Property Insurance Deductibles

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A deductible is a portion of a loss that is borne by the policyholder. Deductibles are common in property insurance. Most commercial property policies include at least one deductible. 

Purpose

Deductibles serve several purposes. First, they help keep insurance affordable. Small claims are expensive to process. The cost of adjusting them may exceed the amount paid to the policyholder. If insurers were required to cover every small property loss, the cost of insurance would increase.

Deductibles also afford some flexibility to insurance buyers. A deductible is a type of self-insurance. A policyholder can lower his or her premium by choosing a higher deductible. The policyholder can then invest the savings in the business. Finally, deductibles encourage policyholders to practice good risk management. Property owners are more likely to protect their property against damage if they know they will have to assume a portion of any loss that occurs.

Three types of deductibles are commonly found in commercial property policies: flat deductibles,  percentage deductibles, and waiting periods.

Flat Deductible

Most commercial property policies include a flat deductible (also called a straight deductible). A flat deductible is a specified dollar amount that applies to each loss. It is subtracted from the amount of a covered loss. The amount remaining is paid by the insurer.

For example, suppose that your policy includes a $2,500 deductible and a $250,000 limit.

Your property incurs a $50,000 fire loss. Assuming that no coinsurance applies, your insurer will pay $47,500 ($50,000 - $2,500). If the loss is subject to coinsurance, your insurer will determine whether your limits are adequate. If not, the insurer will reduce your insured loss by the coinsurance penalty.

The insurer will then pay the difference between the adjusted loss amount and your $2,500 deductible.

A flat deductible applies to each occurrence. If more than one occurrence takes place during the policy period, the deductible will apply separately to each. For instance, suppose an insured building is damaged by vandals. One month later the building is damaged by a fire. The vandalism and the fire were two separate occurrences. Thus, the deductible applies separately to each one.

Percentage Deductible

A percentage deductible often applies to perils that can cause catastrophic losses. Examples are earthquake and volcanic eruption. When these perils are covered and a loss occurs, the loss is reduced by a deductible that applies on a percentage basis. The deductible may be a percentage of the limit or the value of the damaged property. 

For example, suppose that a building is insured for earthquake at a limit of $500,000. Earthquake coverage is subject to a deductible of 15% of the building limit. The building sustains $250,000 in earthquake damage. The insurer pays $175,000 ($250,000 - $75,000).

Losses caused by hurricanes, other windstorms or hail may also be subject to a percentage deductible.

Hurricane deductibles are common in states that border the Atlantic or Gulf Coasts. Hurricane deductibles apply to damage caused by hurricanes only (not other types of windstorms). What constitutes a hurricane may be determined by the policy wording or by state law. Generally, a windstorm is not considered a hurricane until it is declared as such by National Weather Service. A hurricane deductible is typically expressed as a percentage of the insured value of the building.

In some states property policies may include a wind or wind/hail deductible. A wind deductible applies to damage caused by any type of wind (hurricane, tornado, straight winds etc.). A wind/hail deductible applies to damage cause by wind or hailstones. A wind or wind/hail deductible is typically a percentage of the value of the insured building.

Waiting Period

Most business income policy forms don't use the word "deductible." Nevertheless, they may include a type of deductible called a waiting period. A waiting period is the amount of time that must elapse before coverage begins. A typical business income waiting period is 72 hours (3 days). Income you lose during the waiting period is not covered. A waiting period also applies to Civil Authority Coverage.