A deductible is an amount that the insurer and insured have agreed to deduct from the value of a loss before the insurance company pays the remainder, up to the limits of a commercial property or liability insurance policy. It is the copay amount a business is required to pay out-of-pocket when an insurance claim is submitted.
According to the International Risk Management Institute, most property insurance policies include a provision stipulating that the deductible amount specified in the policy declarations will be subtracted from each occurrence of a loss before the amount of the insured’s loss recovery is determined.
Policy Limits Include the Deductible
Although the deductible essentially comes out of the insured’s pocket, the amount of the deductible is typically not subtracted from limits of the insurance policy, so the actual obligation of the insurance company’s claim payment may be the policy limit minus the deductible.
Deductibles Help Insurers and Insureds
A policy deductible works to the benefit of both the insurance company and the insured. The amount of the deductible creates a threshold that losses must meet in order to make a claim worthwhile for the insured.
Commercial property deductibles also eliminate moral hazard, the circumstance in which an insured has little motivation to avoid a claim or negative motivation to invent a claim.
A loss with insured value less than the insurance deductible can be handled out-of-pocket by the insured. This helps the insurance company by relieving it of the cost of handling many small claims. The process for adjusting and settling a small claim can be just as complex as a large claim. Avoiding small claims saves time and insurance costs.
Deductibles help the insured by keeping insurance costs affordable for small businesses. The deductible also has the practical effect of allowing the insured to avoid engaging with the insurer in an elaborate claims process over a small occurrence.
Another benefit of a higher deductible is built-in motivation for improving safety and quality. If the business can use extra care to avoid paying a large deductible for an insurance claim, that money stays in the bank and can be used to grow the business.
Deductibles Apply to Most Insurance Coverage
Business owners and managers can expect deductibles to apply their commercial property, vehicle and professional liability errors and omissions insurance. Although a business may carry combined commercial insurance coverage from one company, deductibles are applied separately for different occurrences and types of loss. For example, if a business has one loss from a fire and subsequent damage from a storm, separate deductibles must be met for each claim.
A Higher Deductible Yields a Lower Premium
When the insured takes full responsibility for small losses and is willing to absorb more of the potential cost of a covered claim, this is a direct savings to the insurance company. Accordingly, the insurer can offer the same total policy limits to that insured at a lower price. A high deductible can also allow an insurance company to extend coverage to a business with operations or products presenting higher risks, which might not otherwise be insurable.
Most Businesses Choose a Reduced Premium
Business owners and managers should carefully consider the outcomes of an insurance loss. If coming up with the money to cover a high deductible would seriously harm the operation of a business, it is possible that a high deductible plan is too risky.
How Insurance Deductibles are Applied
When a claim for commercial property insurance is filed, the insurance company will assign an adjuster to determine the cost of covering the loss. Depending on the type of insurance policy, the insured may be required to pay the deductible before the insurer will pay any money toward the settlement. In other cases, the insurance company will determine the amount and then issue a check to the payee or to the insured for the amount of the settlement less the amount of the deductible.
Common Forms of Commercial Deductibles
Flat Deductible – Applies a fixed traditional dollar deductible amount to each loss, regardless of the amount of the claim.
Percentage Deductibles – Use a percentage of the loss or of the total value of the damaged property or of the total values insured.
Straight Deductible – Subtracts the deductible amount from each separate occurrence of loss.
Aggregate Deductible – Limits the maximum an insured must pay in multiple straight deductibles.
Basket Deductible – Limits losses from multiple risks, such as commercial property and general liability.
Buyback Deductible – Raises coverage by paying a higher premium to lower the deductible.
Disappearing Deductible – Reduces as the amount of loss rises, disappearing above a specified level.
Per-Loss Deductible – Sets forth amounts for different types of loss to be paid by the insured.
Waiting-Period Deductible – Specifies the length of time a business must be shut down before the insurance company makes payments under a business interruption policy.
Wind or Hail Deductible – Specifies a different deductible amount when a loss is caused by wind or hail.
Choosing the Right Insurance Deductible
To determine the right deductible for any business, owners and managers should work closely with an insurance professional to better understand their insured property and liability policies and to consider their effects in the unique context of the business. Want to learn more? Contact us today for more information about deductibles tailored for your industry.