2.4 Deductibles, Limits, and Loss Settlement

Deductibles: The Insured's Share

A deductible is the amount the insured pays out of pocket before the policy responds. Deductibles serve three purposes: they lower premium, eliminate nuisance (small) claims that cost more to adjust than to pay, and keep the insured engaged in loss control.

Flat vs. Percentage Deductibles

• A flat deductible is a fixed dollar amount, such as $500 or $1,000, subtracted from each covered loss.
• A percentage deductible is a percent of a coverage limit. These are common for hurricane, windstorm, and earthquake perils and can be enormous.

Worked Example — Percentage Deductible

A home is insured for $400,000 with a 5% hurricane deductible. A hurricane causes $120,000 of damage.

• Deductible = 5% x $400,000 = $20,000.
• Insurer pays $120,000 - $20,000 = $100,000.

A $20,000 hurricane deductible dwarfs a typical $1,000 flat deductible and surprises many policyholders. Earthquake deductibles commonly run 10-20% of the dwelling limit.

Policy Limits

The limit of insurance is the most the insurer will pay. Property limits take several forms:

Sublimits (Special Limits of Liability)

Homeowners forms cap theft-prone or hard-to-value categories regardless of the overall Coverage C limit. Typical ISO figures include:

• Money and coins: $200
• Securities, deeds, manuscripts: $1,500
• Watercraft and trailers: $1,500
• Jewelry, watches, and furs (theft): $1,500
• Silverware and goldware (theft): $2,500
• Firearms (theft): $2,500
• Business property on premises: $2,500

An insured who loses $8,000 in jewelry to theft recovers only the $1,500 sublimit unless they scheduled the items on an endorsement (a floater) for their appraised value.

Loss Settlement: Order of Operations

The sequence in which you apply coinsurance, limits, and deductibles changes the answer. The correct order:

1. Determine the loss amount using the proper valuation method (ACV or RCV).
2. Apply any coinsurance adjustment.
3. Cap the result at the policy limit or applicable sublimit.
4. Subtract the deductible to reach the net payment.

Worked Example — Full Sequence

Contents loss of $10,000 (ACV); Coverage C limit $50,000 (no coinsurance issue); jewelry portion is $3,000 with a $1,500 sublimit; flat deductible $500.

• Non-jewelry contents: $7,000 (within limit).
• Jewelry: capped at $1,500 (sublimit).
• Subtotal = $7,000 + $1,500 = $8,500.
• Less deductible $500 = $8,000 paid.

Other-Insurance Clauses

When two or more policies cover the same loss, other-insurance provisions divide the payment:

• Pro rata (proportional): each policy pays its share of the loss in proportion to its limit. A $40,000 and a $60,000 policy split a $50,000 loss as $20,000 and $30,000.
• Contribution by equal shares: each insurer pays equally until the smaller limit is exhausted, then the larger continues.
• Excess: the primary policy pays first; the excess policy responds only above the primary limit.

Common Exam Traps

• Wrong order of operations — coinsurance and limits come before the deductible, not after.
• Ignoring sublimits — a large overall limit does not protect cash, jewelry, or firearms beyond their special limits.
• Treating percentage deductibles as flat — 5% of a $400,000 home is $20,000, not $5,000.
• Confusing pro rata with excess — pro rata shares simultaneously; excess only pays above the primary limit.

How Deductibles Lower Premium

A deductible transfers small, high-frequency losses back to the insured, and frequency is what drives most claim cost. Raising a deductible from $500 to $2,500 removes a large slice of inexpensive claims, so the premium falls noticeably. The trade-off is more out-of-pocket exposure on each loss. On the exam, expect the relationship to be stated plainly: higher deductible, lower premium; lower deductible, higher premium.

Disappearing and Franchise Deductibles

Two older deductible structures occasionally appear:

• A franchise deductible pays nothing until the loss reaches a threshold, then pays the loss in full with no deduction. It is common in ocean marine coverage.
• A disappearing deductible shrinks as the loss grows and vanishes entirely above a stated amount.

Both differ from the ordinary straight (flat) deductible, which is always subtracted regardless of loss size.

Split Limits and Combined Single Limits

While property losses usually use a single per-occurrence limit, liability portions of property-casualty policies often use split limits written as three numbers, such as 100/300/100:

A combined single limit (CSL) instead provides one pooled amount, such as $300,000, for all bodily injury and property damage in an occurrence. A CSL is more flexible because it does not separate the per-person and property-damage caps.

Restoration of Limits

Most property policies automatically restore the per-occurrence limit after a paid loss, so a second loss later in the term still has the full limit available. Aggregate limits, by contrast, are not restored — once exhausted, coverage is gone until renewal. Knowing which limits reinstate is a subtle but tested point, especially on commercial forms with annual aggregates.

Putting Deductible and Limit Together

The limit caps the top of a loss and the deductible trims the bottom; the insurer pays the band in between. A $250,000 limit with a $1,000 deductible on a $260,000 loss pays $250,000 (limit caps it) and the deductible is moot because the loss already exceeds the limit. Recognizing when the limit, not the deductible, controls the math prevents a common arithmetic error.

Homeowners Special Limits (Sublimits) on Personal Property