Study guide
2.5 Deductibles and Policy Limits
Property & Casualty Insurance Exam
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1 Introduction
0.1 About the Property & Casualty Exam 0.2 How to Use This Course
2 Chapter 1: Insurance Fundamentals
1.1 Risk and Risk Management 1.2 Types of Risk 1.3 Principles of Insurance 1.4 The Insurance Contract 1.5 Policy Structure and Components
3 Chapter 2: Property Insurance Concepts
2.1 Property Coverage Basics 2.2 Perils, Hazards, and Exclusions 2.3 Valuation Methods 2.4 Coinsurance and Insurance to Value 2.5 Deductibles and Policy Limits
4 Chapter 3: Dwelling Policies
3.1 Dwelling Policy Overview 3.2 Dwelling Policy Forms (DP-1, DP-2, DP-3) 3.3 Dwelling Property Coverages 3.4 Dwelling Exclusions and Conditions
5 Chapter 4: Homeowners Policies
4.1 Homeowners Policy Overview 4.2 Homeowners Policy Forms (HO-2 through HO-8) 4.3 Section I: Property Coverages 4.4 Section II: Liability Coverages 4.5 Homeowners Exclusions 4.6 Homeowners Conditions 4.7 Common Homeowners Endorsements
6 Chapter 5: Personal Auto Policy
5.1 Personal Auto Policy Overview 5.2 Part A: Liability Coverage 5.3 Part B: Medical Payments Coverage 5.4 Part C: Uninsured/Underinsured Motorists 5.5 Part D: Physical Damage Coverage 5.6 PAP Exclusions 5.7 No-Fault Insurance and PIP
7 Chapter 6: Liability Insurance Concepts
6.1 Liability Insurance Basics 6.2 Negligence and Tort Law 6.3 Types of Legal Liability 6.4 Personal Umbrella Policies
8 Chapter 7: Commercial Property Insurance
7.1 Commercial Package Policy (CPP) 7.2 Building and Personal Property Coverage Form 7.3 Causes of Loss Forms 7.4 Business Income Coverage 7.5 Businessowners Policy (BOP)
9 Chapter 8: Commercial General Liability
8.1 CGL Policy Overview 8.2 Coverage A: Bodily Injury and Property Damage 8.3 Coverage B: Personal and Advertising Injury 8.4 Coverage C: Medical Payments 8.5 CGL Exclusions 8.6 CGL Limits and Conditions
10 Chapter 9: Commercial Auto Insurance
9.1 Business Auto Policy Overview 9.2 Covered Auto Designation Symbols 9.3 BAP Liability Coverage 9.4 BAP Physical Damage Coverage 9.5 Garage and Truckers Coverage Forms
11 Chapter 10: Workers Compensation
10.1 Workers Compensation Overview 10.2 Part One: Workers Compensation Insurance 10.3 Part Two: Employers Liability 10.4 Workers Compensation Exclusions 10.5 Other States and USL&H Coverage
12 Chapter 11: Other Commercial Lines
11.1 Inland Marine Insurance 11.2 Ocean Marine Insurance 11.3 Commercial Crime Insurance 11.4 Surety Bonds 11.5 National Flood Insurance Program 11.6 Professional Liability Insurance 11.7 Commercial Umbrella and Excess Liability 11.8 Boatowners and Personal Watercraft Insurance 11.9 Farm and Ranch Insurance 11.10 Mobile Home and Manufactured Housing Insurance 11.11 Title Insurance
13 Chapter 12: Insurance Regulations and Ethics
12.1 Producer Licensing 12.2 Producer Authority and Responsibilities 12.3 Unfair Trade Practices 12.4 Claims Settlement Practices 12.5 State Insurance Department 12.6 Penalties and Disciplinary Actions
2.5 Deductibles and Policy Limits
Key Takeaways Explain This Topic AI
A deductible is what the insured pays before coverage responds; raising it lowers premium and trims nuisance claims.
Flat deductibles are fixed dollar amounts; percentage deductibles are a percent of coverage (common for wind, hurricane, and earthquake) and can be very large.
Limits come in per-occurrence, aggregate, split (e.g., 100/300/100), and combined single limit (CSL) forms.
Sublimits cap specific property categories (cash $200, jewelry/firearms/silverware $1,500-$2,500) far below the overall personal-property limit.
Order of operations: apply the limit cap first, then subtract the deductible; for shared losses, pro rata splits by limits while excess pays only above the primary.
Last updated: June 2026
Deductibles — the Insured's Retention
A deductible is the amount the insured pays out of pocket before the insurer pays. Deductibles eliminate small nuisance claims that cost more to adjust than to pay, reduce premium, share risk, and give the insured "skin in the game" to prevent losses.
