With any insurance policy, deductibles play a key role in keeping insurance costs low for policyholders. While deductibles can help commercial insureds in several ways, insurance providers will sometimes use sophisticated tactics to abuse deductibles by applying multiple to a single loss. Business owners must be aware of these efforts to ensure they are not being taken advantage of after suffering a major loss.
Commercial Property Insurance Deductibles
Commercial property insurance deductibles refer to a portion of the loss that the policyholder is responsible for after a covered event. Insurance deductibles work to ensure that coverage for property damage and losses remains affordable for the policyholder, as certain claims can be incredibly costly to adjust. Without these deductibles, the insurance company would then have to pay out for every loss, which can lead to an increase in insurance costs.
Once a commercial property damage claim has been filed, the policyholder will then be responsible for paying the deductible before the insurance company pays its portion of the claim. Although deductibles are used in most types of insurance, commercial property policies work a little differently.
Typically, because an insured pays a deductible out of pocket, it would make sense to keep the amount as low as possible, however, many commercial policyholders opt for higher deductibles to achieve a lower premium rate. Having a deductible amount that is beyond the means of the policyholder will undermine the purpose of having one, as the insured will likely not have the coverage they need.
Insurance deductibles can also vary when it comes to how they are calculated. The five most common types of deductibles include:
Flat Deductible
Flat or straight deductibles utilize a specific dollar amount that will be applied to each covered loss. The deductible is subtracted from the amount of the covered loss and the insurer pays out the remaining total. Flat deductibles apply to each instance of damage that occurs within the policy period. For instance, if a commercial property suffers damage due to vandalism and then a fire breaks out at a later date, the vandalism and the fire will each be subject to a separate deductible.
Percentage Deductible
A percentage deductible is applied to perils that can result in catastrophic losses, such as a hurricane, tornado, earthquake, or another natural disaster. For example, when an earthquake is a covered peril and a loss happens, the claim payment will then be reduced by a deductible on a percentage basis. This means the deductible may be a percentage of the policy limit or the value of the damaged property.
For example, a percentage deductible for a hurricane-related loss is often expressed as a percentage of the insured value of the commercial property. However, a percentage deductible for a hurricane will not apply to other types of damages, such as windstorm damage. The amount is established by the terms of the policy, usually on the declarations page, and/or by state law.
Waiting Period Deductible
After a major loss, businesses may need to shut down for a period of time or indefinitely. When this happens, the company’s business interruption or business income policy can be utilized to help recoup the costs of running the business while it is inoperable. This includes everything from payroll expenses to company income lost during the time the business is shut down.
In these instances, business income policy forms do not use the word “deductible.” Rather, they often include a type of deductible called a waiting period. This waiting period is the amount of time that must elapse before insurance coverage can begin. Typically, this waiting period is 72 hours and any income lost during the waiting period is not included.
Aggregate Deductible
An aggregate deductible refers to the most a policyholder will have to pay out of pocket within a specified time, often the policy year. For instance, if a commercial property policy includes a $10,000 aggregate deductible and the insured sustains several losses during the policy period that fall within the deductible amount, the business will be responsible for those costs. The insurance company will then be responsible for paying out the third loss in full. By the time that third loss occurs, the policyholder will have satisfied its aggregate deductible obligation under the policy.
Franchise Deductible
A franchise deductible encompasses the minimum loss that must occur before insurance will be triggered. In the event a policy contains a $5,000 franchise deductible, no coverage will apply if the insured suffers a $4,000 loss because the franchise deductible has not been reached. However, a $5,000 loss can be fully covered as the deductible will have been satisfied.
The Manipulation of Commercial Deductibles
Despite the many benefits deductibles offer for commercial property owners, insurance companies will often employ tactics to manipulate their use to benefit themselves. This typically happens when a commercial policyholder has multiple properties insured under one policy. In certain cases, the application of multiple deductibles is appropriate in the event several properties suffer damage; however, insurers may attempt to deliberately confuse a per-building limit.
For example, say the owner of multiple condominiums experiences fire damage to one of its properties. The fire likely caused extensive damage to the interior and exterior of the property, leading the owner to file an insurance claim under a policy with blanket or flat coverage. In this request for coverage, no per-building limitations or exceptions to the coverage are disclosed, discussed, or agreed to by the policyholder. A per-building deductible commonly requires the policyholder to pay a separate deductible for each damaged building, rather than a single deductible for the property that suffered damage. Although the insurance company had prior knowledge of these explicitly requested policy terms when it sold the policy to the insured, they can still choose to wrongfully deny the claim by falsely representing that the property would be fully covered under the per-building limitation.
Instances like this are unfortunately not uncommon when it comes to commercial property policies. In the event an insurance company wrongfully attempts to deceive a policyholder to avoid rightfully paying a valid claim, the insured should consult with experienced legal counsel as soon as possible.
Commercial Property Insurance Claim Attorneys
At Raizner Slania, our law firm has represented thousands of commercial clients in claims against most major insurance companies that have acted in bad faith. If your commercial property claim has been wrongfully denied, delayed, or grossly underpaid, we can help. Contact our experienced team today to see how we can best assist you with your claim.
