Deductible

In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses.^[1] It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured, before the benefits of the policy can apply. Typically, a general rule is: the higher the deductible, the lower the premium, and vice versa. Depending on the policy, the deductible may apply per covered incident, or per year. For policies where incidences are not easy to delimit (for example health insurance), the deductible is typically applied per year.

In a typical automobile insurance policy, a deductible will apply to claims arising from damage to or loss of the policy holder's own vehicle, whether this damage/loss is caused by accidents for which the holder is responsible, or vandalism and theft.

Third-party liability coverages including auto liability, general liability, garagekeepers, inland marine, professional liability and workers compensation are also written with deductibles. These deductibles on commercial liability policies are known as third party deductibles or liability deductibles. Because the insured and claimant are not the same entity, insurers cannot pay the claim minus the deductible. This creates a receivable owed from the insured to the insurer. Due to the complexity of identifying these third party deductible receivables many are often missed by the insurer causing millions of dollars to go uncollected. ^[2]

Most health insurance policies and some travel insurance policies have deductibles as well. The type of health insurance deductibles can also vary, as individual amounts and family amounts. Major medical insurance policies are known for often having a deductible which does not cover the cost of routine visits (e.g. to a doctor's office).

For example, a person might have an auto insurance policy with a $500 deductible on collision coverage. If this person were in an accident that did $800 worth of damage to the car, then the insurance company would pay him or her $300. The insured is responsible for the first $500 of damage (the deductible), and the insurance company pays the balance. In industrial risks it is also common for the deductible to be expressed as a percentage of the loss, often though not always, with a minimum and maximum amount, for example 10% of loss minimum $1,500 max $5,000. Therefore in the event of a claim totalling $25,000 the applicable deductible is $2,500 (i.e. 10% of the loss), meaning that the insured would receive an indemnity payment from the insurer of $22,500. If the claim only amounts to $7,500 then the applicable deductible is $1,500 and not 10% of the loss, since 10% is below the minimum deductible level. Similarly, in this instance, for losses above $50,000 the deductible will never be more than $5,000.

Deductibles can also differ depending on the cause of the claim: the same policy can contain varying deductibles which are applied to loss or damage arising from theft, fire, natural perils, etc. For example, a plastics factory may have a deductible of $10,000 for theft, $50,000 for natural perils and $100,000 for fire.

A deductible should never be confused with a franchise, the latter representing a threshold which needs to be exceeded in order for the insurer to be liable for the entirety of the claim. In other words, with a franchise of $20,000 a claim of $19,900 is borne entirely by the assured whereas in the event of a claim totaling $20,500 the insurer would be liable for the whole amount.

There are also deductible reimbursement programs that reimburse a deductible in the event of an auto, home, boat/yacht or health insurance claim.

Deductible and Excess

A deductible is also known as excess in some countries, especially the United Kingdom. However, an excess and deductible are slightly different, even though they are generally used as synonyms.

An excess is an amount a policyholder must bear before the liability passes to the insurer (subject to the sum insured). Whereas a deductible is an amount deducted from the claim amount.

The only case where a deductible is different to an excess is when the claim amount is greater than the sum insured. Under an excess, the policyholder pays the excess amount first, but is still insured for the full sum insured. Whereas under a deductible, the most a claim can be is the claim amount less the deductible.

For example; two identical policies, both with sum insured of €1000. Policy A: Excess of €100 Policy B: Deductible of €100 For a claim of €1500: Policyholder A will pay the first €100. But since A has a claim greater than the sum insured, they can claim the full sum insured amount of €1000. Policyholder A receives €1000. Policyholder B also has a claim of €1500, so they can also put in a claim for the full sum insured amount of €1000. However, they must bear the deductible, which is deducted from the claim. So Policyholder B receives only €900.

External links

• Connelly, Joseph (March 3, 2008). "Homeowner's Insurance & the Claims Process - Radio Interview March 3, 2008". WPBR - The Justice Hour with Lisa Macci. http://www.lisamacci.com/thejusticehour/archives.html. Retrieved 2008-06-27. 
• Warnagiris, Joseph (February, 2009). "Collecting Third Party Deductibles". Claims Magazine. http://www.propertycasualty360.com/2009/02/02/collecting-third-party-deductibles. 
• Zero Deductible Insurance Program

References

1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 524. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. 
2. ^ Warnagiris, Joseph (February, 2009). "Collecting Third Party Deductibles". Claims Magazine. http://www.propertycasualty360.com/2009/02/02/collecting-third-party-deductibles.