Four Types of Deductibles
- Type Definition Typical use
- Flat (per-occurrence) Fixed dollar amount per loss ($500, $1,000, $2,500) Homeowners, auto, general property
- Percentage A percent of coverage (2%, 5%, 10%, 15%) Earthquake, hurricane/wind, flood
- Aggregate One total deductible for all losses in the period Commercial, umbrella
- Split Different deductibles per peril All-peril $1,000, wind 2%, quake 15%
Flat example: $5,000 loss with a $1,000 flat deductible → insurer pays $4,000 .
Percentage example: $400,000 dwelling coverage, 15% earthquake deductible = $60,000 retained. On an $80,000 quake loss the insurer pays only $20,000 . Percentage deductibles are why catastrophe losses leave owners with huge out-of-pocket costs.
Aggregate example: $5,000 annual aggregate — a $2,000 loss (insured pays $2,000), then a $4,000 loss (insured pays the remaining $3,000, insurer pays $1,000), then a $3,000 loss (insurer pays all $3,000 once the aggregate is met).
Deductible-Premium Trade-off
- Deductible Premium impact Best for
- Low ($250-$500) Higher premium Maximum protection
- Medium ($1,000) Moderate Average homeowner
- High ($2,500+) Lower premium Those who can self-insure small losses
Raising a deductible from $500 to $1,000 commonly trims premium 10-20% .
Policy Limits
The limit is the most the insurer will pay. Four structures appear on the exam.
- Limit type What it caps Example
- Per-occurrence Any single event $300,000 limit, $400,000 fire → pays $300,000
- Aggregate All losses in the policy period $1,000,000 annual cap across claims
- Split limits Separate categories Auto 100/300/100
- Combined single limit (CSL) One pooled limit for all damages $500,000 covers BI and PD together
Split-limit detail (100/300/100): $100,000 bodily injury per person, $300,000 bodily injury per accident, $100,000 property damage. CSL is more flexible because one pool covers any mix of bodily injury and property damage.
Sublimits
A sublimit caps a specific property category below the overall limit. They are a frequent exam trap because the large personal-property limit is irrelevant once a sublimit applies.
- Property type Typical sublimit
- Cash / currency $200
- Securities / documents $1,500
- Jewelry / watches (theft) $1,500
- Firearms $2,500
- Silverware $2,500
- Business property (on premises) $2,500
Worked example: $150,000 personal-property limit, $1,500 jewelry sublimit. A $10,000 ring is stolen → the insurer pays only $1,500 . To fully cover valuables, use a scheduled personal property endorsement , a floater , or an increased-sublimit endorsement .
Limit and Deductible — Order of Operations
Apply the limit first , then subtract the deductible .
Limit $250,000, deductible $2,500, loss $100,000 → $100,000 − $2,500 = $97,500 paid.
Limit $250,000, deductible $2,500, loss $300,000 → cap at $250,000, then − $2,500 = $247,500 paid.
Other-Insurance Clauses
When two policies cover the same loss:
Pro rata (contribution by limits): each insurer pays (its limit ÷ total of all limits) × loss . Two insurers with $100,000 and $300,000 limits on a $40,000 loss pay $10,000 and $30,000 respectively.
Primary and excess: the primary policy pays first; the excess (such as an umbrella) pays only after the primary limit is exhausted.
Excess (escape) and other-insurance subtleties: some clauses make a policy strictly excess over any other collectible insurance, while others coordinate so no insured profits from duplicate coverage — the principle of indemnity caps total recovery at the actual loss no matter how many policies respond.
Special Deductible Mechanics: Disappearing and Franchise
Beyond the four core types, two legacy structures still appear as exam distractors. A franchise deductible pays nothing until the loss reaches the franchise amount, then pays the entire loss with no deduction — common historically in ocean marine. A disappearing (diminishing) deductible shrinks as the loss grows: the insurer applies a factor so that above a certain loss size the deductible reaches zero and the full loss is paid. Contrast both with the ordinary straight (flat) deductible , which is always subtracted regardless of loss size.
The exam tests whether you can match the behavior to the name — for example, recognizing that a clause paying the full loss once a threshold is crossed is a franchise deductible, not a flat one.
Hurricane and Named-Storm Deductibles
In coastal states, percentage deductibles get their own trigger language. A hurricane deductible (a percent of Coverage A) applies only when the National Hurricane Center declares a hurricane, and the trigger window is defined by statute or policy — often from the time a hurricane watch or warning is issued until a set number of hours after it ends. A broader named-storm or windstorm deductible can apply to tropical storms as well.
Because these are percentage deductibles on the full dwelling limit, a 5% hurricane deductible on a $400,000 home is $20,000 out of pocket before coverage responds, and many states require the deductible amount and trigger to be disclosed prominently on the Declarations.
Putting Limits, Sublimits, and Deductibles in Order
The safest claims sequence is: (1) confirm the loss is covered, (2) identify the applicable limit or sublimit and cap the loss to it, (3) apply any coinsurance factor, and (4) subtract the deductible last. Reversing steps 2 and 4 — subtracting the deductible before capping at the limit — is the most common arithmetic error on exam payment questions, so always cap first and net the deductible at the end.