Author: Chris Boggs

A concept as common as the application of a “property deductible" is rarely taught or even considered, it is simply “understood." The problem is we tend towards the belief that everyone “understands" the application of a property deductible the same way. They don't.

Occasionally, the question is asked, “Is the deductible subtracted from the loss or the limit?" If everyone “understood" deductibles the same way, this question would never be asked.

Now that it has been asked, let's make sure everyone “understands" the correct application of a property deductible. To do this requires the unthinkable, using policy language.

What do the policies say about deductibles?

Homeowners' Forms:

B. Deductible

Unless otherwise noted in this policy, the following deductible provision applies:

With respect to any one loss:

 1. Subject to the applicable limit of liability, we will pay only that part of the total of all loss payable that exceeds the deductible amount shown in the Declarations.

 2. If two or more deductibles under this policy apply to the loss, only the highest deductible amount will apply.

Commercial Property:

D. Deductible

In any one occurrence of loss or damage (hereinafter referred to as loss), we will first reduce the amount of loss if required by the Coinsurance Condition or the Agreed Value Optional Coverage. If the adjusted amount of loss is less than or equal to the Deductible, we will not pay for that loss. If the adjusted amount of loss exceeds the Deductible, we will then subtract the Deductible from the adjusted amount of loss and will pay the resulting amount or the Limit of Insurance, whichever is less.

When the occurrence involves loss to more than one item of Covered Property and separate Limits of Insurance apply, the losses will not be combined in determining application of the Deductible. But the Deductible will be applied only once per occurrence.

Businessowners' Policy (BOP):

D. Deductibles

1. We will not pay for loss or damage in any one occurrence until the amount of loss or damage exceeds the Deductible shown in the Declarations. We will then pay the amount of loss or damage in excess of the Deductible up to the applicable Limit of Insurance of Section I - Property.

What Does This Mean?

Although stated slightly different in each form, all three apply the deductible the same way. The deductible is subtracted from the amount of the loss; the deductible is never subtracted from the limit purchased. But remember, the insured never gets paid more than the limit purchased, so the maximum payout is the coverage limit.

Consider a commercial building insured on a replacement cost basis at $200,000 (assume all coinsurance guidelines are met) with a $5,000 deductible. Assume a fire loss destroys the building and the cost to rebuild is $220,000. How much does the insured get paid? Let's do the calculation.

 
But there is a limits issue, the insured purchased only $200,000. According to policy provisions, the maximum the insured can expect is $200,000. So, in this example, the insured is paid the policy limit because the amount of loss minus the deductible was greater than the amount of coverage purchased. The same is true of homeowners', commercial property and BOP property claims.

If deductibles were subtracted from the limit, the limit listed on the declarations page would be a misrepresentation of policy terms. Courts have a real problem with carriers misrepresenting coverage terms.

The Takeaway

In property coverage, the deductible is subtracted from the amount of loss with ultimate payout subject to specific conditions (coinsurance for example) and the limits purchased. No insured ever gets paid more than the amount of coverage purchased (excluding the additional coverages found in the policy).

If the amount of loss minus the deductible exceeds the coverage limits, the insured gets the coverage limit.

Realizing I've said the same thing four different times, I simply want to make sure no one ever forgets the actual application of a property deductible. No one should “understand" the application of a property deductible differently moving forward.

Last Updated: August 30, 2019

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