2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Percentage deductibles (wind/quake) are calculated on the policy limit, not the loss amount.
- Split limits read per-person BI / per-accident BI / property damage (e.g., 100/300/50); CSL is one combined number.
- Sublimits cap specific property classes inside the broader Coverage C limit.
- Vacancy beyond 60 days cuts a commercial covered loss by 15% and suspends certain perils.
- Claim order: covered peril → value → coinsurance → deductible → policy limit → loss-payee direction.
Deductibles
A deductible is the portion of a covered loss the insured pays before the insurer responds. Deductibles control small, frequent claims, reduce moral/morale hazard, and lower premium. Property exams test several deductible structures:
| Type | How It Works |
|---|---|
| Flat (straight) dollar | Fixed amount subtracted from each loss (e.g., $500, $1,000) |
| Percentage | A % of the dwelling/building limit — common for windstorm/hurricane (2%–5%) and earthquake (10%–20%) |
| Disappearing/franchise | Older forms; once loss passes a threshold the deductible shrinks or vanishes |
| Aggregate | One total deductible applied across all losses in the policy term |
| Waiting period | Time-based deductible used in business income (e.g., 72 hours) |
Percentage-deductible trap: a 2% hurricane deductible on a $300,000 dwelling is $6,000, not 2% of the loss. Compute it on the limit, not the claim.
Limits of Insurance
The limit of insurance is the most the insurer will pay. Limits are organized several ways:
- Per-occurrence limit — maximum for one event.
- Aggregate limit — maximum for all covered losses in the policy period.
- Sublimits — caps inside a broader limit (e.g., HO-3 special limits: $200 on cash, $1,500 on jewelry theft, $2,500 on business property on-premises).
- Split limits (liability) — three numbers such as 100/300/100 meaning $100,000 per person bodily injury, $300,000 per accident BI, $100,000 property damage.
- Combined single limit (CSL) — one number for all BI and PD combined.
Split-limit example: Under 100/300/50, an at-fault accident injures three people ($120K, $90K, $40K = $250K) and damages a car worth $60K. The insurer pays each injured person up to $100K (so $100K + $90K + $40K = $230K, under the $300K cap) and PD up to $50K of the $60K. The insured owes the uncovered $20K BI and $10K PD.
Loss Settlement Provisions
Property policies settle losses under several rules the exam contrasts directly:
- Replacement cost vs. ACV — RC pays new-for-old (holdback released after repair); ACV deducts depreciation (see 2.2).
- Other-insurance / pro rata — when two policies cover the same loss, each pays its proportional share of the limit.
- Valued policy laws — in some states, on a total loss the insurer must pay the full face amount of a fire policy regardless of ACV.
- Loss payable / mortgagee clause — directs payment to a lienholder; the standard (union) mortgage clause protects the mortgagee even if the insured's own act voids coverage.
- Vacancy provision — commercial property reduces a covered loss by 15% (and suspends certain perils) if the building has been vacant beyond 60 consecutive days.
Order of operations on a claim: determine covered peril → value the loss → apply coinsurance (if any) → subtract the deductible → cap at the limit → direct payment per loss-payee clauses.
Combined Single Limit vs. Split, and When CSL Wins
A combined single limit (CSL) of $300,000 pools all bodily injury and property damage into one bucket per occurrence. Replay the earlier accident under a $300,000 CSL: three injuries ($120K + $90K + $40K = $250K) plus $60K property damage = $310K; the CSL pays the full $300,000 and the insured owes only $10K. Under the split 100/300/50 the same accident left a $20K BI gap and a $10K PD gap because each silo had its own ceiling.
The lesson the exam reinforces: a CSL is more flexible because unused capacity in one category covers a shortfall in another — split limits cannot share dollars across the per-person, per-accident, and property-damage compartments.
Aggregate, Self-Insured Retention, and Sublimit Stacking
Watch how multiple limits interact on commercial claims:
- An aggregate limit is consumed by every paid loss, so late-term losses may find the aggregate exhausted even though each occurrence was small.
- A self-insured retention (SIR) behaves like a large deductible the insured must pay and administer before the policy responds — unlike a deductible, the insurer often does not advance the SIR.
- Sublimits do not add to the policy limit — a $2,500 jewelry sublimit is carved out of, not on top of, the Coverage C limit.
Claim sequence reminder: value → coinsurance → deductible/SIR → per-occurrence limit → aggregate cap. Skipping a step is the most common scoring error on multi-limit problems.
Deductible Types and How Limits Are Stated
Deductibles come in several forms the exam tests. A straight (flat) deductible subtracts a fixed dollar amount from each loss. A percentage deductible, common for windstorm, hurricane, and earthquake, is computed as a percentage of the dwelling limit (a 2 percent deductible on a $300,000 home is $6,000), which can dwarf a flat deductible and surprises insureds. A disappearing (franchise) deductible shrinks as the loss grows and vanishes once the loss exceeds a threshold, so a large loss is paid in full.
An aggregate deductible caps the total deductibles an insured pays in a policy year. A waiting period functions as a time deductible for business income, suspending coverage for the first hours of a shutdown.
Limits are stated in matching forms. A per-occurrence limit caps payment for one event; an aggregate limit caps total payments for the policy period; a sublimit caps a specific category (jewelry, money, business income) within a larger limit; and a split limit versus combined single limit governs liability allocation. Blanket limits cover multiple locations or property types under one limit, while specific (scheduled) limits assign a separate limit to each item, which matters when applying coinsurance because blanket coverage tests the requirement against total values.
Loss settlement also depends on whether coverage is primary (pays first), excess (pays after other coverage), or pro rata (shares proportionally), the other-insurance methods covered in fundamentals. The order of operations remains fixed: establish value, apply coinsurance, subtract the deductible, then cap at the per-occurrence and aggregate limits.
Worked sequence: a $90,000 covered loss on a policy with a 90 percent coinsurance requirement met (no penalty), a $5,000 deductible, a $100,000 per-occurrence limit, and $40,000 of the $250,000 annual aggregate already used. The full $90,000 loss minus the $5,000 deductible is $85,000, within the $100,000 per-occurrence limit, but the remaining aggregate is $210,000, so the full $85,000 is paid and the aggregate drops to $125,000. Running each loss through the same value-coinsurance-deductible-limit-aggregate sequence prevents the most common scoring errors.
Key Takeaways
Deductibles may be straight, percentage (common for wind/quake and computed on the dwelling limit), disappearing/franchise, aggregate, or a waiting period for business income. Limits appear as per-occurrence, aggregate, sublimit, split versus combined single limit, and blanket versus scheduled. Always settle in order: value, coinsurance, deductible or SIR, per-occurrence limit, then aggregate cap, and account for primary, excess, or pro-rata other-insurance status.
A homeowner has a 5% windstorm deductible on a dwelling insured for $400,000. A hurricane causes $30,000 of covered damage. How much does the insurer pay?
Under a 100/300/50 split-limit auto policy, an at-fault insured injures one person for $130,000. How much bodily-injury coverage applies to that person?