2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Settlement order: apply coinsurance, then subtract the deductible, then cap at the policy limit.
- Percentage deductibles (hurricane, wind/hail, earthquake) are calculated on the building/dwelling limit, not the loss.
- Split limits read per-person BI / per-accident BI / per-accident PD (e.g., 100/300/50); CSL is one combined figure.
- Other-insurance clauses (pro rata, equal shares, primary/excess) allocate payment among overlapping policies.
- The principle of indemnity prevents the insured from collecting more than the actual loss across all policies.
Deductibles, Limits, and How Losses Are Settled
A deductible is the amount of loss the insured retains before coverage responds. A limit of insurance is the maximum the insurer will pay. Together they define the band of risk transferred to the carrier. The exam tests flat deductibles, percentage deductibles, the order in which coinsurance and deductibles interact, and how limits behave across multiple policies.
The basic settlement order is: apply coinsurance → then subtract the deductible → then cap at the limit.
Types of Deductibles
- Flat (straight) deductible — a fixed dollar amount per occurrence (e.g., $1,000).
- Percentage deductible — common for wind/hail, hurricane, and earthquake; a percent of the dwelling/building limit, not of the loss. A 2% hurricane deductible on a $300,000 dwelling = $6,000.
- Aggregate deductible — a total the insured absorbs over the policy period before coverage applies.
- Franchise deductible — once the loss exceeds the franchise amount, the insurer pays the entire loss (rare in modern personal lines but tested historically).
Trap: percentage hurricane/earthquake deductibles are calculated on the limit, not the loss — a frequent miss on exam questions.
Limits of Insurance
- Per-occurrence limit — max for any single occurrence.
- Aggregate limit — max for all losses during the policy period.
- Sublimits / special limits — lower caps for specific property (e.g., homeowners special limits: jewelry theft, money, firearms).
- Blanket limit — a single limit covering multiple buildings or categories, providing flexibility versus specific (per-item) limits.
For liability, split limits appear 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. A combined single limit (CSL) is one figure (e.g., $300,000) for BI and PD combined.
Worked Examples — Split Limits and Percentage Deductibles
Split-limit example: Driver carries 100/300/50. An at-fault accident injures three people: $80,000, $120,000, and $40,000 in bodily injury, plus $60,000 property damage.
- Per-person cap $100,000: pays $80,000 + $100,000 (capped from $120,000) + $40,000 = $220,000, within the $300,000 per-accident cap → BI paid $220,000.
- Property damage $60,000 exceeds the $50,000 PD cap → pays $50,000. Insured owes the $10,000 excess.
Percentage-deductible example: $400,000 dwelling, 5% hurricane deductible, $90,000 hurricane loss. Deductible = $400,000 × 5% = $20,000. Insurer pays $90,000 − $20,000 = $70,000.
Other-Insurance and Settlement Clauses
When more than one policy covers the same loss, other-insurance provisions allocate payment:
| Method | How it shares |
|---|---|
| Pro rata | Each insurer pays its share of the limits (its limit ÷ total limits × loss). |
| Contribution by equal shares | Insurers pay equally until the lower limit is exhausted, then the rest continues. |
| Primary and excess | Primary pays first to its limit; excess pays only above that. |
The insured can never collect more than the actual loss — the principle of indemnity prevents profiting from insurance. Trap: with two $50,000 pro-rata policies and a $40,000 loss, each pays $20,000 (50% share), not $40,000 each.
A homeowner has a $250,000 dwelling with a 2% hurricane deductible. A covered hurricane causes $30,000 of damage. How much does the insurer pay?
An auto policy with split limits of 50/100/25 results in a covered accident where one injured person's bodily injury claim is $70,000. How much does the insurer pay for that person?
Coinsurance + Deductible + Limit: Full Worked Order
When all three factors appear together, the exam expects strict ordering. Building value $1,000,000, 80% coinsurance, insured carries $640,000, $2,500 deductible, loss $200,000.
- Required = $1,000,000 × 80% = $800,000.
- Coinsurance ratio = $640,000 ÷ $800,000 = 0.80.
- Apply ratio = 0.80 × $200,000 = $160,000.
- Subtract deductible = $160,000 − $2,500 = $157,500.
- Cap at limit ($640,000) — not exceeded.
The insured recovers $157,500 and absorbs the $40,000 coinsurance penalty plus the $2,500 deductible. Order matters: applying the deductible before the coinsurance ratio yields a different (incorrect) answer, and examiners write distractors around that error.
Building value $1,000,000, 80% coinsurance, insured carries $640,000, $2,500 deductible, loss $200,000. What does the insurer pay?
Aggregate Limits, Restoration, and Self-Insured Retentions
Beyond per-occurrence and aggregate limits, the exam tests how limits behave over a policy term. An aggregate limit caps total payments for the period; once exhausted, the policy pays nothing more even if the per-occurrence limit appears available. Some commercial property policies include a loss-limit or margin clause to control exposure on blanket limits.
A self-insured retention (SIR) differs from a deductible: with a deductible the insurer pays the claim and then collects the deductible back from the insured; with an SIR the insured pays first (often handling the claim) and the policy responds only above the SIR. SIRs are common on large commercial and umbrella programs.
| Mechanism | Who pays the first dollars | Erodes the limit? |
|---|---|---|
| Deductible | Insurer pays, recovers from insured | Usually no |
| Self-insured retention | Insured pays directly | No (sits below the limit) |
| Aggregate limit | n/a | Caps all payments for the term |
Exam tip: percentage deductibles are figured on the limit/value, not the loss; the SIR sits below the umbrella for losses the underlying does not cover.
Settlement-Order Pitfalls to Memorize
The single most-tested deductible/limit error is applying the deductible before the coinsurance ratio. Always: apply coinsurance, then subtract the deductible, then cap at the limit. The second recurring trap is calculating a percentage hurricane or earthquake deductible on the loss instead of the limit — it is always a percentage of the dwelling or building limit.
The third is misreading split limits: in 100/300/50, the middle number is the total bodily-injury cap per accident, not per person. Internalizing this order and these three traps lets you answer the bulk of numeric property and casualty limit questions quickly and correctly.