2.4 Deductibles, Limits, and Loss Settlement

Deductibles

A deductible is the portion of a loss the insured retains before the insurer pays. Deductibles reduce premium, eliminate small nuisance claims, and keep the insured invested in loss control. On the exam, know the common types and the order of application.

Types of Deductibles

The deductible is applied after any coinsurance calculation and before the policy limit cap is checked against the remaining amount.

Higher deductibles trade premium for retained risk. A move from a $500 to a $2,500 deductible can cut the premium meaningfully because it eliminates frequent small claims, which carry high handling cost relative to their size. Coastal states often mandate separate percentage deductibles for wind and hurricane to keep carriers solvent against catastrophe exposure.

Percentage (Wind/Hurricane) Deductible Example

A coastal home has Coverage A = $300,000 with a 2% hurricane deductible. A hurricane causes $50,000 of damage.

Deductible = 2% x $300,000 = $6,000
Payment    = $50,000 - $6,000 = $44,000

Note the deductible is 2% of the dwelling limit, not 2% of the loss — a common trap that dramatically changes the math. Percentage deductibles are typically triggered only by a named storm or hurricane warning.

Limits of Insurance

The limit is the maximum the insurer will pay. Key structures:

• Specific limit: a separate limit for each item or location (e.g., $300,000 building, $150,000 contents).
• Blanket limit: a single limit covering multiple items/locations, giving flexibility where loss concentrates.
• Sublimits: internal caps for special property — e.g., Homeowners caps on money (often $200), jewelry theft (often $1,500), and firearms.
• Aggregate vs. per-occurrence: liability forms commonly carry both a per-occurrence limit and a higher annual aggregate.

Other Limit Concepts

A Margin Clause caps blanket coverage at a stated percent of the value reported for each location. Loss payment never restores the limit on most property forms unless the policy says otherwise, but standard property limits are generally non-reducing (not eroded by prior losses within the term) — distinguish this from liability aggregates, which do erode.

Blanket coverage is valued using the total of the Statement of Values the insured files; if reported values are understated, a margin clause or coinsurance can still claw back the shortfall. Specific limits are simpler but offer no flexibility to move coverage to where the loss actually lands.

Loss Settlement Mechanics

The order of operations on a property claim is a guaranteed exam item:

1. Determine the loss amount using the policy's valuation basis (ACV, RC, or functional).
2. Apply coinsurance if the insured is underinsured (multiply by the ratio).
3. Subtract the deductible.
4. Cap at the policy limit if the result still exceeds it.

Loss Settlement Traps

• Pair-and-set clause: loss to one item of a pair/set is not valued as if the whole set were destroyed.
• Other-insurance / pro rata: when two policies cover the same loss, each pays its proportionate share.
• For replacement cost, the insurer may pay ACV first and release recoverable depreciation only after repairs are completed.
• Always confirm whether the deductible applies per occurrence or per item.

A Full Settlement Walkthrough

Tie 2.2 through 2.4 together. A $500,000 building (80% coinsurance, so $400,000 required) is insured for $360,000. A fire causes a $120,000 ACV loss; the flat deductible is $2,500; the policy limit is $360,000.

Step 1 Loss value (ACV)   = $120,000
Step 2 Coinsurance ratio  = $360,000 / $400,000 = 0.90
Step 3 After coinsurance  = 0.90 x $120,000 = $108,000
Step 4 Less deductible    = $108,000 - $2,500 = $105,500
Step 5 Cap at limit       = $360,000 (no cap needed)

Final payment: $105,500. Notice the order — valuation first, coinsurance ratio second, deductible third, limit cap last. Reversing any step changes the answer, and the exam writes distractors for each wrong sequence.

Aggregate, Per-Occurrence, and Restoration of Limits

Property limits are generally per-occurrence and reinstate after each loss, unlike liability aggregate limits that erode over the policy year. The exam tests three limit structures: a specific limit covers one item at one location; a blanket limit applies a single amount across multiple buildings or coverages (improving flexibility but requiring an accurate statement of values); and a sublimit caps a particular category within a larger limit.

Note the margin clause sometimes attached to blanket policies, which caps recovery at a stated percentage (e.g., 110%) of the value reported for the affected location — a guard against under-reporting on blanket schedules that examiners pair with statement-of-values questions.

Deductible Types Recap

Property deductibles come in three exam-tested shapes. A flat (straight) deductible subtracts a fixed dollar amount per occurrence. A percentage deductible — common for wind/hail or hurricane perils in catastrophe-prone areas — is calculated as a percent of the Coverage A limit, not of the loss, so a 2% deductible on a $300,000 home is $6,000 regardless of claim size. A franchise deductible (rare, seen in some marine forms) pays nothing until the loss reaches a threshold, then pays the loss in full once that threshold is crossed. Matching the deductible type to its calculation base is the recurring task.