If you’ve done any amount of research on insurance, you’ve likely heard the term “deductible” thrown around. You probably already know that deductibles are the amount of a claim you are responsible for—the amount the insurance won’t pay for. Deductibles are usually deducted from the claim check—hence the name.
But what kinds of deductibles are there? How do they work? Let’s take a look at these questions and more.
Types of Deductibles
While all deductibles share the same basic function, there’s differences in how they’re calculated. The three most common forms of deductible are flat deductibles, percentage deductibles, and time deductibles.
A flat deductible means the same rate will be deducted from the claim every time. If you have a $1,000 deductible, then you will be responsible for the first $1,000 of damage whether the claim is $2,000, $20,000, or $2 million.
A percentage deductible causes a lot of confusion amongst policyholders. People often assume the “percentage” refers to a percentage of the claim. In fact, the percentage is based on the value of what’s covered.
For example, if you have a $100,000 building with a 1% deductible, the deductible will always be $1,000. This holds true whether there’s a $500 claim, $5,000 claim, or a total loss.
Time deductibles are usually specific to business interruption insurance. Business interruption insurance covers the cost of lost business due to another covered loss. As such, a business interruption’s deductible is usually based on the lost time.
For example, a time deductible may state that the policyholder is responsible for the first 72 hours of lost business. After that 72 hours, the policy will kick in and cover all lost business up to the limit.
Deductibles Based on Type of Loss
Oftentimes, a policy will have multiple deductibles based on type of loss. There may be one deductible for windstorm hail, another for a named storm or hurricane, and yet another for fire damage.
Moreover, these deductibles may be different types of deductibles—so fire damage may have a flat deductible while your hurricane coverage has a percentage deductible.
Deductibles vs. Sub-Limits
It’s also important to note the difference between a deductible and a sub-limit. While a deductible is the minimum amount of money your insurance provider will remove from your claim check, a sub-limit is the total amount your provider will pay for a specific type of loss or specific type of property.
While these are the broad strokes, it’s important to note every policy is different. To truly understand your deductibles and sub-limits, you need to consult a trusted insurance provider. If you don’t have a trusted insurance provider or would like a second opinion, feel free to reach out to us at D&A Insurance!