2.4 Deductibles, Limits, and Loss Settlement

Deductibles — The Insured's Retained Loss

A deductible is the amount the insured retains on each loss; it reduces premium, eliminates small nuisance claims, and gives the insured a stake in preventing loss. On property forms the deductible is typically applied per occurrence after coinsurance is calculated. Liability coverages generally have no deductible — a common exam trap (medical payments and BI/PD limits pay from the first dollar).

Types of Deductibles

• Flat (straight) deductible — a fixed dollar amount subtracted from each loss (e.g., $1,000).
• Percentage deductible — a percent of the dwelling limit, common for windstorm/hurricane and earthquake (e.g., a 2% wind deductible on a $300,000 home = $6,000).
• Franchise deductible — the insurer pays nothing until the loss reaches a threshold, then pays the loss in full (common in ocean marine).
• Aggregate deductible — a total the insured absorbs over the policy period rather than per loss.

Limits of Insurance and Sublimits

The limit of insurance is the most the policy pays for a covered loss. Property forms add sublimits that cap certain categories below the overall limit:

Sublimits are part of Coverage C, not extra; to insure a $10,000 ring fully the insured needs a scheduled personal property endorsement.

Single Limits, Split Limits, and Aggregates

Limits come in several structures the exam tests directly:

• Specific limit — one amount for one item or coverage (Coverage A dwelling = $300,000).
• Split limits — separate caps shown as three numbers, e.g., 100/300/50 = $100,000 bodily injury per person / $300,000 BI per accident / $50,000 property damage. A two-injury crash with one claimant at $150,000 collects only the $100,000 per-person cap.
• Combined single limit (CSL) — one pooled amount for BI and PD together.
• Aggregate limit — the most the policy pays for all losses in the policy period, regardless of the number of occurrences.

Loss Settlement and Other-Insurance Provisions

When more than one policy covers the same loss, other-insurance clauses prevent the insured from collecting more than the loss:

• Pro rata — each insurer pays its share by limit. With $100,000 and $300,000 policies on a $40,000 loss, the smaller pays 100/400 × $40,000 = $10,000 and the larger pays $30,000.
• Primary and excess — one policy pays first; the other pays only after the primary limit is exhausted.

Property loss settlement also follows the principle of indemnity — restore the insured to pre-loss condition, no better.

Worked Example — Order of Operations

A $300,000 home (open-peril, 100% insured) suffers a $50,000 wind loss with a 2% wind deductible.

1. Coinsurance: insured to value, so no penalty.
2. Deductible: 2% × $300,000 = $6,000.
3. Payment: $50,000 − $6,000 = $44,000.

Trap: Apply the percentage deductible to the dwelling limit, not the loss amount. A 2% deductible here is $6,000 (2% of $300,000), not $1,000 (2% of $50,000).

Deductible Types in Detail

• Flat (straight) deductible — a fixed dollar amount subtracted from each loss; the most common.
• Percentage deductible — a percent of the limit (catastrophe/wind/hurricane and earthquake), so a 2% deductible on $300,000 = $6,000 before any payment.
• Disappearing (franchise-style) deductible — shrinks to zero as the loss grows past a threshold; rare today.
• Aggregate deductible — one annual amount absorbs all losses for the period; common in commercial accounts and self-insured plans.
• Waiting period — a time deductible used in business income coverage (72 hours).

Split vs. Single Limits and Aggregates

Liability limits come in two layouts. Split limits show three numbers — per-person BI / per-accident BI / per-accident PD (e.g., 100/300/50 means $100,000 per injured person, $300,000 per accident for all injuries, $50,000 property damage). A Combined Single Limit (CSL) is one pool (e.g., $300,000) usable for BI and PD in any mix, which is broader because it never strands money in the wrong bucket.

An aggregate caps total payouts for the policy period; a per-occurrence limit caps a single event. Commercial general liability carries both — the per-occurrence limit can be reached repeatedly until the aggregate is exhausted, after which coverage stops even for new covered claims.

Worked Order-of-Operations Numeric

Process a loss in a fixed order: apply coinsurance first, then the deductible, then cap at the limit. A $250,000 building (80% clause, required $200,000) is insured for $150,000; a $40,000 loss occurs with a $2,500 deductible. Did/Should = 150,000/200,000 = 0.75 -> 0.75 x 40,000 = $30,000, minus $2,500 deductible = $27,500, which is below the $150,000 limit, so the insurer pays $27,500. Reversing the order (deductible before coinsurance) is the classic wrong answer the exam plants.

Per-Occurrence vs. Aggregate, One More Time

Keep two limit concepts distinct. A per-occurrence (each-occurrence) limit caps what one event can collect; an aggregate caps the total for the entire policy period across all events. Liability forms (CGL) carry both; most property forms carry only a per-occurrence limit with sublimits for specific perils or property (signs, money, off-premises). On a question asking "how much is left after three claims," track the running total against the aggregate, because once it is exhausted the insurer pays nothing further even on otherwise covered claims.