2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- A deductible is the insured's retained portion of each loss; it lowers premium, eliminates small claims, and keeps the insured engaged in loss prevention.
- Flat (dollar) deductibles subtract a fixed amount; percentage deductibles (common for wind/hurricane/earthquake) are a percent of the dwelling limit, not of the loss.
- Policy limits cap the insurer's payout; sublimits cap specific property categories (jewelry, cash, firearms) within the overall limit.
- Aggregate limits cap total payouts for the policy period; per-occurrence limits cap each event — distinguish these on liability and some property forms.
- Loss settlement provisions specify the valuation basis, the deductible, and the order of application: apply the coinsurance factor first, then subtract the deductible, then cap at the limit.
Deductibles
A deductible is the portion of each covered loss the insured retains before the insurer pays. Deductibles lower premium, screen out small nuisance claims, and give the insured a stake in preventing losses (reducing morale hazard).
Flat vs. Percentage Deductibles
| Type | How it works | Where used |
|---|---|---|
| Flat (dollar) | Subtract a fixed dollar amount from each loss | Standard homeowners and commercial losses ($500, $1,000, $2,500) |
| Percentage | A percent of the Coverage A / building limit, not of the loss | Wind/hail, named-storm/hurricane, and earthquake deductibles in catastrophe-prone areas |
Critical trap: a hurricane deductible of 2% on a home with a $300,000 Coverage A limit is $6,000 — calculated on the dwelling limit, not on the size of the loss. Many candidates wrongly multiply 2% by the loss amount.
Worked Example — Percentage Deductible
A hurricane causes $40,000 of covered damage to a home insured for $250,000 Coverage A under a 5% hurricane deductible.
- Deductible = 5% × $250,000 = $12,500
- Loss $40,000 − $12,500 = $27,500 paid
If the same home had a flat $1,000 deductible, the insurer would pay $39,000 — percentage deductibles shift far more of a catastrophe loss back to the insured.
Limits and Sublimits
The policy limit is the most the insurer will pay for a covered loss to that coverage. Sublimits cap specific high-theft or hard-to-value categories within the overall Coverage C limit. Exceeding a sublimit requires scheduling the item on an endorsement.
| Property category | Typical homeowners special limit |
|---|---|
| Money, bank notes, coins | $200 |
| Securities, deeds, manuscripts | $1,500 |
| Jewelry, watches, furs (theft) | $1,500 |
| Firearms (theft) | $2,500 |
| Silverware/goldware (theft) | $2,500 |
| Business property on premises | $2,500 |
These are not deductibles — they are the most the policy pays for that category. A $9,000 stolen ring on an unscheduled policy collects only the $1,500 jewelry sublimit.
Per-Occurrence vs. Aggregate Limits
- Per-occurrence limit: the most paid for a single event or loss.
- Aggregate limit: the most paid for all covered losses during the policy period.
Property coverage is usually per-occurrence with a reinstating limit, while liability and some commercial property extensions carry an annual aggregate. Once an aggregate is exhausted, no further payments are made that term even if the per-occurrence limit remains.
Split Limits Example
Liability is often shown as split limits such as 100/300/50:
- $100,000 bodily injury per person
- $300,000 bodily injury per accident (all people)
- $50,000 property damage per accident
If three people are injured for $90,000 each ($270,000 total), each is capped at $100,000 individually, and the $300,000 per-accident cap is not exceeded, so all three are paid in full — $270,000 total.
Loss Settlement: Order of Operations
When several conditions apply at once, the sequence matters and is heavily tested. Apply them in this order:
- Determine the covered loss amount using the policy's valuation basis (ACV or RC).
- Apply the coinsurance factor (Carried ÷ Required) if it is below 1.0.
- Subtract the deductible.
- Cap the result at the policy limit.
Doing the deductible before coinsurance produces a wrong answer — coinsurance scales the loss first, then the deductible comes off the scaled figure.
Deductible Structures Worth Knowing
Beyond flat and percentage deductibles, the exam tests a few special structures. A disappearing (franchise) deductible is fully absorbed by the insurer once the loss exceeds a threshold, so a large loss is paid in full. A per-occurrence deductible applies once to each event regardless of how many items are damaged, while a per-item deductible applies separately to each scheduled article. Commercial property may also use a waiting-period deductible on business income — a 72-hour window before time-element coverage begins.
Limits also interact with coverage extensions and additional coverages that sit outside the main limit. Debris removal, for example, is often payable up to 25% of the direct loss plus deductible, with an extra amount available when removal costs are high. Knowing whether a payment erodes the main limit (it usually does) or is provided as additional insurance (it sits on top) changes the maximum recovery and is a recurring distractor on limit questions.
Deductible Types You Must Distinguish
The exam separates several deductible structures. A straight (flat) deductible subtracts a fixed dollar amount per loss. A percentage deductible (common for wind/hail and earthquake) applies a percent of the dwelling limit — on a $300,000 home a 2% wind deductible is $6,000, not 2% of the loss. A disappearing (franchise) deductible shrinks as the loss grows and vanishes above a threshold. An aggregate deductible caps total retention across a policy year.
Limits: Per-Occurrence vs. Aggregate
Distinguish the per-occurrence limit (most paid for one event) from the aggregate limit (most paid for all covered events in the policy period). Liability forms typically show both; once the aggregate is exhausted, no further claims are paid even if a per-occurrence limit remains. Property limits also interact with inflation-guard endorsements that raise the limit automatically, and with blanket limits that cover multiple items or locations under one shared amount rather than scheduling each separately.
A home has a $400,000 Coverage A limit with a 2% windstorm deductible. A windstorm causes $30,000 of covered damage. How much does the insurer pay?
An auto liability policy carries split limits of 100/300/50. Four people are each injured for $80,000 in one accident (total $320,000 bodily injury). How much does the insurer pay for bodily injury?