Understanding Property Insurance Deductibles: A Simple Guide

When you buy an insurance policy, it can be easy to assume that your money will be fully reimbursed if you ever make a claim. But that’s not quite how it works. In almost every scenario, policy holders have to pay money out of pocket before their policy activates. Here’s what you need to know about how these “initial costs” work so you can try to avoid situations where you’re paying more than you can afford.

What is a deductible?

A deductible is the amount of money you, the policyholder, must pay before your insurance coverage kicks in. Deductibles are part of all types of insurance policies, including property insurance, so you can expect to see them in all coverage details.

Types Of Deductibles

Depending on the insurance, you can see different types of deductibles in your commercial property policy language:

Flat Deductible

This is a specific dollar amount that must be paid before insurance covers the rest. For example, if you have a $1,000 deductible and suffer a $5,000 loss, you will pay $1,000, and the insurance company will pay $4,000.

Percentage Deductible

This is a percentage of the property's insured value. For example, if your property is insured for $200,000 and you have a 2% deductible, you would pay $4,000 out of pocket for a claim.

Split Deductible

This is a combination of both flat and percentage deductibles. Certain types of claims (like wind or hail damage) might have a percentage deductible, while others (like fire) have a flat deductible. So, your commercial property policy can include multiple types of deductibles.

Time-Based Deductible

Instead of a dollar amount, this deductible is measured in time. For example, business income coverage often has a 72-hour deductible, meaning the coverage begins 72 hours after the loss occurs. During this waiting period, no benefits are paid.

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How Deductibles Work In Claims

Regardless of the ins and outs of the claims process, you should always expect to pay the deductible right away and out of your own pocket. When you file a claim, the deductible is then subtracted from the claim payout. To explain more, here’s a chronological breakdown of the claims process:

• An incident occurs resulting in damage or a loss to your insured property.
• You notify your insurance company about the incident and file a claim.
• An insurance adjuster assesses the damage and determines the cost of repairs or replacement.
• The insurance company calculates the payout by subtracting your deductible from the total claim amount.
• You receive the payout (the claim amount minus the deductible).

Payout Examples For Each Deductible Type

Flat Deductible

• Property Insured Value: $1,000,000
• Deductible: $10,000
• Claim Amount: $100,000
• Payout: $100,000 - $10,000 = $90,000

Percentage Deductible

• Property Insured Value: $1,000,000
• Deductible: 2% ($20,000)
• Claim Amount: $100,000
• Payout: $100,000 - $20,000 = $80,000

Time-Based Deductible

• Deductible: 72 hours (with business income insurance)
• Payout: $0 from 0-72 hours; 72+ hours, insurance coverage per the policy terms

Choosing The Right Deductible

In general, the more you pay upfront, the less you’ll pay out of pocket (and vice versa). More specifically:

Higher Deductible, Lower Premiums

A higher deductible typically results in lower insurance premiums because you’re agreeing to pay more out of pocket in the event of a claim.

Lower Deductible, Higher Premiums

A lower deductible means higher premiums but less out-of-pocket expense when you file a claim.

Considerations When Selecting Deductibles

When it comes to deductibles, it’s important to think about what you can afford and when you can afford to pay it. Is it better to pay more on premiums—a set amount you plan in advance to pay each month or year? Or do you want to pay less on premiums and roll the dice on being able to afford a higher deductible in the event of a claim? Most business owners try to find a balance between those two options by weighing their:

Financial Situation

Are you financially able to pay a higher deductible in the event of a claim? Choose a deductible that aligns with your budget and savings.

Risk Tolerance

How comfortable are you with risk? A higher deductible might be suitable if you’re willing to take on more financial responsibility in exchange for lower premiums.

Claim Frequency

How often do you think you might file a claim? If you live in an area prone to frequent but minor damages, a lower deductible might be more cost effective.

Insurance Policy Terms

What are the terms and conditions of your insurance policy? Some insurers may have specific deductible requirements for certain types of coverage or perils.

Special Deductibles

There are some deductibles to keep an eye out for in specific scenarios:

Named Storm/Wind Deductibles

In windy or hurricane-prone areas, policies might have specific deductibles for damage caused by named storms or wind events. These deductibles are often higher than standard deductibles and apply separately from the general property deductible. For example, if your property is damaged by a hurricane (a named storm), the deductible might be a percentage of the insured value rather than a flat amount.

Water Damage Deductibles

Water damage deductibles apply specifically to damages caused by water-related incidents, such as burst pipes or tenant damages. These deductibles can vary widely depending on the policy and cause of the water damage. Some policies might have higher deductibles for water damage due to the high cost of repairs associated with these incidents.

Know Before You Go

Understanding how property insurance deductibles work is crucial in selecting the right insurance policy for your needs. Balancing the deductible amount with your financial situation and risk tolerance will help ensure you have adequate coverage without overpaying for premiums.

If you need further assistance or tailored advice for your specific situation, feel free to reach out! We can get you a fast quote or help you understand how deductibles work in more detail.