When shopping for insurance coverage, there is typically a balance between the risk involved with a certain policy and cost of that policy. The more comprehensive and higher limits of coverage you have, the higher your premium costs typically will be. This rule generally applies regardless of what you are insuring, whether it be a business, a vehicle, or a building.
One item that influences the premium costs of a policy is the policy’s deductible. A deductible is sometimes called the “insured contribution” because it is the amount of money that the insured agrees to pay before the insurance company is responsible to pay anything. Usually there are several options when it comes to deductibles. There are “fixed amount deductibles”, “all peril deductibles”, “peril specific deductibles”, “percentage deductibles”, as well as other, more individualized deductibles. When looking for insurance, it is important to understand the differences between deductible types so that you can more aptly review the benefits and burdens of each with your broker before you choose a particular policy. This allows you to form a strategy to cover your deductible and any other financial burdens in event of a loss.
Fixed Deductibles vs. Percentage Deductibles:
Fixed Deductibles are simple and straight forward. If the policy says, “Deductible: $50,000.00,” the the insured must incur a loss exceeding the $50,000 deductible that the insured is responsible for before insurance must pay anything. Percentage Deductibles are calculated differently and its VERY important understand this. The common misconception that I have come across repeatedly is that a percentage deductible is based on the amount of a loss. That would seem to make sense…but it’s WRONG! The percentage deductible is typically based on the TOTAL LIMIT OF INSURANCE coverage and NOT on THE VALUE OF A LOSS. Percentage deductibles can range anywhere from 1% to 5% of the coverage limit. That means that, if you have $10,000,000 in coverage with a 5% deductible and you suffer a $100,000 loss you aren’t going to get a penny from insurance! Why? Because 5% of $10,000,000 equals a deductible of $500,000! That means that your loss has to exceed $500,000 before insurance has to pay you anything at all!
All Peril Deductibles vs. Peril Specific Deductibles:
All Peril Deductibles apply to all losses covered by the policy, but Peril Specific Deductibles apply only to specific losses. It is possible for your policy to contain both an all peril deductible and a peril specific deductible. For example, many insurance policies have an all perils deductible that is a fixed deductible, but also have peril specific deductible that applies specifically to wind and hail losses. In a scenario where there is a fixed, all peril deductible of $50,000 and a separate peril specific deductible of 1% for wind and hail the following would take place: For a fire claim, the deductible would be a flat $50,000, because fire falls under the category of “all peril”. However, under the same policy with a wind or hail claim, the 1% deductible would apply since wind or hail falls under the 1% peril specific deductible.
Other Deductible Variations and Combinations:
New and changing policies can include several combinations of all the deductibles defined above. The resulting deductibles can mitigate or enhance risk. One variation is a per building deductible. Meaning, rather than applying the deductible once, the deductible is applied separately to each damaged building. Depending on the terms of the policy, the deductible could be either a fixed deductible or a percentage deductible. On a 40 to 80 building complex a per building deductible can add up quickly!
Taking on a higher deductible or per building deductible can have great benefits and reduce your overall premium costs. However, it is important that you completely understand how your deductible will be applied, are prepared to shoulder the financial burden of your deductible, and that you are aware of any other policy limitations that might exist in the event of a loss. As always, ask for clarification from your broker or agent if you are not completed sure about the terms of your policy.
Article written by Peter Obrien, President and Founder of Solutia Adjusters.