Calculate deductibles, limits and coinsurance

What you will learn

• Calculate a fixed-dollar or percentage deductible using the stated base.
• Apply a stated coverage limit in the order given by the policy or exercise.
• Calculate required insurance and explain how carrying too little can reduce a payment.
• Check a payment by separating property value, coverage amount, covered loss and retained loss.

Before you start

Before you start, review Lesson 04: Value damaged property correctly. You will use subtraction, multiplication and division; a calculator is fine. A loss valuation tells us the size of the loss, but not how that cost is shared. A deductible, a limit and a coinsurance condition each answer a different question. We will keep those jobs separate and use only the settlement rules supplied in each example.

A loss amount is the start, not always the payment

After identifying a covered loss and its value, you may still need to apply a deductible, a payment limit and a coinsurance condition. These answer different questions. How much of the loss remains with the insured? What is the most the insurer will pay under the applicable limit? Was enough insurance carried to avoid an underinsurance adjustment? Keep those questions separate before doing the arithmetic.

A deductible leaves part of the loss with the insured

For a simple fixed-dollar deductible, subtract the stated deductible from the covered loss as directed by the policy. In an exercise with a $6,500 covered loss, a $500 deductible and no other adjustment, the payment is $6,000. If the loss is only $300 with that deductible, the payment is zero, not negative $200. The insurer does not make a negative claim payment.

A percentage needs a base

Suppose a question states that the deductible is 2% of a $250,000 coverage limit. Convert 2% to 0.02, then calculate 0.02 × $250,000 = $5,000. Do not apply the 2% to the loss amount instead. A percentage without its base is incomplete information. Read what the question or policy says the percentage applies to; this example does not establish the deductible used by every policy.

A limit is a ceiling, not the property's value

The applicable limit is the maximum payable under the coverage provision being applied. It is not automatically the value of the entire property or a promise to pay the limit for a smaller loss. A building could be worth $300,000 while carrying a lower limit. Keep property value, amount of insurance and amount of covered damage in separate places on your worksheet.

Follow the stated order

Use this exercise rule: subtract the deductible from the covered loss, then cap the result at the applicable limit. With a $28,000 loss, a $1,000 deductible and a $20,000 limit, first calculate $28,000 − $1,000 = $27,000. The limit then caps payment at $20,000. Applying the limit first and subtracting the deductible afterward would give $19,000, which does not follow this exercise's rule. Actual policy wording determines the applicable order.

Coinsurance checks the amount carried against a requirement

Some property policies require insurance equal to a stated percentage of the property's value. This is an insurance-to-value requirement. Carrying less than the required amount can reduce payment even for a partial loss. An 80% coinsurance requirement does not simply mean the insurer always pays 80% of every claim. First calculate the required insurance, then compare the amount carried with that requirement.

Calculate the requirement before the adjustment

Suppose the policy uses a property value of $300,000 and an 80% coinsurance requirement. Required insurance is $300,000 × 0.80 = $240,000. If the amount carried is $180,000, the fraction of the requirement met is $180,000 ÷ $240,000 = 0.75. The denominator is required insurance, not the full $300,000 property value. In this example, 80% sets the requirement; 75% is the resulting underinsurance factor. They are different numbers for different purposes.

Complete one payment calculation

Continue with the same property and amount carried. Assume a covered loss of $40,000 and a $1,000 deductible. The exercise rule is to multiply the loss by the underinsurance factor, subtract the deductible, and then apply the applicable limit. First: $40,000 × 0.75 = $30,000. Next: $30,000 − $1,000 = $29,000. The $180,000 limit does not reduce that result, so payment is $29,000. This calculation uses only the supplied rule; no other coverage or adjustment is assumed.

Meeting the requirement removes this penalty, not every other adjustment

If the same property carries at least the required $240,000, this exercise applies no coinsurance reduction. A $40,000 covered loss less the $1,000 deductible would therefore yield $39,000, subject to the applicable limit. Do not multiply the loss by a factor greater than one when insurance exceeds the requirement. Adequate insurance removes the underinsurance penalty; it does not turn a loss into a larger payment or remove the deductible.

Pause and predict

Keep the $300,000 property value, 80% requirement, $40,000 covered loss and $1,000 deductible from the worked example. Change only insurance carried and its applicable limit from $180,000 to $240,000. Before calculating, predict whether the payment rises, falls or stays the same. Explain what changed and what did not.

Check the meaning of each number

Label property value, required percentage, insurance carried, covered loss, deductible and applicable limit. Calculate required insurance first. If insurance carried is below that requirement, use the stated adjustment; if it meets the requirement, do not invent a penalty. Follow the supplied order, apply the relevant ceiling, and check that a simple claim payment is neither negative nor above that ceiling. Never use the whole property's value as if it were the amount damaged.

Try the calculations

1. Assume no coinsurance adjustment. Subtract a $750 deductible from a $500 covered loss, with payment not below zero. What is payable?
2. Use the rule 'subtract deductible, then apply limit.' The loss is $17,000, deductible $1,000 and limit $12,000. What is payable, and why is it not $11,000?
3. A question specifies a deductible of 1% of a $400,000 limit. What is the deductible? Which number supplies its base?
4. A property's stipulated value is $500,000 and the coinsurance requirement is 80%. Insurance carried is $300,000. The covered loss is $24,000 and deductible $2,000. Calculate required insurance, the underinsurance factor and payment. Use the rule 'multiply loss by factor, subtract deductible, then cap at the $300,000 limit.'
5. In question 4, change only insurance carried and the applicable limit to $400,000. What is payable when the coinsurance requirement is met?

Check your work and its meaning

What to remember

A deductible and a limit are not the same thing. Coinsurance compares insurance carried with insurance required, not simply with the size of the claim. Find the correct percentage base, keep each value labelled, and follow the supplied order. The final answer must match both the arithmetic and the policy assumptions.