Your commercial property insurance policy likely includes a deductible. If you file a claim, the deductible is the amount you will have to pay out of pocket before the insurance company pays. While deductibles are seen in many types of insurance, from health to auto, they can work a little differently in commercial property policies.
Types of Deductibles
Because the deductible is the amount you’ll have to pay out of pocket, it makes sense that you’d want it to be a low as possible. However, many policyholders opt for higher deductibles, which can be attractive because they usually come with lower premiums. But be careful when making this bargain. Selecting a deductible that is beyond your means to afford undermines the purpose of insurance. If a loss occurs, you won’t have the coverage you need.
Deductibles can also vary in the way they’re calculated. The two most common types of property deductible are a flat deductible or a percentage deductible.
- A flat deductible is a set amount. For example, if your property deductible is $1,000, you’ll pay $1,000 for a claim, and your insurer will pay up to the policy’s limit. If you file another, separate claim, you’ll have to pay the $1,000 deductible again in most cases.
- A percentage deductible is based on a percentage of the insured property value. For example, if you have a property insured for $1 million with a 2 percent deductible, your insurance doesn’t pay until the loss exceeds 2 percent, or $20,000. If the claim is valued at $250,000, your insurance would pay $230,000 – the cost of the claim less the deductible. Keep in mind that when dealing with catastrophic claims, a percentage deductible can amount to a substantial sum.
Your policy may also have different deductibles for different types of claims. The deductible amounts may differ for claims caused by different types of events, such as flood or hurricanes, if they are covered in the policy. Additionally, the way the deductibles are calculated may vary. For instance, your percentage deductible can be based on the total insured value listed on your policy or only on the total insured value at that location. The policy documents will explain any differences, and you should talk to your insurance broker if you have any questions.
How Deductibles are Applied
When calculating a loss payment, the insurer first needs to determine the cost of the covered loss. This is the value of your claim. The value of the claim must then be compared to the policy deductible, which may apply per occurrence of a claim or per insured location.
- If the value of your claim is less than your deductible, there is nothing to be gained from filing a claim, although you may still be required to notify your insurer of the event.
- If the value of your claim is more than your deductible, you should consider filing a claim. When you do so, the deductible value is deducted and then the insurer pays the remainder of the claim up to the policy limit.
To see how this works, let’s look at some hypothetical examples using flat deductibles. The figures used are chosen to make the examples simple.
- Let’s say you have a $10,000 claim, a $1,000 deductible and a $20,000 policy limit. You pay $1,000. This leaves $9,000 remaining for the claim, which is lower than the policy limit, so the insurer pays $9,000.
- Alternatively, let’s imagine you have a $12,000 claim, a $1,000 deductible and a $10,000 policy limit. You pay $1,000. This leaves $11,000 for the claim. Assuming there are no other factors to consider, such as a coinsurance penalty, the insurer will pay $10,000, the policy limit. The remaining $1,000 is not covered. This is why, in addition to picking a reasonable deductible, it’s important not to be underinsured.
Wondering about your commercial property insurance coverage and deductibles? Your Higginbotham Insurance broker will gladly explain your coverage and help you determine if you have adequate insurance. Contact us today.