2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Deductible types: flat, percentage, disappearing, aggregate, franchise, and waiting-period (time) deductibles.
- Percentage wind/hurricane deductibles apply to the Coverage A limit, not the loss — a major trap.
- Limit types: specific, blanket, scheduled, aggregate, and sublimits inside larger limits.
- Other-insurance clauses (pro rata, equal shares, excess) enforce indemnity and prevent profit.
- Settlement order: valuation, coinsurance, policy-limit cap, deductible, then other insurance.
Deductibles: Sharing the First Dollars
A deductible is the amount the insured retains before coverage responds. It eliminates small, costly-to-handle claims and lowers premium. The exam tests several deductible structures and how each interacts with the loss.
| Deductible type | How it works |
|---|---|
| Flat (straight) dollar | Fixed amount subtracted from each loss (e.g., $1,000) |
| Percentage | A % of the dwelling/building limit, common for wind/hail and named storms (e.g., 2% of $300,000 = $6,000) |
| Disappearing | Shrinks as the loss grows, vanishing above a threshold |
| Aggregate (annual) | One total deductible across all losses in the policy period |
| Franchise | No payment below a threshold; full loss paid once it is exceeded |
| Waiting period | Time-based, used in business income (a "time deductible") |
Percentage Deductible Trap
Wind/hurricane percentage deductibles apply to the Coverage A limit, not the loss. On a $400,000 dwelling with a 5% hurricane deductible, the insured first absorbs $20,000 — far more than a typical $1,000 flat deductible. Candidates routinely (and wrongly) multiply the percentage by the loss.
Types of Policy Limits
- Specific limit - one limit on one item or location.
- Blanket limit - a single limit covering multiple items/locations, providing flexibility when values shift between them.
- Scheduled limit - separate listed limits for each described item (e.g., scheduled jewelry).
- Aggregate limit - the most the insurer pays for all losses in the policy period (common in liability).
- Sublimit - a cap inside a larger limit (e.g., $1,500 on jewelry theft within personal property).
Loss Settlement Provisions
When multiple policies cover the same loss, other insurance clauses prevent the insured from profiting:
- Pro rata - each insurer pays in proportion to its share of total coverage. If Insurer A carries $200,000 and Insurer B carries $300,000 (total $500,000) on a $100,000 loss, A pays 200/500 x $100,000 = $40,000 and B pays $60,000.
- Contribution by equal shares - each insurer pays equally until the loss is paid or a policy limit is reached.
- Excess - one policy pays only after another (the primary) is exhausted.
- Primary vs. excess - the order in which policies respond.
These mechanisms enforce indemnity - restoring the insured to the pre-loss position without gain.
Pair, Set, and Other Settlement Rules
- Pair or set clause - loss to one item of a pair/set is settled on the reduced value of the set, not the full set value; the insurer may also repair/replace to restore the set or pay the difference in ACV.
- Loss to a part - the insurer may repair or replace only the damaged part rather than the whole.
- Salvage - after paying a total loss the insurer may take the damaged property and recover salvage value.
- Abandonment - the insured generally may not abandon property to the insurer and demand a total-loss payment.
Loss Settlement Options
Most property policies let the insurer choose to: pay the value of the lost property, pay the cost to repair or replace, repair/rebuild with like kind and quality, or take all/part of the property at an agreed/appraised value (with salvage). The insurer typically has 30 days after proof of loss to notify the insured of its intention.
Order of Operations (memorize)
- Determine the valuation (ACV/RCV).
- Apply any coinsurance ratio.
- Apply the policy-limit / sublimit cap.
- Subtract the deductible.
- Coordinate other insurance (pro rata/excess).
Reversing steps 2 and 4 is a guaranteed wrong answer.
How Limits Apply: Specific, Blanket, and Sublimits
The way limits are structured changes how much is available for a loss:
| Limit type | How it responds |
|---|---|
| Specific | A separate limit for each item/location; applies only to that item |
| Blanket | One limit covering multiple items/locations, providing flexibility when values shift between them |
| Scheduled | Each listed item has its own stated value (jewelry floater) |
| Sublimit | A cap within a larger limit (e.g., $2,500 on business property off-premises) |
A blanket limit is valuable when a fire destroys one of several covered buildings: the full blanket limit is available, whereas specific limits would cap recovery at that one building's scheduled amount.
Reinstatement and Nonreduction
Most property limits reinstate automatically after a partial loss — paying a claim does not permanently shrink the limit available for the next, separate loss in the policy period. By contrast, an aggregate limit (common in liability and some crime forms) is reduced by each payment until exhausted. Knowing whether a limit reinstates or aggregates determines how much remains after a first loss.
Loss Settlement Order of Operations
For a covered partial loss, settle in this sequence: (1) determine the valuation basis (ACV or RCV); (2) apply any coinsurance penalty; (3) subtract the deductible; (4) cap at the policy limit. Reversing steps — for example, subtracting the deductible before coinsurance — produces a wrong figure the exam plants as a distractor.
Worked Settlement
A $300,000 dwelling (RCV met) suffers a $30,000 covered loss with a 2% percentage deductible. The deductible = 2% x $300,000 = $6,000, applied to the limit not the loss. RCV pays $30,000 minus the $6,000 deductible = $24,000, well within the policy limit. The percentage-of-limit deductible, not a flat $1,000, is what trips candidates.
A $400,000 dwelling has a 5% named-storm percentage deductible and suffers $50,000 of hurricane damage. How much does the insured absorb as the deductible?
Two policies cover the same building on a pro rata 'other insurance' basis: Policy A has a $200,000 limit and Policy B has a $300,000 limit. On a $50,000 covered loss, how much does Policy A pay?