2.4 Deductibles, Limits, and Loss Settlement

Deductibles — Purpose and Types

A deductible is the amount the insured retains on each loss before the policy responds. Deductibles lower premium, discourage trivial claims, and reduce administrative cost. The exam tests three structures.

Percentage-deductible trap: A 5% hurricane deductible on a $300,000 dwelling is $15,000, not 5% of the loss. These named-storm deductibles are common in coastal states and dwarf an ordinary flat deductible — a favorite exam distractor. Earthquake deductibles run even higher, 10-20% of the dwelling limit.

Policy Limits and Sub-Limits

The policy limit is the maximum the insurer will pay for a covered loss. Within that, sub-limits cap specific categories of property regardless of the overall limit. Homeowners Coverage C carries special internal limits that are heavily tested.

To insure high-value items above these caps, the insured schedules them (a Scheduled Personal Property endorsement / personal articles floater), which also broadens to open-perils coverage and usually drops the deductible.

Single Limits vs. Split Limits

Liability and some property coverages express limits two ways.

• Single limit (combined single limit, CSL): one amount applies to the entire loss event — for example, a $500,000 CSL can be used for property damage, bodily injury, or any mix, up to $500,000 total.
• Split limits: separate caps expressed as three numbers, e.g., 100/300/50 = $100,000 bodily injury per person / $300,000 bodily injury per accident / $50,000 property damage per accident.

Worked split-limit example: A 100/300/50 auto policy. The insured injures three people — claims of $80,000, $120,000, and $90,000.

• Person 1: $80,000 (under the $100k per-person cap) → pays $80,000.
• Person 2: $120,000, but capped at $100,000 per person → pays $100,000.
• Person 3: $90,000 (under $100k) → pays $90,000.
• Total bodily injury = $80,000 + $100,000 + $90,000 = $270,000, within the $300,000 per-accident cap, so all $270,000 is paid.

The per-person cap bites on Person 2; the per-accident cap is not reached.

Other-Insurance Clauses

When two or more policies cover the same loss, other-insurance provisions decide how they share it.

• Pro rata: each insurer pays its share in proportion to its limit (its limit divided by total limits, times the loss).
• Primary and excess: one policy pays first; the other responds only after the primary limit is exhausted.
• Contribution by equal shares: each insurer pays equally until the smallest limit is exhausted, then the rest share the remainder.

Pro rata example: Insurer A carries $100,000 and Insurer B carries $300,000 on a $40,000 loss. Total limits = $400,000. A pays $100,000/$400,000 x $40,000 = $10,000; B pays $300,000/$400,000 x $40,000 = $30,000.

Subrogation

After paying a claim, the insurer acquires the insured's right to recover from the at-fault third party — this is subrogation. It prevents the insured from collecting twice and shifts the cost to the responsible party. The insured must not waive recovery rights or impair subrogation after a loss; doing so can reduce or void the claim. Subrogation supports the principle of indemnity — the insured is made whole, not enriched.

Aggregate vs. Per-Occurrence Limits

Liability coverages frequently carry two limit layers. A per-occurrence limit caps payment for any single loss event; an aggregate limit caps total payments for all losses during the policy period. A commercial general liability policy written at $1,000,000 per occurrence / $2,000,000 aggregate pays up to $1 million for one claim, but no more than $2 million for the year regardless of how many separate occurrences arise. Once the aggregate erodes, remaining coverage shrinks even though the per-occurrence number is unchanged.

Deductible Maintenance and Disappearing Deductibles

A few specialized structures appear on exams.

• Franchise deductible: the insurer pays nothing until the loss exceeds a threshold, then pays the loss in full with no deduction (common historically in marine cargo).
• Disappearing (diminishing) deductible: the deductible shrinks as the loss grows and reaches zero above a stated amount.
• Aggregate deductible: the insured retains losses up to a total for the period rather than per claim.

How the Pieces Stack on One Loss

The components in this section apply in a fixed order. Compute the loss amount on the correct valuation basis, apply any coinsurance factor, subtract the deductible, confirm the result fits within the sub-limit for that property class, then cap at the policy limit. Only after that single-policy figure is settled do other-insurance clauses allocate the bill among carriers and subrogation shift the cost to whoever caused the loss. Working out of order — subtracting the deductible before applying coinsurance — produces the wrong answer on most multi-step problems.