2.4 Deductibles, Limits, and Loss Settlement

Deductibles: Flat vs. Percentage

A deductible is the amount the insured retains before coverage responds; it discourages small claims and lowers premium.

• Flat (straight) deductible — a fixed dollar amount (for example $1,000) subtracted from each loss.
• Percentage deductible — common for wind/hail and hurricane perils, computed on the dwelling limit (Coverage A), not on the loss amount.

Exam trap: a 2% hurricane deductible on a $300,000 home is $6,000 ($300,000 x 2%), not 2% of the loss. On a $40,000 loss the insured still retains the full $6,000.

Limits and Sublimits

The policy limit is the maximum the insurer pays for a covered loss. Several limit structures appear on the exam.

A homeowners policy may have a $300,000 Coverage C limit but a $1,500 special limit on theft of jewelry; a $15,000 jewelry theft loss still pays only $1,500 unless scheduled.

Homeowners Loss Settlement (the 80% Condition)

The ISO Homeowners Loss Settlement condition pays the building on a replacement-cost basis only if the insured carries at least 80% of the full replacement cost at the time of loss. If not, the insurer pays the larger of:

1. The Actual Cash Value of the damaged part, or
2. The proportion found by the coinsurance-style formula: (Amount Carried / (0.80 x Replacement Cost)) x Loss.

Worked example: Home replacement cost $400,000; required = 80% x $400,000 = $320,000. Insured carries only $240,000. A $50,000 partial loss:

• Proportional amount = ($240,000 / $320,000) x $50,000 = 75% x $50,000 = $37,500.
• Compare to ACV of the damaged part; the insurer pays the larger of the two, then subtracts the deductible.

Auto Split Limits and Order of Operations

Personal Auto liability is often written as split limits: bodily injury per person / bodily injury per accident / property damage per accident, expressed in thousands. A 100/300/50 policy pays up to:

• $100,000 for any one person's bodily injury,
• $300,000 total bodily injury per accident, and
• $50,000 property damage per accident.

If three people are injured for $80,000, $120,000, and $90,000, the per-person cap limits the first to $80,000, caps the second at $100,000, and the third at $100,000 — total $280,000, within the $300,000 per-accident cap.

Claim order of operations (memorize this): (1) confirm a covered loss, (2) apply the valuation method, (3) apply coinsurance/ITV, (4) cap at the limit or sublimit, (5) subtract the deductible. Doing the deductible too early is a classic error.

Single Limits, Aggregates, and Restoration

Many commercial and umbrella policies use a combined single limit (CSL) instead of split limits. A $300,000 CSL pays up to $300,000 for any combination of bodily injury and property damage from one accident, giving more flexibility than 100/300/50 when one severe injury exhausts a per-person cap.

Other limit mechanics tested on the national portion:

Deductible design directly affects premium: a higher deductible or a percentage wind deductible lowers premium by shifting frequency to the insured, while sublimits let an insurer offer broad coverage while capping volatile exposures such as jewelry theft or flood-prone contents.

Self-Insured Retentions and How Limits Interact with Deductibles

On liability coverage the analog to a deductible is the self-insured retention (SIR). Two differences are tested. First, a deductible is usually subtracted from the limit and the insurer pays and then bills the insured back, so the carrier still controls the claim from dollar one. A SIR sits outside and below the policy limit and the insured must pay and often administer the claim until the retention is exhausted before the insurer's duty to defend or indemnify attaches.

Second, in stacking the limit, a per-occurrence limit applies to each separate occurrence while an aggregate caps total payments for the policy period. Understanding that the deductible erodes nothing on the limit side but the SIR can change when the insurer's duty begins lets candidates resolve commercial-lines scenarios that mix the two.

Sublimits, Inner Limits, and Coinsurance Order

A sublimit is a cap within a larger limit — for example, a homeowners policy with $300,000 contents but only $1,500 for jewelry theft. The sublimit is not additional insurance; it carves a smaller ceiling out of the broader limit for a high-theft or high-volatility category. When solving a settlement, apply the steps in order: determine the loss amount, apply any coinsurance ratio, then apply the sublimit or limit, and finally subtract the deductible. Reversing that order is the single most common arithmetic error candidates make on numeric questions.