The humble deductible: broadly understood and often ignored. But there’s actually a a surprising number of levers one can pull to customize them. Whether you’re looking to reduce cost by taking on more risk, or looking for certainty in your budget outlays, there may be opportunity in reviewing your deductible structure. Below are just a few examples.
- Deductibles and Retentions are Different but Cannot be Assumed
Point zero here is to acknowledge a technical difference between a “Deductible” and “Self-Insured Retention” (SIR). However, the industry is inconsistent in applying this terminology so you should NEVER assume your obligations based solely on the label. For simplicity, the term “Deductible” is used here in a general manner.
- “Loss Only” Deductibles (aka First Dollar Defense)
A traditional deductible applies any time a claim is made. However, for liability policies, we can have a “Loss Only” deductible. This exempts defense costs from the deductible and applies it only when an award or similar payment is made; this is often known as “First Dollar Defense”. Since defense costs can comprise the entirety of a claim, this type of deductible can be hugely beneficial.
Though rare, this is something worth exploring on any professional liability policy, especially one that assesses separate deductibles for individual claimants. However, you can still find these with some regularity in places such as D&O and Cyber policies.
Alternately, removing this type of deductible could be a way to save premium dollars – if your policy already considers as “Loss Only” deductible, there’s potential to lower policy cost by moving to the traditional structure.
- Aggregate Deductibles
Aggregate deductibles are exactly what they sound like – a cap on the amount of deductible dollars over the course of the policy period. These are common in property policies, especially those with a geographic concentration of CAT exposed properties which could all theoretically be damaged by the same event. Aggregate deductibles are seen in liability policies as well, usually as part of a quasi-self-insurance large deductible program. Aggregate deductibles are negotiable, but often start at 3x the underlying (e.g., if you have a $100K deductible expect an aggregate to be no less than $300K aggregate).
These aggregate deductibles can be exceedingly helpful as they can contain an insured’s deductible exposure from essentially infinite (as one can have any number of claims under, say, $500,000) to a specific dollar amount that can then be funded.
Because of this, aggregate deductibles can make moving to a voluntary high deductible program much more palatable and a great “first step” toward self-insurance. A side benefit of this is that having an aggregate (especially one fully funded) is a great way to get finance partners and jurisdictional authorities on board with an otherwise non-compliant high deductible program.
Note that when putting money aside like this for liability cover, one also needs to fund deductible amounts for incidents reported under prior policy periods as typically those are subject to that prior policy”s terms, including any deductibles/aggregates therein.
- Deductibles that Reduce Limits
Be very aware that coverage varies on whether payments under the deductible count toward the policy limit. By this I mean a policy that has a $1M limit with a $100K deductible may only obligate the carrier to pay $900K (since the $100K deductible is considered part of the limit).
While all policy forms vary, the “rule of thumb” that for professional liability policies you should assume the deductible is part of the limit, while with General Liability it typically is not (nb: Surplus Lines GL carriers love to sneak this in). For other liability cover, such as D&O and EPLI, it’s a crapshoot.
So consider this when comparing competing options; a quote that’s more competitive may actually be offering a functionally lower limit of coverage. This is especially easy to miss on policies with relatively low deductibles ($50K or under) as the premium impact from such a condition is likely to not be so significant as to make the discrepancy obvious.
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- Reductions for Mediation, Arbitration, etc.
Unfortunately this particular lever isn’t likely to result in any change to cost, regardless of which way it’s pulled, it’s still worth noting that some carriers will reduce the deductible (usually half) in cases such as when a claim is settled via mediation/arbitration rather than going to court. The obvious goal here is to reduce claim expenses, so consider this a “carrot” to the hammer clause‘s “stick”. Do note these reductions tend to cap out fairly low, commonly at $25,000.