2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Flat deductibles retain a fixed dollar amount; percentage deductibles (wind/quake) apply a percent of the coverage limit, not the loss.
- Only one deductible applies per occurrence, selected by the cause of loss.
- Limit structures include specific, blanket, sublimit, and aggregate limits.
- Split limits like 100/300/50 = per-person BI / per-accident BI / property damage; a CSL pools BI and PD into one per-accident limit.
- Recovery is always capped at the applicable limit; amounts above the cap are the insured's personal exposure.
Deductibles — Sharing the First Dollars
A deductible is the amount of loss the insured retains before the insurer pays. Deductibles control moral hazard, eliminate costly small claims, and lower premium. Property deductibles are usually flat-dollar (e.g., $1,000 or $2,500 per occurrence) but several specialized structures appear on the exam:
- Percentage deductibles — common for wind/hurricane and earthquake; calculated as a percent of the coverage limit (or sometimes property value). A 2% wind deductible on a $300,000 dwelling = $6,000.
- Disappearing (franchise-style) deductibles — reduce as the loss grows and vanish above a threshold (now rare).
- Aggregate deductibles — a single annual retention across all losses, common in commercial programs.
Worked Deductible Example
A homeowner has a $250,000 Coverage A dwelling limit, a $1,000 all-other-perils deductible, and a separate 5% hurricane deductible. A hurricane causes $60,000 of damage.
- Hurricane deductible = 5% × $250,000 = $12,500 (the percentage applies to the dwelling limit, not the loss)
- Insurer pays = $60,000 − $12,500 = $47,500
Notice the flat $1,000 deductible does not apply because the cause was a hurricane; only the named-storm percentage deductible is used. Stacking the wrong deductible is a classic distractor — only one deductible applies per occurrence based on the cause of loss.
A commercial building is insured for $800,000 with a 2% windstorm deductible. A windstorm causes $90,000 in damage. How much does the insurer pay?
Policy Limits — How Recovery Is Capped
The limit of insurance is the maximum the insurer pays for a covered loss. Limit structures tested on the property portion include:
| Structure | How it works |
|---|---|
| Specific limit | A separate limit for each item/location (e.g., Coverage A dwelling) |
| Blanket limit | One limit shared across multiple items/locations |
| Sublimit | A capped amount within a larger limit (e.g., $1,500 on jewelry theft) |
| Aggregate limit | The most paid for all losses during the policy period |
Casualty (liability) limits add split limits and combined single limits (CSL). A split limit shown as 100/300/50 means $100,000 per person bodily injury, $300,000 per accident bodily injury, and $50,000 property damage. A CSL of $300,000 is one pooled limit for BI and PD combined per accident.
Split-Limit Worked Example
A driver carries 100/300/50 auto liability. An at-fault accident injures four people with these adjudicated bodily-injury claims: $90,000, $120,000, $70,000, and $60,000, plus $65,000 in property damage.
- Per-person BI cap = $100,000. The $120,000 claimant is capped at $100,000; the others are within $100,000 each. Sum payable for BI = $90,000 + $100,000 + $70,000 + $60,000 = $320,000, but...
- Per-accident BI cap = $300,000. BI payment is reduced to $300,000.
- Property damage cap = $50,000. The $65,000 PD claim is paid only $50,000.
The insured is personally exposed for the $20,000 over the BI aggregate and the $15,000 over the PD limit.
An insured with 25/50/15 auto coverage injures one person whose bodily-injury claim is $40,000. The insurer will pay:
Percentage and Calendar-Year Deductibles
Beyond flat-dollar deductibles, property forms use percentage deductibles for catastrophe perils — common in hurricane-exposed states like Louisiana, where named-storm or windstorm deductibles run 1%–5% of the Coverage A limit (not of the loss). On a $400,000 dwelling, a 5% named-storm deductible is $20,000 before the insurer pays a dime of wind damage. Medical and some health-related property coverages may use an aggregate or calendar-year deductible that applies once per year rather than per loss.
Aggregate Limits and Restoration
Liability and some property forms carry an aggregate limit — the most paid for all covered losses in the policy term — distinct from the per-occurrence limit. Once the aggregate is exhausted, coverage stops until renewal unless reinstated. Property forms generally do not reduce the limit after a partial loss (the limit is restored for the next loss), whereas liability aggregates erode permanently. Distinguish specific limits (one item/location), blanket limits (multiple items/locations under one amount), and sublimits (caps inside a larger limit, e.g., $2,500 on business records).
A $400,000 Louisiana dwelling carries a 5% named-storm deductible and suffers $60,000 of hurricane wind damage. How much does the insurer pay?
Franchise vs. Straight Deductibles
A straight (flat) deductible is subtracted from every loss. A franchise deductible — common in ocean marine — pays nothing until the loss reaches the franchise amount, then pays the loss in full with no deduction. The exam contrasts these: with a $1,000 straight deductible a $5,000 loss pays $4,000; with a $1,000 franchise the same loss pays the full $5,000. A disappearing deductible shrinks to zero as the loss grows. Match the mechanic to the loss size in scenario questions.
Split Limits, CSL, and Restoration of Limits
Liability limits come as split limits (e.g., 25/50/15 = per-person BI / per-accident BI / per-accident PD) or a single combined single limit (CSL) that one bucket can satisfy any covered claim up to. On a 25/50/15 policy, three injured claimants share at most $50,000 even though one alone could collect $25,000. Property per-occurrence limits typically restore for the next loss, while liability aggregates erode for the term. Always identify whether a question is testing a per-person cap, a per-accident cap, or an annual aggregate before computing the payout.