Deductibles and Payment Limits

Understanding Deductibles and How They Work

A deductible is the portion of a covered loss the insured bears before the insurer pays under a coverage to which the deductible applies. By requiring policyholders to share in a loss, deductibles help reduce moral hazard and morale hazard because you retain a direct financial interest in preventing losses. In addition, deductibles help reduce the insurer's expense of handling small claims by discouraging claims for losses that fall below the deductible amount.

Choosing your deductible directly impacts the policy premium. Choosing a higher deductible typically lowers the insurance policy premium because you take on more initial financial risk, which spares the insurer from processing small claims. In contrast, choosing a lower deductible typically raises the insurance policy premium because the insurer assumes more risk and must respond to smaller claims.

In standard homeowners policies, the policy deductible applies on a per occurrence basis. A per occurrence limit is the most an insurer will pay for losses subject to that limit from one occurrence; other coverages may have separate limits. If multiple covered items are damaged in that single event, the per occurrence deductible is generally subtracted only once for that event. For example, if a severe storm damages both a homeowner's roof and detached garage, the insured pays only the single per occurrence deductible rather than separate deductibles for each damaged item.