Deductible
Variations on the Applicability of a Deductible
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A deductible is “a fixed amount or percentage of an insurance claim that is the responsibility of the insured, and which the insurance company will deduct from the claim payment.”[1]
The deductible is often considered a means used by brokers and agents to help their clients save premium dollars by offering a higher than standard deductible on the policy.
An insurer will, on the other hand, require a higher deductible when an underwriter needs to be convinced that an insured is serious about loss control by compelling the insured to share in potential losses via a higher than normal deductible. It is a way for the insured to put his or her money where his or her mouth is.
While higher deductibles can always be chosen at policy inception or added to the policy midterm or at renewal, some insureds may want to select higher deductibles for only some perils and maintain the standard deductible for other perils. Conversely, an underwriter who is concerned with certain potential losses like wind losses at a coastal property may require the insured to carry a higher deductible on just that cause of loss but allow the insured to choose varying deductibles for various causes of loss.
Another method to vary the premium and, in some cases, eliminate the policy’s standard deductible (at least for some losses) is by using Insurance Services Office form C.P. 03 10 Deductible Limitation. It is also called the “accumulation deductible” because the deductibles on all losses are tracked until they total the chosen aggregate deductible. A subsequent loss has only a token $250 deductible applied to it.
Earthquake insurance deductibles are often percentages, rather than flat dollar amounts. Options range from 5% to 15% and more. The percentage deductible chosen applies to all building and personal property losses and the percentage is usually applied to the full insured value of the property covered. It is not applied to the policy limit. An example of an earthquake deductible follows:
1. The following is applicable to all Coverage forms …
The Deductible, if any, in this Coverage Part is replaced by the following with respect to Earthquake and Volcanic Eruption:
We will subtract a sum from the amount of loss or damage in any one occurrence.
Or, another example:
When: The value of the property is $100,000
The Earthquake Deductible is 5%
The amount of loss is $ 20,000
Step (a): $100,000 x 5% = $5,000
Step (b): $20,000 - $5,000 = $15,000
The most we will pay is $15,000. The remaining $5,000 is not covered because of the deductible.
It works like this:
Insured value of building: $150,000
Earthquake deductible chosen: 10%
Amount of Loss: $100,000
Payment calculation: $150,000 x 10% = $15,000
$100,000 loss - $15,000 deductible = $85,000.
The deductible in Insurance Services Office form 10 40 10 90 provides, in relevant part:
Notice that this deductible is taken from the amount of loss, not the amount of claim. If, using the same example the loss and value was $200,000 the deductible would be $10,000 and the insured would still collect the full limit of liability, $100,000.
Some insurers want the insured to always share in the loss regardless of the amount of loss. To avoid the problem of a loss greater than the limit of liability, Lloyd’s, and some other insurers, use a deductible provision that provides:
In consideration of the reduced premium charged, each claim for loss or damage (separately occurring) shall be adjusted separately and from the amount of each adjusted claim or the applicable limit of liability, whichever is less, the sum stated in the Schedule as the deductible shall be deducted. (Lloyd’s form 0(L), Emphasis added.)
The difference between this clause and the Insurance Services Office deductible clause is that the deductible is applied to the “adjusted claim” rather than to the amount of loss. Therefore, in the case of a total loss, the adjusted claim is usually the policy limit. The policy limit will never, in such a situation, be paid, since the deductible is applied to the limit.