How Deductibles Apply to Your Policy

Understanding deductibles can help you make informed insurance decisions.

Most auto and homeowner policies include deductibles, which is a portion of a covered loss you agree to pay before the insurance company covers the remaining amount. Most policies will offer a standard deductible but if you live in an area that is susceptible to natural disasters you may be required to have a special deductible. When purchasing an insurance policy, be sure to discuss deductible options with your agent to ensure you understand how and when they apply. 

Standard Deductibles 

Often referred to as an “all other perils deductible,” standard deductibles apply to most causes of loss. These deductible amounts do not vary, regardless of the loss type or amount. For example, if an auto policy has a standard $2,000 deductible and you incur a covered loss of $5,000, you would pay $2,000 and your insurance company would pay the remaining $3,000. Even if the loss is greater, the insured would still pay the same standard $2,000 deductible with no additional cost, unless the limits of insurance are depleted.

Special Deductibles

In some parts of the United States, natural disaster losses, such as wildfire and hurricanes, are catastrophic and widespread. The costly and extensive damage from these events creates a large financial responsibility for insurance carriers providing coverage in those areas. 

Because of these exceptional circumstances, policies in disaster prone areas may require a separate, higher deductible for specific loss types. For example, policies in coastal locations often have separate deductibles for wind-related damage due to a tropical storm or hurricane, while homes in wildfire-prone areas have separate deductibles for wildfire losses. Other regions requiring special deductibles include those prone to floods and earthquakes. 

When there is a percentage deductible for these losses, it applies to the Coverage A amount for homes and condos, not to the loss amount. For example, a 2% wind/hail deductible on a $1 million home would be $20,000. If that home incurred a covered loss of $70,000 the insured would pay the $20,000 deductible and the insurance carrier would pay $50,000.

Adding these special deductibles to policies allows the insurance carriers to continue providing coverage in high-risk areas. 

High Deductible Option

Your insurance company may give you an option to increase your deductible. Selecting a higher deductible on your insurance policy could lower your premium but will increase what you pay if you incur a loss. It's always best to discuss deductible amounts with your agent to keep in mind what is financially feasible for you if you were to have a claim.  

This loss control information is advisory only. The author assumes no responsibility for management or control of loss control activities. Not all exposures are identified in this article. Contact your local, independent insurance agent for coverage advice and policy service.