2.4 Deductibles, Limits, and Loss Settlement

Deductibles

A deductible is the portion of a covered loss the insured retains before the policy pays. Deductibles reduce premium, eliminate small nuisance claims, and reduce moral/morale hazard. Common forms:

• Flat (dollar) deductible — a fixed amount, e.g., $500, subtracted from each covered loss.
• Percentage deductible — a percentage of the dwelling limit (Coverage A), frequently used for windstorm or hurricane in coastal states.
• Aggregate / disappearing deductible — less common; the deductible shrinks or applies once per policy period.

Percentage Deductible Math

A hurricane percentage deductible is the biggest exam trap because it is calculated on the dwelling limit, not the loss.

Example: a home insured for $300,000 (Coverage A) with a 2% hurricane deductible suffers $50,000 in wind damage.

• Deductible = 2% × $300,000 = $6,000 (not 2% of $50,000).
• Insurer pays $50,000 − $6,000 = $44,000.

If the same home had a flat $1,000 deductible for non-hurricane perils, an ordinary loss would only be reduced by $1,000.

Limits and Sublimits

The policy limit is the maximum the insurer will pay for a covered loss. Sublimits cap recovery within a category even though the overall limit is higher. ISO homeowners forms apply special theft sublimits on high-value, easily-stolen property.

Watch the difference between a per-occurrence limit (resets each claim) and an aggregate limit (a cap for the whole policy period, common in liability). Property limits are generally per-occurrence; liability often carries an aggregate.

Common Homeowners Coverage C Special Limits (ISO)

Split Limits in Liability

Liability limits are commonly written as split limits with three numbers, e.g., 100/300/50:

• $100,000 bodily injury per person,
• $300,000 bodily injury per accident (all persons combined),
• $50,000 property damage per accident.

Example: an at-fault driver with 100/300/50 injures three people at $80,000, $120,000, and $90,000. Each person is capped at $100,000, so payments are $80,000 + $100,000 + $90,000 = $270,000 — within the $300,000 per-accident cap, so the full $270,000 is paid. A combined single limit (CSL) instead provides one pooled amount for all bodily injury and property damage.

The Loss Settlement Clause

The loss settlement provision (HO Section I, Condition C) ties everything together. It states that the dwelling is paid at replacement cost if the insured carries at least 80% of replacement value, while personal property defaults to ACV unless replacement-cost coverage is endorsed.

The insurer's payment equals the least of: the policy limit, the cost to repair/replace, or the amount actually spent — minus the deductible. This 'least of' rule prevents the insured from profiting from a loss, reinforcing the principle of indemnity.

Combined Single Limit vs. Split Limit

A combined single limit (CSL) provides one pooled amount for all bodily injury and property damage in a single occurrence — for example, a $300,000 CSL can pay $300,000 in any mix of injury and damage. It is more flexible than split limits because it has no per-person sub-cap.

With split limits, a severely injured single claimant is constrained by the per-person figure even if the per-accident limit is untouched. Commercial auto and umbrella policies often favor CSL for exactly this reason. Expect the exam to give a fact pattern with one badly injured person and ask which limit structure pays more — the answer is typically the CSL.

Sublimits and Scheduling

When a client owns property exceeding a special theft sublimit — say $8,000 of jewelry against a $1,500 theft sublimit — the fix is scheduling the items on a personal articles floater or via the HO 04 61 endorsement. Scheduled coverage typically removes the deductible, broadens to open-peril, and often uses agreed value.

Understanding the interaction is key: the unscheduled sublimit caps recovery and applies the policy deductible, while a scheduled item pays the agreed amount with no deductible. Exam questions love to pay only the $1,500 sublimit on a $5,000 unscheduled ring to test whether the candidate noticed scheduling was absent.

Deductible Types and How They Apply

Deductibles come in several forms the exam distinguishes. A flat (straight) deductible is a fixed dollar amount subtracted from each loss. A percentage deductible (common for windstorm/hurricane and earthquake) is a percentage of the Coverage A limit, not the loss - so a 2% hurricane deductible on a $300,000 dwelling is $6,000, which can dwarf a flat all-perils deductible. A disappearing (franchise-style) deductible shrinks as the loss grows. A waiting period functions as a time deductible for business income.

Connecticut coastal homeowners frequently carry separate, higher hurricane/windstorm percentage deductibles, so producers must explain that a named-storm loss is settled very differently from an ordinary claim.

How Limits and Deductibles Interact - Worked Example

A homeowner has a $300,000 Coverage A limit, a $1,000 all-perils deductible, and a 2% hurricane deductible. A hurricane causes $50,000 of damage.

If the same $50,000 loss came from a kitchen fire, only the $1,000 flat deductible would apply, paying $49,000. The $5,000 difference shows why identifying which deductible the loss triggers is essential. Combined with the special theft sublimits above, this section tests whether the candidate can correctly subtract the right deductible and respect the right sublimit before stating the net recovery - the everyday arithmetic of claims adjusting.