2.4 Deductibles, Limits, and Loss Settlement

Deductibles — Types and Mechanics

A deductible is the retained amount the insured pays before the insurer responds; it eliminates small claims and lowers premium. Exam-tested deductible types:

• Flat (straight) deductible — a fixed dollar amount subtracted from each loss (e.g., $1,000).
• Percentage deductible — a percent of the dwelling/building limit, common for wind/hurricane and earthquake (e.g., 2% of a $300,000 limit = $6,000).
• Franchise deductible — once the loss exceeds the franchise amount, the insurer pays in full (common in ocean marine).
• Disappearing/aggregate deductible — shrinks as the loss grows, or applies once per policy period across all losses.

Percentage deductibles surprise insureds because they are tied to the limit, not the loss — a $6,000 hurricane deductible can dwarf a small claim.

Policy Limits: Single, Split, and Sublimits

• Single (combined) limit — one limit applies to a covered loss (e.g., $500,000 per occurrence covering all damage).
• Split limits — separate limits stated as three numbers, classically in auto liability: $100,000 / $300,000 / $50,000 = $100,000 bodily injury per person, $300,000 bodily injury per accident, $50,000 property damage per accident.
• Aggregate limit — the most the policy pays in total for the policy period (common in CGL: per-occurrence and general aggregate).
• Sublimits — internal caps on specific property (jewelry, currency, business records) that sit inside the overall limit, not in addition to it.

Split-limit worked example: Two passengers are injured for $90,000 and $150,000 (total $240,000) plus $60,000 of vehicle damage under 100/300/50 limits. BI: the first passenger gets $90,000 (under the $100,000 per-person cap); the second is capped at $100,000 per person (not $150,000); both are within the $300,000 per-accident cap. PD pays $50,000 of the $60,000 (the per-accident PD cap). Insurer pays $90,000 + $100,000 + $50,000 = $240,000; the insured owes the remaining $60,000.

Loss Settlement Provisions

How multiple policies and limits interact at claim time:

The pair-and-set clause lets the insurer pay the difference in value of a complete set rather than replace the whole set when one item is lost. The loss payable / mortgagee clause directs payment to a lienholder and protects that lienholder even if the insured's own act voids coverage.

Order of Operations at Claim Time

Work problems in this sequence — reversing steps is a common error:

1. Determine covered loss amount (is the peril covered? open vs. named peril).
2. Apply the valuation basis (ACV vs. RC vs. functional — deduct depreciation if ACV).
3. Apply coinsurance if the limit is below the required amount (Section 2.3).
4. Cap at the policy limit / sublimit (whichever applies to that property).
5. Subtract the deductible — always last.

Example: $50,000 loss; ACV reduces it to $40,000; coinsurance ratio 90% → $36,000; under the $200,000 limit; minus a $1,000 deductible = $35,000 paid. Note that the deductible comes off after coinsurance and the limit, never before.

Per-Occurrence vs. Aggregate and Restoration of Limits

Property and liability policies treat limits differently after a loss:

• Per-occurrence limit — the most paid for one event; it generally reinstates automatically for the next unrelated occurrence (property forms restore the limit after each loss).
• Aggregate limit — the total available across the policy period; once exhausted, the policy is spent until renewal (typical in CGL and on certain catastrophe sublimits).

Watch for "per location" vs. blanket limits on commercial schedules: a blanket limit floats across all listed locations, while a specific (scheduled) limit caps each location separately — a key driver of whether a large single-site loss is fully paid. When a question gives both a per-occurrence and an aggregate figure, confirm whether prior losses in the term have already eroded the aggregate before you pay the new claim.

Pair-and-Set, Loss-Settlement Order, and Salvage

Two settlement rules round out the topic. The pair, set, or parts clause lets the insurer either repair/replace to restore a set or pay the difference between the value of the set before and after loss — it is not obligated to pay the full set value for one lost piece.

After a covered loss the insurer may exercise salvage rights, taking title to damaged property it has paid for and selling it to reduce the net claim. The order of operations at claim time is: confirm a covered peril, apply valuation (ACV/RC), apply any coinsurance penalty, subtract the deductible, and finally cap at the limit of insurance.

Per-Occurrence vs. Aggregate and Restoration

Property limits usually restore automatically after each loss, but liability limits may be capped by an annual aggregate that is not reinstated until renewal. The exam distinguishes the per-occurrence (each-loss) limit — the most paid for any single event — from the aggregate — the most paid for all losses in the policy period. Once the aggregate is exhausted, later covered claims go unpaid even if each is within the per-occurrence limit, which is the rationale for buying an umbrella to add fresh aggregate capacity above the primary.