Category: Operations, Misc.

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.

0. 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.

1. “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.

2. 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.

3. 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.

4. 4. 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.

The most common case of percent deductibles is in Catastrophe (CAT) property coverage – carriers mandate a deductible be a percentage of insured value (with a minimum) rather than a flat dollar amount. Yet two options that look the same could be anything but.

A primary difference lies in how or to which figure the percentage is applied. If you have a combined 100M in coverage, with 70M of that building and 30M contents, is your (e.g.) 5% deductible applied to 30M or 100M? That’s a question with three and a half million dollars of relevance.

Now imagine that same claim happens on a multi-location policy with a 500M limit – does our deductible then apply to that aggregate value? Yikes.

The preferred method is to apply the deductible to only the specific coverage part(s) triggered by the loss . You’ll often see policies refer to this as a “per coverage unit” deductible; the coverage units typically being Building, Contents, and Business Income/Extra Expense. Doing so means if you have a loss to only (e.g.) Contents and Income you only pay the 5% of the value of those two items. “Coverage unit” can be further itemized, such as if you have large amounts of categorized “Outdoor Property” or “Property of Others”.

Note this ultimately requires identifying the underlying value of these “coverage units”. This is done either via reference to the policy declaration or, more typically, to the Schedule of Value (“SOV”) on file with the carrier. Be aware what this means: the itemization on your SOV is ultimately what determines your deductible. In other scenarios, this might be a non-issue, but here, lumping values into a single entry or evenly allocating a sum total across locations could obligate you to a much larger deductible than imagined.

Percent deductibles vary not only in the dollar amounts they represent but also in how they are triggered. Because of this they demand scrutiny as well as a good scrubbing of your SOV. Pay close attention to the values on which the percentage is based, and aim to secure one that applies “per coverage unit”. Also make sure your SOV is itemized correctly as, after all that, we don’t want to be left holding the bag because a spreadsheet had 25 lines instead of 26.

The Wildest Insurance Fraud Scheme Texas Has Ever Seen: https://www.texasmonthly.com/articles/it-was-never-enough/

I guess everything *is* bigger in Texas. (RIMSHOT)

This one comes from personal experience (and you know who you are if you’re reading this!).

General Liability is, obviously, not intended to cover incidents that are intentionally done with knowledge they will cause harm. But there is an exception to this: coverage applies if you knowingly cause injury in effort to otherwise preserve persons or property. Here is the (very brief) exclusion and exception from the 2013 CGL:

a. Expected Or Intended Injury “Bodily injury” or “property damage” expected or intended from the standpoint of the insured. This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property.

The real-world example I was provided for something of this nature is a crane operator who has to drop a load to prevent a catastrophic failure. If they intentionally drop a load, and that injures someone, the CGL will provide coverage if that action was taken to prevent a larger event occurring.

As a side note, there is a bevy of case law regarding this “expected or intended” exclusion and how it applies, whether the language is ambiguous, and whether coverage hinges on the intention of the act or the intention of the damage. It’s definitely worth looking into.

However, for our purposes, we’re focusing on what is not in the exclusion: specifically you will note the exception provides coverage only for “Bodily Injury”. I.e., the unendorsed CGL does not cover expected or intended Property Damage; only Bodily Injury. And even then only via a narrow “reasonable use of force” exception.

In the example of a crane operator dropping a load you can see how this could be incredibly problematic: you are almost assured to cause property damage in such a case. But, going by the strict “4 corners” of the ISO policy, you’re not going to be covered for such event if your intent was to prevent a much large instance of property damage. This is true even if you intended to prevent both BI and PD because recall we are dealing with an exception to an exclusion; meaning we are talking about the type of damage covered, not the trigger itself.

Thankfully, some carriers do offer proprietary wording to add this back, and such is even included on “enhancement” endorsements among even the smaller/mutual carriers of the world. However, even some national carrier brands don’t address this in their policy and, when I brought this to them, they were flummoxed how to respond. My key partners asked for language I could provide them (and this particular one eventually manuscripted!), while others essentially shrugged.

In the end this is an incredibly easy fix for a carrier – it literally takes adding only three words to the exception (“or Property Damage”). The fact that it does need to be manually added can be troublesome – it’s going to need approval. While troublesome, and likely frustrating to carrier personnel, it’s precisely these type of esoteric situations by which brokers live and die. A client can go to nearly any broker/carrier and get an unendorsed ISO policy; if you’re not giving them a reason not to then that’s precisely what’s going to happen.