2.4 Deductibles, Limits, and Loss Settlement

Deductibles: The Insured's Retained Risk

A deductible is the amount the insured retains on each loss before the insurer pays. Deductibles reduce premium, eliminate small nuisance claims, and curb morale hazard by giving the insured a financial stake in preventing loss. Property forms use several deductible structures, and the exam tests how each interacts with the limit and the coinsurance result.

The main deductible structures are:

• Flat (straight) deductible: a fixed dollar amount subtracted per occurrence (e.g., $1,000).
• Percentage deductible: a percentage of the property value or limit, common for windstorm/hurricane and earthquake (e.g., 2% of $300,000 = $6,000).
• Aggregate deductible: applies once over the policy period rather than per loss.
• Disappearing / franchise deductible: older structures where the deductible shrinks or vanishes once the loss exceeds a threshold.

Percentage Deductibles — A Coastal Trap

After major hurricanes, insurers added named-storm and hurricane percentage deductibles. On a $400,000 dwelling with a 5% hurricane deductible, the insured retains $400,000 × 5% = $20,000 before any payment — far more than a $1,000 all-other-perils deductible on the same policy. Exam questions test that the percentage applies to the Coverage A limit (or property value), not to the loss amount.

Policy Limits and How They Cap Payment

The limit of insurance is the maximum the insurer will pay for a covered loss. Property forms layer several limit types: per-occurrence or per-item limits (Coverages A, B, C, D on a homeowners form), blanket limits that cover multiple locations or property types under one limit, and aggregate limits that cap total payouts in the policy period. The narrowest applicable limit controls the payment.

Special internal sub-limits cap theft-prone categories regardless of the overall Coverage C limit: jewelry/watches/furs ($1,500 theft), money ($200), securities ($1,500), firearms ($2,500 theft), and silverware ($2,500 theft). Scheduling the property on a personal-articles floater or endorsement removes these caps and typically adds open-peril, worldwide, no-deductible coverage at an agreed value.

Loss Settlement Mechanics

When multiple provisions stack, apply them in order: (1) determine the covered loss amount under the valuation method (ACV or RC); (2) apply any coinsurance ratio; (3) compare the result to the limit; (4) subtract the deductible last. The smaller of the formula result and the limit governs, and only then does the deductible come off the top.

Worked stack: a $300,000 dwelling on RC settlement carries a $250,000 limit and a $2,500 deductible, and suffers a $260,000 loss. The loss exceeds the limit, so payment caps at the $250,000 limit, then − $2,500 deductible = $247,500. Had the loss been $100,000, no limit cap applies, so the payment would be $100,000 − $2,500 = $97,500 (assuming the coinsurance/RC requirement is met).

Other-Insurance and Pro-Rata Loss Sharing

When two or more policies cover the same property, the pro-rata (other-insurance) clause splits the loss by each policy's share of total coverage. If Policy A carries $200,000 and Policy B carries $300,000 (total $500,000) on a $100,000 loss, A pays 200/500 = 40% = $40,000 and B pays 300/500 = 60% = $60,000. The insured is never paid more than the actual loss — the principle of indemnity governs.

Types of Deductibles

Percentage deductibles are heavily tested for catastrophe perils: a 2% wind deductible on a $400,000 building is $8,000, far larger than a typical flat deductible — and it applies per occurrence.

Limits: Specific, Blanket, and Sublimits

A specific limit applies a separate amount to each item/location; a blanket limit covers multiple items/locations under one combined limit, giving flexibility when values shift between locations. Sublimits cap certain property within the overall limit (e.g., money, valuable papers). On the exam, blanket coverage is the answer when an insured needs limit flexibility across several buildings whose values fluctuate.

Aggregate vs. Per-Occurrence Limits

A per-occurrence limit caps each separate loss; an aggregate limit caps total payments for the policy term. Liability forms use both (each-occurrence plus general aggregate); most property forms use per-occurrence limits only. Mixing these up — assuming a property limit "refills" or that an aggregate applies per loss — is a frequent error the exam exploits.

Restoration of Limits

Property limits generally restore automatically after each loss during the term (the limit is available again for the next unrelated loss), whereas liability aggregates erode as claims are paid and do not reset until renewal. This is why a business with multiple liability claims in one year can exhaust its aggregate and be left bare for later claims — a point tested alongside the CGL aggregate.