2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Deductibles can be flat dollar, percentage (used for wind/hurricane/quake on the dwelling limit), disappearing, or aggregate.
- Split limits read per-person BI / per-accident BI / per-accident PD; CSL pools all BI and PD into one amount.
- Apply coinsurance first, then cap at the policy limit, then subtract the deductible.
- Percentage catastrophe deductibles apply to the Coverage A limit, not to the loss amount.
Deductibles: the Insured's First Layer
A deductible is the amount the insured retains on each loss before the insurer pays. Deductibles control small-claim frequency, lower premium, and keep the insured engaged in loss prevention. Property forms use several structures:
- Flat (straight) deductible — a fixed dollar amount subtracted from each covered loss (e.g., $1,000). The most common.
- Percentage deductible — a percentage of the dwelling/building limit, used for windstorm, hurricane, and earthquake in catastrophe-prone states. On a $300,000 home with a 2% hurricane deductible, the insured retains $6,000 — far more than a typical flat deductible.
- Disappearing (franchise-style) deductible — shrinks as the loss grows and vanishes above a threshold; mostly historical.
- Aggregate deductible — a cap on total retained losses over a policy period; common in commercial programs.
How Limits Cap Recovery
The limit of insurance is the most the insurer will pay. Property limits are typically per occurrence by coverage (Coverage A dwelling, Coverage C contents). Liability limits come two ways:
- Split limits are written as three numbers, e.g. 100/300/50: $100,000 bodily injury per person, $300,000 bodily injury per accident, $50,000 property damage per accident.
- Combined Single Limit (CSL) is one pooled amount for all BI and PD in an occurrence (e.g., $500,000 CSL).
Worked split-limit example. Limits 100/300/50. An at-fault auto accident injures three people ($120,000, $80,000, $40,000) and causes $60,000 property damage. The first injured person is capped at $100,000 (per-person limit), the others paid in full ($80,000 + $40,000). BI subtotal = $220,000 — under the $300,000 per-accident cap, so all three are covered to their per-person caps. Property damage of $60,000 is capped at the $50,000 PD limit. The insured personally owes the $20,000 BI shortfall plus the $10,000 PD shortfall.
Loss Settlement Provisions
When the loss is settled, several provisions interact:
| Provision | Effect |
|---|---|
| Pair or set clause | Loss to one item of a set is valued by the reduction in value of the whole set, not the price of one piece |
| Loss settlement (HO) | Building losses settle at RC if insured to 80% of replacement cost; otherwise the larger of ACV or the proportion |
| Other insurance / pro rata | Multiple policies on the same risk share the loss in proportion to their limits |
| Salvage | The insurer takes title to recovered property after paying a total loss |
| Abandonment | The insured may not abandon damaged property to the insurer and demand a total-loss payment |
Order of operations on a single claim: apply the coinsurance test (if any), then the policy limit cap, then subtract the deductible. Reversing deductible and coinsurance order is the single most common settlement error on the exam.
A policy carries split limits of 100/300/50. An at-fault accident injures two people for $130,000 and $90,000 and causes $70,000 in property damage. Ignoring deductibles, what does the insurer pay in total?
A home in a coastal state has a $400,000 Coverage A limit with a 2% named-storm percentage deductible. A hurricane causes $90,000 of covered damage. How much does the insured retain?
Deductible Types and How They Interact With the Loss
A deductible is the insured's retained first layer, lowering premium and discouraging small claims. Straight (flat) deductibles subtract a fixed dollar amount from each loss. Percentage deductibles, common for wind/hail and catastrophe perils, subtract a percentage of the dwelling limit, which can dwarf a flat deductible. Aggregate deductibles cap total retained losses over a period. A disappearing (franchise-style) deductible reduces as the loss grows. The exam routinely gives two deductibles on one policy and tests which applies to which peril, so always match the cause of loss to its corresponding deductible.
How Limits Cap Recovery: Specific, Blanket, and Sublimits
A specific limit applies a separate amount to each described item or location. A blanket limit covers multiple items or locations under a single shared amount, offering flexibility when values shift between locations. Sublimits cap recovery for designated property within a broader limit (for example, the special limits on jewelry, firearms, and cash inside homeowners Coverage C). Aggregate limits cap total payments for a policy period regardless of the number of claims, prominent in liability and certain property catastrophe contexts. Knowing whether a limit is per-item, per-occurrence, or aggregate determines the maximum payout.
Loss Settlement: Sequence of the Calculation
The order of operations matters. First determine the valuation basis (ACV or RC) and compute the loss amount on that basis. Second, apply any coinsurance or insurance-to-value condition to get the proportionate payable amount. Third, subtract the applicable deductible. Fourth, cap the result at the policy limit or applicable sublimit. Reversing these steps, especially subtracting the deductible before applying coinsurance, produces a wrong answer the exam deliberately offers as a distractor, so memorize the sequence and apply it mechanically.
Other-Insurance and Recovery-Limiting Provisions
When more than one policy covers the same loss, other-insurance clauses prevent the insured from collecting more than the loss. Pro rata sharing splits the loss by each policy's proportion of total limits; primary-and-excess clauses make one policy pay first and the other only above that; and an escape clause voids coverage if other insurance exists. Salvage and subrogation further protect the indemnity ceiling: the insurer takes title to recovered property and pursues responsible third parties. A scenario with two homeowners policies on the same property is testing pro rata contribution, not double recovery.