e. effectively when the products are placed on the market. The trouble is that this does not mean when they are first placed on the market. It s easy enough to see this if one imagines a toy example: Hypothetical 2 On Monday, M sells one unit of P to X. On Tuesday X is badly injured and M thereby learns that there is a defect in P which makes it fatal. On Wednesday, M sells one unit of P to Y. On Thursday, Y is injured by the product. It seems clear that M had no expectation of injuring X, but that M did have an expectation of injuring Y. The relevant action took place each time M placed a product into the stream of commerce, but M s intentions varied as new information became available. This is also a problem with respect to the maintenance deductible. Expectations (whether of actual or alleged injury) are not constant; they change over time. But this makes it 5

6 very challenging to answer the question whether the actual rate of anything has been greater than the expected rate, especially since there will often be a long latency period. The picture is very unlikely to be clean : there are two moving targets. V. Problem 4: Converting Numbers to Dollars On the assumption that the level or rate is concerned with numbers, a deductible cannot be expressed simply in numbers of claims, because claims have different values. It is necessary somehow to turn this into a figure, and the clause does not explain how that should be done, either with respect to indemnity payments or defence costs. It cannot be assumed that the relationship between claims and costs is necessarily linear. In practice, this is another area where an arbitral tribunal would have broad discretion. VI. Conclusion The maintenance deductible is a hugely problematic concept. It makes some sort of sense in broad terms, but it is more or less impossible to apply in practice. Once the insured concedes, or a tribunal holds, that some more than de minimis level or rate of actual or alleged injury was expected, one enters a world of more or less unbounded uncertainty as to how the provisions should be applied. Possible reactions (all with legal and commercial problems): 6

7 Remove the maintenance deductible provisions, so that the only exclusion is for injury that was specifically expected or intended. Leave the layering to deal with the costs of business. Agree maintenance deductibles as dollar figures for products which have a reasonable history in the market, with default provisions for new products. Amend the maintenance deductible provisions to make clear that there is a covered occurrence if the costs and indemnity payments for claims vastly exceed what the insured would have expected given its expectations about actual or alleged injury. Simply put up with the possible problems, and hope for the best. 7