2.4 Deductibles, Limits, and Loss Settlement

Deductibles: Purpose and Types

A deductible is the amount the insured retains on each loss before the insurer pays. Deductibles eliminate small-claim friction, reduce premium, and reduce moral/morale hazard by giving the insured skin in the game. The exam tests several structures:

• Flat (straight) deductible — a fixed dollar amount subtracted from each loss (e.g., $500, $1,000).
• Percentage deductible — a percent of the Coverage A limit (not the loss), common for wind/hail, hurricane, and earthquake. A 2% deductible on a $300,000 dwelling = $6,000.
• Calendar-year / aggregate deductible — the insured satisfies one total before the insurer pays for the rest of the period (health-style; rare in property).
• Franchise / disappearing deductible — once the loss exceeds a threshold, the deductible drops to zero (largely historical).

Limits, Sublimits, and Restoration

The policy limit is the maximum the insurer pays for a covered loss. Key limit concepts:

• Per-occurrence limit — the cap for a single event.
• Sublimits — internal caps for specific property classes that sit BELOW the overall limit (jewelry/theft $1,500; money $200; firearms theft $2,500; business property $2,500 on-premises).
• Special limits of liability — the homeowners Coverage C list above; raising them requires a scheduled personal property endorsement (HO 04 61).

Most property policies are non-reducing (the limit restores after each loss). Liability aggregate limits, by contrast, reduce as claims are paid.

Other-Insurance and Loss-Settlement Provisions

When more than one policy covers the same loss, other-insurance clauses prevent the insured from profiting:

• Pro rata — each insurer pays its share = (its limit ÷ total limits) × loss. Standard in property.
• Contribution by equal shares — each pays equally until the lower limit is exhausted (common in liability).
• Primary and excess — one policy pays first; the other pays only after the primary limit is exhausted.

Pro rata example

A $90,000 loss is covered by Insurer A ($200,000 limit) and Insurer B ($100,000 limit), total $300,000.

Loss-settlement order: apply coinsurance first, cap at the limit and the loss, then subtract the deductible.

Worked Settlement and Traps

Full worked settlement. Dwelling value $250,000, 80% coinsurance (required $200,000), limit $220,000, $2,000 deductible, $40,000 covered loss:

1. Carried $220,000 ≥ required $200,000 → factor = 1.0 (no penalty).
2. Indicated payment = $40,000 (under the limit).
3. Subtract deductible: $40,000 − $2,000 = $38,000.

Traps

• A percentage deductible is a percent of the dwelling limit, NOT the loss — a frequent miscalculation.
• Hurricane/named-storm deductibles often apply per season triggered by a named storm; verify the trigger.
• Sublimits cannot be exceeded even if the overall limit is ample — $200 on cash is $200.
• Apply the deductible after coinsurance, never before.
• Other-insurance clauses make the policies share; they do not add up to a windfall.

Aggregate Limits, Reinstatement, and Loss Settlement Order

Most property limits are per-occurrence and non-reducing — the full limit is available for the next loss after one is paid. Liability coverages add an aggregate: once total paid claims reach the aggregate (e.g., the CGL general aggregate), the policy is exhausted until renewal. Some commercial property forms allow reinstatement for an additional premium after a large loss.

Walk loss settlement in a fixed order so multi-step exam questions resolve cleanly:

1. Confirm coverage (causes-of-loss trigger).
2. Determine the loss amount (ACV or RC).
3. Apply coinsurance if carried < required.
4. Cap at the policy limit and at the actual loss, whichever is less.
5. Subtract the deductible last.
6. Apply other-insurance proration if more than one policy responds.

Skipping or reordering steps 3–5 produces the wrong dollar figure on nearly every numeric question — the deductible always comes after coinsurance and the limit cap.

Self-Insured Retentions and Coordinating Multiple Coverages

A self-insured retention (SIR) differs from a deductible: with a deductible the insurer pays the loss and then collects the deductible back from the insured, whereas with an SIR the insured pays the retained amount directly and the insurer's duties (including defense, on some forms) attach only above the SIR. SIRs are common on umbrella and large commercial programs.

Trap: On an umbrella, the SIR applies only to drop-down claims the underlying policy did not cover - not when the umbrella merely sits excess of a paid primary loss.

Sublimits, Non-Reducing Limits, and the Order of Application

Property limits are usually non-reducing (the full limit restores after each loss), while liability aggregates shrink as claims are paid. Sublimits cap specific property classes below the overall limit and cannot be exceeded even when the overall limit is ample.

Trap: A percentage deductible (wind/hail, hurricane, earthquake) is a percent of the coverage limit, not of the loss - a 2% deductible on a $300,000 dwelling is $6,000 regardless of claim size. And always subtract the deductible after coinsurance and the limit cap, never before.