The term "deductible" in insurance circles is too often treated generically. It is widely considered to be the amount that an adjusted claim is reduced by to arrive at a net insurance recovery. In reality, deductibles can and do operate in many different ways.
Let's consider a Commercial General Liability ("CGL") policy. There are several different ways of structuring a deductible arrangement. The stated deductible may apply per "occurrence" or per "claim"; to damages only; to damages including allocated expenses; to damages plus allocated expenses; to damages plus a pro-rated share of "allocated expenses"; to bodily injury ("BI") alone; to property damage ("PD") alone; to BI and PD combined; and well, the list goes on and on.
An example may help illustrate the differences of how deductibles are applied. Walsh Industries manufactures fans for residential use and has a CGL policy with Stucker Insurance Co. One of its fans malfunctions and causes a fire at a residence. Two guests at the home suffer bodily injuries and the home is completely destroyed. Walsh Industries settles the first bodily injury claim at $100,000 and incurs $60,000 of legal expenses. It settles the remaining bodily injury claim at $250,000 and has $80,000 of legal expenses. It settles the home owner's claim at $500,000 and legal expenses amount to $40,000. Walsh Industries has a $50,000 deductible under its CGL policy. But the devil is in the details. Here is how it comes out for the policyholder:
| If the deductible applies: | Then the deductible is: |
| Per claim for damages and allocated expenses combined |
$ 150,000 |
| Per claim for damages plus all allocated expenses | $ 330,000 |
| Per claim for damages plus pro-rated allocated expenses | $ 181,765 |
| Per occurrence for damages and allocated expenses combined | $ 50,000 |
| Per occurrence for damages plus all allocated expenses | $ 230,000 |
| Per occurrence for damages plus pro-rated allocated expenses | $ 60,588 |
Obviously there are other combinations if the deductibles apply to BI and PD claims separately or combined. However, the point is that the ultimate deductible amount varies considerably depending on how the deductible amount is applied.
It should also be kept in mind that insurers use differing wordings in deductible clauses and endorsements. So the next time an insurer or broker/agent says the deductible is "X", say "tell me more about that....."
