2.4 Deductibles, Limits, and Loss Settlement

Deductibles

A deductible is the portion of each loss the insured retains before the insurer pays. Deductibles lower premiums, discourage small nuisance claims, and reduce moral/morale hazard. The exam tests several types:

• Flat (straight) deductible — a fixed dollar amount subtracted from each loss (e.g., $500).
• Percentage deductible — common for wind/hail, hurricane, and earthquake; a percent of the dwelling limit (not the loss). A 2% deductible on a $300,000 home is $6,000.
• Aggregate deductible — applies to total losses over a policy period rather than per occurrence.
• Franchise deductible — once the loss exceeds the threshold, the insurer pays the entire loss with no deduction (common in ocean marine).

How Deductibles Interact With Coinsurance and Limits

Order of operations matters on multi-step questions. Apply the coinsurance penalty first, then subtract the deductible, then cap the result at the policy limit. Skipping or reordering a step is the single most common arithmetic mistake on the property portion.

A percentage catastrophe deductible can dwarf a flat deductible: a homeowner used to a $1,000 flat deductible may face a $10,000 hurricane deductible on a $500,000 home (2%), so coastal insureds must budget for a large retained loss. Some states require insurers to disclose hurricane deductibles in bold on the declarations page. Deductibles never reduce liability coverage in standard homeowners forms — they apply to first-party property losses, not third-party bodily injury or property damage claims.

Limits of Insurance

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

• Specific (scheduled) limit — a separate limit on each item or location.
• Blanket limit — one limit covering multiple items/locations, providing flexibility when values shift.
• Sublimits — internal caps within a larger limit (e.g., $1,500 on jewelry theft, $2,500 on business property at home, $200 on cash) — even though the contents limit may be far higher.
• Per-occurrence vs. aggregate — per-occurrence caps a single event; aggregate caps total payouts for the period.

Limits in Homeowners forms are set as a percentage of Coverage A (the dwelling). Coverage B (other structures) is typically 10% of A, Coverage C (personal property) 50% of A, and Coverage D (loss of use) 20–30% of A. Raising Coverage A automatically raises these derived limits, which is why insuring the dwelling to value matters beyond the building itself.

Split Limits and Loss Settlement

Liability often uses split limits written as three numbers, e.g., 100/300/50 (in thousands): $100,000 per person bodily injury, $300,000 per accident bodily injury, and $50,000 per accident property damage. A combined single limit (CSL) instead provides one pooled amount (e.g., $300,000) for any mix of BI and PD.

Worked split-limit example: An at-fault driver with 100/300/50 injures three people for $80,000, $120,000, and $40,000, plus $60,000 in property damage.

• Person 1: $80,000 (under $100K cap) → pay $80,000.
• Person 2: $120,000 → capped at $100,000 per person → pay $100,000.
• Person 3: $40,000 → pay $40,000.
• BI subtotal $220,000 is under the $300,000 per-accident cap → all paid.
• Property damage $60,000 → capped at $50,000 → pay $50,000.
• Total paid: $270,000; the insured owes the $20,000 + $10,000 = $30,000 excess.

Combined Single Limit and Excess Layers

A combined single limit (CSL) avoids the rigidity of split limits. With a $300,000 CSL, a claim totaling $300,000 across bodily injury and property damage is paid in full from one pool, because nothing forces a $100,000 per-person cap. CSL therefore protects the insured better when one claimant has catastrophic injuries.

The exam often asks you to recognize that under split limits a single severely injured person can exhaust the per-person cap while leaving the per-accident limit untouched — money the insured cannot access for that person.

Above primary limits, an umbrella or excess policy provides an additional layer (commonly $1 million or more) that drops down after the primary limit is exhausted. Umbrellas broaden coverage and often fill gaps the primary excludes, after the insured satisfies a self-insured retention on losses the primary does not cover.

Common Homeowners Sublimits

These caps apply inside Coverage C; scheduling valuable items on an endorsement removes the sublimit and usually adds open-peril, no-deductible coverage.

How Limits and Deductibles Interact in Settlement

Settlement combines the valuation method, the deductible, the coinsurance result, and the limit of insurance - applied in that logical order. The deductible is the insured's retained first-dollar amount; the limit is the insurer's ceiling.

Deductible variations the exam tests include the flat (per-occurrence) deductible, the percentage deductible (common for wind/hurricane and earthquake - a $300,000 home with a 2% wind deductible self-insures $6,000), the disappearing deductible, and the franchise deductible (no payment until loss exceeds a threshold, then paid in full).

Exam trap: Percentage hurricane/named-storm deductibles are crucial in coastal Mississippi: they are calculated on the Coverage A dwelling limit, not on the loss amount, so a 2-5% wind deductible can dwarf the standard flat deductible after a hurricane. Always identify which deductible the fact pattern triggers before computing the net payment.