2.4 Deductibles, Limits, and Loss Settlement

Deductibles: The Insured's Retention

A deductible is the amount the insured retains on each covered loss before the insurer pays. Deductibles lower premium, eliminate small nuisance claims, and keep the insured engaged in loss control. The exam tests deductible types and how they interact with limits and coinsurance.

Deductible Types

• Flat (straight) deductible: a fixed dollar amount per occurrence (e.g., $1,000). The most common property deductible.
• Percentage deductible: a percent of the dwelling limit (Cov A) or of the loss — typical for wind/hail, hurricane, and earthquake. On a $300,000 home with a 2% hurricane deductible, the insured retains $6,000 per event.
• Calendar-year / aggregate deductible: the insured pays losses until total retained reaches a set figure for the year (more common in health/commercial).
• Franchise deductible: nothing is paid until the loss exceeds a threshold, then the entire loss is paid (common in ocean marine). Contrast with a flat deductible, which is always subtracted.
• Disappearing (vanishing) deductible: shrinks as the loss grows and disappears entirely above an upper limit.

Worked Settlement With Deductible

A $300,000 home suffers $50,000 in wind damage under RCV; the insured meets insurance-to-value; a 2% wind deductible applies.

• Deductible = 2% × $300,000 = $6,000
• Payment = $50,000 − $6,000 = $44,000

A flat $1,000 deductible instead would pay $49,000 — note how percentage deductibles cost the insured far more on catastrophe perils.

Policy Limits

The limit of insurance is the most the insurer pays for a covered loss. Key limit concepts:

• Per-occurrence limit: the cap for any one event.
• Aggregate limit: the cap for all losses in the policy period (common in liability, not first-party property).
• Sublimits: internal caps for specified property (e.g., $1,500 on jewelry theft, $2,500 on business property in HO forms, $200 on money/coins). The full Cov C limit does not apply to these special categories.
• Blanket limit: one limit over multiple buildings or coverages; contrast with specific (scheduled) limits naming each item/location.

Loss Settlement Order of Operations

Other Limit Mechanics

• Pair-and-set clause: the insurer may pay the difference in value of a set or repair/replace the lost item rather than pay for the whole set.
• Loss-settlement "floor": ISO HO forms pay RCV in full only if the building is insured to at least 80% of replacement cost at the time of loss; below that, the larger of ACV or the proportional formula applies.

Common Traps

• Trap: Percentage (cat) deductibles apply to the Coverage A limit, not the loss amount, unless the form says otherwise — read the question.
• Trap: Sublimits replace, not supplement, the main limit for that property; you cannot stack the $1,500 jewelry sublimit on top of full Cov C.
• Trap: Subtract the deductible after coinsurance but before the limit cap.
• Trap: A franchise deductible pays the whole loss once the threshold is crossed; do not subtract it like a flat deductible.

Why Percentage Deductibles Exist

After catastrophic hurricane seasons, insurers adopted percentage deductibles for named storms, wind/hail, and earthquake so the insured retains a meaningful share of a high-severity event. Because they are tied to the Coverage A dwelling limit, they scale with the size of the home and can be far larger than the old flat deductibles. A 5% hurricane deductible on a $500,000 home is $25,000 — many homeowners are surprised to learn their out-of-pocket retention is this high, which is a common consumer-complaint and exam scenario. Some states cap or require explicit disclosure of these deductibles.

Sublimits and Special Limits of Liability

ISO homeowners forms place special limits of liability on theft-prone or hard-to-value categories so the broad Coverage C limit does not become a target for inflated claims. Typical caps include money/coins/precious metals (about $200), securities and tickets ($1,500), watercraft and trailers ($1,500), jewelry/watches/furs against theft ($1,500), firearms theft ($2,500), and silverware theft ($2,500). To restore full value, the insured schedules the item on a Personal Articles/Inland Marine floater, which also broadens the perils to open-peril and removes the deductible.

Specific vs. Blanket Limits

A specific limit names each building or item with its own amount — precise but inflexible. A blanket limit spreads one larger limit across several locations or coverages, giving the insured flexibility to shift value where the loss actually occurs. Blanket coverage usually requires a statement of values and a 90% or higher coinsurance/agreed-value commitment, and the exam tests recognition that blanket limits respond more fully when one location is over the value originally estimated for it.

Loss Settlement Floor in Homeowners Forms

The HO loss-settlement condition rewards insurance to value: if the dwelling is insured to at least 80% of its replacement cost at the time of loss, building losses are paid at full RCV up to the limit. If insured below 80%, the insured recovers the larger of ACV or the proportional amount [(carried ÷ 80% of replacement cost) × loss], a structure that parallels commercial coinsurance and produces nearly identical math on the exam.