2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Deductibles reduce small/nuisance claims and lower premiums; they are subtracted AFTER coinsurance and valuation adjustments, not before.
- Percentage deductibles (common for wind/hail and named-storm) are calculated on the property value or limit, not the loss — often far larger than a flat dollar deductible.
- Coverage limits are the maximum the insurer pays; sublimits cap specific property classes (money, jewelry, business records) below the main limit.
- Split limits state separate maximums per person, per occurrence, and per category; a single combined-single-limit blends them into one figure.
- The order of claim math is: apply valuation, apply coinsurance, cap at the limit, then subtract the deductible.
Deductibles
A deductible is the portion of each loss the insured retains before coverage responds. It eliminates costly small claims, reduces moral/morale hazard, and lowers premium. Know these types:
| Type | How It Works |
|---|---|
| Flat (dollar) | A fixed amount subtracted from each loss (e.g., $1,000) |
| Percentage | A % of property value or limit (common for wind/hail, hurricane) |
| Franchise | No payment until loss exceeds a threshold; then loss paid in FULL |
| Aggregate | Insured retains losses up to an annual total, then full coverage |
Percentage deductible trap: A 2% wind deductible on a $500,000 building = $10,000, far more than a typical $1,000 flat deductible. Percentage deductibles are calculated on the value/limit, not on the loss amount.
A coastal property valued at $500,000 carries a 5% named-storm wind deductible. A hurricane causes $60,000 of covered damage. How much does the insured retain before the insurer pays?
Limits and Sublimits
The coverage limit is the maximum the insurer will pay for a covered loss. Beyond the headline limit, policies impose sublimits — lower internal caps on specific property classes that are easily stolen or hard to value:
- Money and securities — e.g., capped at $200/$1,000
- Jewelry, watches, furs (theft) — e.g., $1,500 sublimit
- Firearms, silverware — separate theft sublimits
- Business records, valuable papers — limited unless scheduled
Property exceeding a sublimit must be scheduled (specifically listed and separately rated) to be fully covered. A diamond ring worth $8,000 under a $1,500 jewelry theft sublimit recovers only $1,500 unless scheduled.
Split Limits vs. Combined Single Limit
Liability and some property coverages express maximums as split limits or a combined single limit (CSL).
Split limits state three separate maximums, written as 100/300/50:
- $100,000 — bodily injury per person
- $300,000 — bodily injury per occurrence (all persons combined)
- $50,000 — property damage per occurrence
Worked split-limit example: A 100/300/50 policy faces an accident injuring three people ($90,000, $120,000, $40,000) plus $60,000 property damage.
- Person 1: $90,000 (under $100k cap) → paid $90,000
- Person 2: $120,000 capped at $100,000 per person → paid $100,000
- Person 3: $40,000 → paid $40,000
- BI subtotal = $230,000 (under the $300,000 occurrence cap) → all paid
- Property damage $60,000 capped at $50,000 → paid $50,000
A CSL of $300,000 blends BI and PD into one $300,000 pool, paying any mix up to that single figure.
Under a 100/300/50 split-limit auto policy, one injured claimant has a $150,000 bodily injury judgment. How much does the insurer pay for that claimant?
The Order of Claim Settlement
The single most-tested process point: adjustments are applied in a fixed order. Doing them out of sequence produces the wrong number.
- Valuation — determine ACV or replacement cost of the loss.
- Coinsurance — apply the (carried ÷ required) ratio to partial losses.
- Policy limit — cap the result at the lesser of the loss or the limit.
- Deductible — subtract the deductible last.
Worked end-to-end: $500,000 building, 80% coinsurance, $400,000 limit, $1,000 deductible, $100,000 RC loss, but only $300,000 carried.
- Coinsurance ratio = $300,000 ÷ $400,000 = 75% → 75% × $100,000 = $75,000.
- Below the $400,000 limit → no cap reduction.
- Subtract $1,000 deductible → $74,000 paid.
Aggregate Limits, Restoration, and the Right Order Again
Many liability and some property coverages carry both a per-occurrence limit (the most paid for any single event) and an aggregate limit (the most paid for all covered events in the policy period). Once the aggregate is exhausted, no further coverage exists until the policy renews. Property policies are generally non-aggregating — the limit restores after each separate loss unless the form says otherwise — so a building hit by two unrelated fires can collect up to the full limit for each.
A disappearing (franchise) deductible is worth a second look: below the threshold the insured retains the whole loss, but once the loss exceeds the franchise amount the insurer pays in full with no deduction. This contrasts with a standard flat deductible, which is always subtracted.
The ordering rule deserves one more pass because examiners reverse it to trap candidates. Always apply coinsurance to the loss first, cap at the limit second, and subtract the deductible last. Subtracting the deductible before applying coinsurance, or applying coinsurance to the limit instead of the loss, both produce wrong answers. When a question gives you valuation, a coinsurance percentage, a limit, and a deductible all at once, write them down in that sequence and work top to bottom — it is the single most reliable way to land the calculated-answer questions on the national property section.