2.4 Deductibles, Limits, and Loss Settlement
Key Takeaways
- Deductibles can be flat dollar or percentage; wind/quake deductibles are usually percentage and large.
- Limits may be specific, blanket, or scheduled, with internal sublimits on high-theft property.
- Settle in order: value the loss, apply coinsurance, subtract deductible, cap at the limit.
- Pro rata other-insurance clauses split a shared loss by each policy's limit share.
- The pair-or-set clause pays the loss in value of a set, not the cost of a complete new set.
Deductibles, Limits, and How Claims Settle
A deductible is the amount the insured retains on each loss before coverage responds; it eliminates small-frequency claims and lowers premium. A limit of insurance is the most the insurer will pay. Loss settlement combines deductible, valuation basis, coinsurance, and the limit into a single check. The exam expects you to apply them in the correct order.
Types of Deductibles
| Type | How It Works |
|---|---|
| Flat (straight) dollar | Fixed amount per occurrence (e.g., $1,000) |
| Percentage | % of the limit or value, common for wind/hail and quake (e.g., 2% of $300,000 = $6,000) |
| Per-occurrence vs. aggregate | Each loss vs. a yearly cap on retained losses |
| Disappearing/franchise | Franchise: no pay below threshold, full pay above; disappearing shrinks as loss grows |
Hurricane and named-storm deductibles are typically percentage deductibles and can dwarf a flat all-other-perils deductible.
Types of Limits
Limits can be specific (one amount per item/building), blanket (a single limit over multiple locations or coverages, giving flexibility), or scheduled (a separate amount listed for each item). Watch for sublimits (internal caps such as $1,500 on jewelry theft) and special limits for high-theft personal property. The limit caps the payment after valuation and coinsurance are applied.
Order of Loss Settlement
Apply the steps in this sequence; reversing them produces a wrong answer:
- Determine the loss amount using the policy's valuation basis (ACV or RC).
- Apply the coinsurance factor if the insured is under-insured.
- Subtract the deductible.
- Cap the result at the policy limit.
Doing the deductible before coinsurance, or before valuation, is a classic exam trap.
Worked Settlement Example
RC loss $60,000; building value $500,000 with 80% coinsurance; limit carried $360,000; deductible $2,500.
Should Carry = $500,000 x 80% = $400,000
Coinsurance factor = $360,000 / $400,000 = 0.90
0.90 x $60,000 = $54,000
Less deductible -$2,500
= $51,500 (within the $360,000 limit) -> PAID
Note the coinsurance penalty cost the insured $6,000 before the deductible because they carried 90% of the required amount.
Other-Insurance and Pair-or-Set Clauses
If two policies cover the same loss, the other-insurance clause (typically pro rata for property) splits the payment by each policy's share of total limits. The pair, set, or parts clause says the insurer need not pay the full value of a set when only part is lost — it pays the difference in value before and after, not the cost of a whole new set.
Percentage Deductibles, Sublimits, and Restoration of Limits
Beyond flat dollar deductibles, two structures appear constantly on the exam.
- Percentage deductibles - common for wind/hail, hurricane, and earthquake, expressed as a percentage of the Coverage A limit (or sometimes the loss). On a $300,000 dwelling with a 2% wind deductible, the insured absorbs $6,000 before coverage applies.
- Sublimits - a smaller cap inside a larger limit for high-theft or specialty property (jewelry, firearms, business property in a homeowners form). The sublimit, not the full Coverage C, caps that category.
Percentage-deductible trap: A 2% deductible on a $300,000 home is $6,000, not 2% of the loss unless the form says so. Read whether the percentage applies to the limit or the loss.
How Limits Restore
Most property policies reinstate the limit automatically after a paid loss (the limit is not reduced for the rest of the term), but aggregate limits on some forms and the named-perils caps do not. Liability limits behave differently - per-occurrence limits restore, but aggregates erode permanently until renewal.
Worked Multi-Layer Settlement
A $250,000 fire hits a building insured to $400,000 (meeting 80% coinsurance on a $500,000 value) with a $2,500 deductible. The coinsurance test is satisfied, so the insurer pays the loss in full minus the deductible: $250,000 - $2,500 = $247,500. The $400,000 limit is not reached, so it is not a factor. Had the limit been only $200,000, the insurer would pay the lesser of the loss-after-deductible and the limit - here $200,000 - because the limit is the final cap after coinsurance and deductible are applied.
Limit Structures, Aggregates, and Coverage Extensions
The word "limit" hides several distinct structures the exam tests apart.
| Limit type | Meaning |
|---|---|
| Per-occurrence / per-loss | Most paid for one event |
| Aggregate | Most paid for the whole policy term |
| Specific limit | A stated amount on one described item/location |
| Blanket limit | One limit shared over multiple items/locations |
| Sublimit | A cap inside a larger limit for a category |
Specific vs. Blanket
Under a specific limit, each location carries its own amount and its own coinsurance test. Under a blanket limit, one limit floats across all listed property and coinsurance is tested against the combined value - which usually softens the penalty because a shortage at one location can be covered by surplus at another. Blanket coverage requires a statement of values on file.
Coverage Extensions and Additional Coverages
Property forms add small extensions (debris removal, newly acquired property, personal property off premises) and additional coverages that may pay in addition to the limit or within it. Read whether debris removal is inside the limit (it usually is, up to a percentage, with an extra amount available) - a classic exam distinction.
Exam trap: Debris removal is generally paid within the Coverage limit up to a percentage of the loss, with a small additional amount available only if the within-limit cap is exhausted. Candidates assume it is always extra.
A wind loss is $300,000 to a building insured for $400,000 with a 5% wind deductible (applied to the limit). How much does the insurer pay?
In settling a property loss, when is the deductible subtracted?