2.4 Deductibles, Limits, and Loss Settlement

Deductibles

A deductible is the portion of each loss the insured retains before coverage responds. It lowers premium, screens out nuisance claims, and discourages carelessness (morale hazard).

Percentage Catastrophe Deductibles

In hurricane-exposed states, the policy carries a separate wind/hurricane deductible as a percentage of the Coverage A limit, not a flat amount. On a $400,000 home with a 5% hurricane deductible, the insured retains 0.05 × $400,000 = $20,000 before wind coverage pays — a costly surprise the exam loves to test.

Limits of Insurance

The limit is the most the policy will pay; valuation and coinsurance determine the loss amount, but the limit caps it.

• Single limit: one dollar amount caps each loss.
• Split limits: three numbers, e.g., 100/300/50 on auto liability — $100,000 bodily injury per person, $300,000 bodily injury per accident, $50,000 property damage per accident.
• Combined Single Limit (CSL): one pooled amount (e.g., $300,000) for BI and PD combined — more flexible than split limits.
• Per-occurrence vs. aggregate: an occurrence limit caps any one loss; an aggregate caps total payouts during the policy period (common on CGL: e.g., $1M per occurrence / $2M aggregate).

Split-Limit Worked Example

Driver with 100/300/50 limits causes an at-fault accident: three injured people claim $80,000, $120,000, and $60,000, and $40,000 in vehicle damage.

Total insurer pays $280,000; the insured personally owes Person 2's remaining $20,000.

Loss Settlement Order, Sub-Limits, and Other Insurance

When multiple provisions apply, work them in this order:

1. Determine the loss value (ACV, RC, etc.).
2. Apply the coinsurance factor if the insured is underinsured.
3. Subtract the deductible.
4. Cap the result at the policy limit (or applicable sub-limit).

Special Limits / Sub-Limits

Homeowners Coverage C imposes special limits of liability on theft-prone or high-value categories regardless of the overall contents limit:

• $200 on money, coins, bullion.
• $1,500 on watercraft and trailers.
• $1,500 on jewelry, watches, and furs for theft.
• $2,500 on business personal property on premises.

Scheduling items on a personal articles floater removes the sub-limit and the deductible.

Other-Insurance Clauses

• Pro rata: each insurer pays its share of the loss based on its limit relative to total coverage.
• Excess: one policy pays only after another (primary) policy's limit is exhausted.
• Primary and excess ordering prevents the insured from collecting more than the loss (the principle of indemnity).

Aggregate vs. Per-Occurrence Limits

Limits come in two structures the exam constantly contrasts. A per-occurrence (each-loss) limit is the most paid for any one event and refills for the next event. An aggregate limit is the most paid during the entire policy period across all events combined; once exhausted, later claims get nothing even though each was within the per-occurrence limit. Liability forms (CGL, professional, umbrella) carry aggregates; basic property and auto physical damage usually do not. A stem describing a third large claim that pays zero after two prior claims is testing aggregate exhaustion.

Restoration, Nonreduction, and Reinstatement

Most property policies do not reduce the limit after a partial loss — the full limit stays available for the next loss in the same period (a nonreduction or automatic-reinstatement feature). Some specialty forms instead reduce the remaining limit by amounts paid until the insured pays a reinstatement premium. Knowing whether a form reinstates automatically or requires a premium is a tested distinction.

Worked Settlement Order With Sub-Limit

A homeowner suffers a covered theft of jewelry valued at $8,000. The HO policy has a Coverage C limit of $150,000 but a special sub-limit of $1,500 on jewelry theft, and a $1,000 deductible.

1. Loss value of jewelry = $8,000.
2. Applicable cap is the $1,500 sub-limit, not the $150,000 Coverage C limit.
3. Apply the deductible to the recoverable amount: $1,500 − $1,000 = $500 paid.

The general limit is irrelevant once a specific sub-limit applies; the specific controls over the general, and the sub-limit caps the loss before the deductible is even reached.

Reading Split Limits Quickly

For auto split limits written 100/300/50, the middle number is the per-accident bodily injury cap regardless of how many people are hurt, the first is per-person within that, and the third is property damage per accident. A single-limit (CSL) of $300,000 instead pools all three into one flexible figure — an advantage when one severely injured claimant would blow through a per-person cap.