2.4 Deductibles, Limits, and Loss Settlement

Deductibles

A deductible is the portion of a loss the insured retains before the insurer pays. Deductibles lower premium, eliminate small nuisance claims, and keep the insured engaged in loss control. The national exam expects you to identify each deductible type and to subtract it correctly after valuation and coinsurance are applied.

Types of Deductibles

• Flat deductible — a fixed dollar amount per occurrence ($500, $1,000, $2,500). Most common on homeowners and commercial property.
• Percentage deductible — a percent of the coverage limit (or sometimes property value), typical for wind/hurricane and earthquake perils. A 2% wind deductible on a $300,000 dwelling = $6,000.
• Aggregate deductible — one annual total the insured absorbs across all losses in the policy year; once met, the insurer pays the rest.
• Calendar-year / per-claim variations appear in health and some commercial lines.

Trap: a 5% hurricane deductible is far larger than a flat $1,000 — read the basis (limit vs. value) carefully.

Policy Limits and Sublimits

The limit of insurance is the most the insurer will pay. Several structures recur on the exam:

• Per-occurrence limit — maximum for any single event.
• Aggregate limit — maximum for the entire policy period (common in liability).
• Sublimits — internal caps for specific property within a broader limit.

Homeowners special limits of liability are favorite test items:

Liability Limits: Split vs. Combined Single Limit

Property-casualty liability uses two limit structures:

• Split limits, written as 100/300/100: $100,000 bodily injury per person, $300,000 bodily injury per accident, $100,000 property damage per accident.
• Combined Single Limit (CSL) — one limit applies to BI and PD combined, e.g., a $300,000 CSL covers any mix of injury and property damage up to $300,000 per accident.

Split-limit worked example: With 100/300/100 limits, an at-fault accident injures three people ($90,000, $120,000, $40,000) and causes $30,000 property damage. The $120,000 claimant is capped at the $100,000 per-person limit; total BI = $90,000 + $100,000 + $40,000 = $230,000, within the $300,000 per-accident cap; PD pays $30,000. Total paid = $260,000.

Order of Loss-Settlement Calculations

Apply the steps in this exact order:

1. Confirm the peril is covered (Section 2.1).
2. Determine the valuation basis (ACV/RC) and compute the value (Section 2.2).
3. Apply any coinsurance ratio (Section 2.3).
4. Subtract the deductible.
5. Cap at the policy limit (and any sublimit).

Reversing steps — especially subtracting the deductible before depreciation or coinsurance — is the most common arithmetic mistake on exam scenarios.

Franchise vs. Disappearing Deductibles

Two specialty structures appear mostly in marine and older commercial forms:

• Franchise deductible — once the loss exceeds a stated amount, the insurer pays the loss in full with no deduction. If the franchise is $1,000 and the loss is $1,500, the insurer pays the entire $1,500. Below the franchise, nothing is paid.
• Disappearing (diminishing) deductible — the deductible shrinks as the loss grows and vanishes once the loss reaches a ceiling, blending features of flat and franchise deductibles.

Contrast both with the ordinary straight (flat) deductible, which is always subtracted regardless of loss size. Distinguishing these three is a classic property question.

How Deductibles Apply Across Multiple Coverages

On a homeowners policy a single Section I deductible normally applies once per occurrence, even when one event damages the dwelling, other structures, and contents — you do not stack three deductibles. By contrast, separate wind/hurricane or earthquake percentage deductibles can apply instead of the flat deductible for those named perils, and they are often far larger. Read whether the question invokes a peril-specific deductible before defaulting to the flat amount.

Restoration of Limits and Nonconcurrency

Property per-occurrence limits typically reinstate automatically after each loss (the policy keeps paying covered losses up to the limit each time), whereas aggregate limits in liability erode and do not restore until renewal. When two policies with different limits or terms cover the same property, a nonconcurrency problem arises; the other-insurance condition then dictates how the carriers share, which is why the order-of-calculation discipline above must be applied to each policy separately before combining results.

Reading a Limit Schedule

On the declarations page each coverage carries its own limit, and the exam expects you to apply the right limit to the right loss. A homeowners loss to a detached garage draws on Coverage B (Other Structures), normally 10% of Coverage A, not the dwelling limit. Stolen jewelry draws on the $1,500 theft sublimit, not the full Coverage C limit.

A liability claim draws on the per-occurrence Coverage E limit, while medical payments draw on the small Coverage F limit. Misreading which limit governs is as costly on the exam as a math error, so identify the coverage line first, then the applicable limit or sublimit, then subtract any deductible. When a single event triggers several coverages, total the recovery across the applicable limits while applying only one Section I deductible.