2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Deductibles can be flat, percentage (applied to the limit, not the loss), disappearing/franchise, aggregate, or waiting-period based.
- Split limits show per-person BI / per-accident BI / per-accident property damage (e.g., 100/300/50).
- A Combined Single Limit pools bodily injury and property damage into one flexible amount.
- Other-insurance provisions (pro rata or equal shares) decide how multiple policies divide a loss.
- Pair-or-set and salvage clauses limit how much the insurer pays beyond the actual diminution in value.
Shaping the Net Payment
Valuation and coinsurance determine the gross indemnity; deductibles and limits then shape the net check. A deductible is the amount the insured retains before coverage responds — it controls small-claim frequency and lowers premium. A limit caps the insurer's maximum payment. The exam tests how these stack and how different limit structures behave across one or many losses.
Deductible Types
| Type | How it works | Common line |
|---|---|---|
| Flat (straight) | Fixed dollar amount subtracted per loss | Property, auto |
| Percentage | A % of the dwelling/building limit (e.g., 2% wind/hail) | Coastal property |
| Disappearing/franchise | No payment below a threshold; pays in full above it | Older/specialty |
| Aggregate | Applies to total losses over the policy period | Commercial |
| Waiting period | Time-based retention (hours) | Business income |
A percentage deductible trap: a 2% wind deductible on a $300,000 dwelling is $6,000 — far larger than a typical flat deductible — and it applies to the limit, not to the loss amount.
Limit Structures — Split vs. Combined Single
Liability limits attached to property packages and auto come two ways. Split limits are shown as three numbers, e.g., 100/300/50, meaning $100,000 per person bodily injury, $300,000 per accident bodily injury, and $50,000 per accident property damage. A Combined Single Limit (CSL) is one pooled amount (e.g., $300,000) covering bodily injury and property damage together, giving more flexibility.
Worked Example — Split Limits
A driver carries 100/300/50 limits and is at fault in an accident injuring three people ($90,000, $150,000, and $80,000 in bodily injury) and causing $20,000 in property damage.
- Person 1: $90,000 paid (under the $100,000 per-person cap)
- Person 2: $150,000 claimed → capped at $100,000 per person
- Person 3: $80,000 paid (under the per-person cap)
- Bodily injury subtotal = $90,000 + $100,000 + $80,000 = $270,000, within the $300,000 per-accident cap
- Property damage: $20,000 paid (under the $50,000 cap)
The injured parties absorb the $50,000 that exceeded the per-person limit on Person 2.
An insured with 50/100/25 split limits injures two people ($40,000 and $70,000 bodily injury) and causes $30,000 in property damage. What does the insurer pay in total?
Loss Settlement Mechanics
Property loss settlement also depends on other-insurance and valuation provisions. Pro rata sharing splits a loss among insurers by their share of total coverage; contribution by equal shares has each insurer pay equally until limits are reached. Salvage and abandonment rules forbid the insured from dumping damaged property on the insurer for full value. Pair limits is another trap: under loss to a pair or set, the insurer may repair or replace, or pay the difference between the set's ACV before and after — it does not buy the whole set.
What does a 2% wind/hail percentage deductible equal on a dwelling insured for $250,000?
Deductible Types the Exam Tests
Deductibles control morale hazard and small-claim friction. Know how each is applied:
| Deductible Type | How Applied | Typical Use |
|---|---|---|
| Flat (dollar) | Fixed amount subtracted from each loss | Most property/auto policies |
| Percentage | A % of the dwelling/building limit, not the loss | Wind/hurricane, earthquake |
| Franchise | No payment below the threshold; full loss paid above it | Ocean marine |
| Disappearing | Shrinks as the loss grows, vanishing at a point | Older property forms |
| Waiting period | Time-based "deductible" before benefits begin | Business income (often 72 hours) |
The percentage deductible is the classic trap: a 2% wind deductible on a $300,000 dwelling = $6,000, applied even if the loss is far larger, and it is calculated on the limit, not the damage amount.
Types of Limits and How They Interact
Limits cap the insurer's payment and stack in several ways:
- Per-occurrence limit — the most paid for one event.
- Aggregate limit — the most paid for all losses in the policy period (common in liability).
- Sublimit — a lower internal cap for a specific category (e.g., $1,500 on jewelry theft).
- Blanket vs. specific — a blanket limit covers multiple items/locations under one limit; specific limits assign a separate limit to each.
Reinstatement provisions in property forms generally restore the limit after a loss, so the limit is not permanently reduced by a partial loss — distinguishing property from many liability aggregates that erode.
A homeowners policy has a 2% wind/hail deductible and a dwelling (Coverage A) limit of $400,000. A hurricane causes $120,000 of covered wind damage. What deductible applies?
Loss Settlement Options and Order of Payment
Loss settlement defines how the insurer discharges its obligation once value is determined. The insurer typically has the option to pay the value of the loss, pay to repair or replace, or rebuild. On a replacement-cost policy the payment proceeds in the two-step manner described earlier: ACV first, recoverable depreciation after repair.
When multiple coverages or policies could pay, the other-insurance provisions decide order: a primary policy pays first to its limit, excess coverage pays only above an underlying amount, and pro-rata sharing splits a loss by each policy's proportion of total limits. A loss is never paid more than once because the principle of indemnity caps total recovery at the actual loss.
Maintenance vs. Aggregate vs. Per-Item Limits
For the exam, separate three limit behaviors. A per-occurrence limit resets for each separate event. An aggregate limit, common in liability and some property endorsements, is the total available for the entire policy term and erodes as claims are paid. A specific/per-item limit assigns its own cap to scheduled property, so each scheduled ring or camera has its own limit independent of the blanket personal-property limit.
Sublimits frequently surprise insureds: a homeowners policy may carry $300,000 of total contents but only a $1,500 special limit on theft of jewelry. The remaining value is uninsured unless the item is scheduled on a personal articles floater, which also broadens the covered perils to open-peril and waives the deductible.