How Do Insurance Deductibles Work?

Understanding the nuances of business insurance will help you to:

• Know what to expect from your existing policy;
• Make any needed changes to it; and 
• Understand your insurance options better.

One key concept you need to be familiar with is deductibles. Deductibles can impact how high or low your premium is. Furthermore, deductibles influence your claims process. 

So whether you’re new to business insurance or you just need a refresher, this guide tells you everything you need to know regarding the question, “how do insurance deductibles work?”.

Let’s get started!

What Are Insurance Deductibles?

An insurance deductible is the set amount or percentage that you will pay or cover yourself before insurance takes over for a claim. Typically, the percentage that you have as deductibles is something you agree to when you sign your insurance policy. 

The amount/percentage and type of deductibles you have are all written in detail in your insurance documents. Note that nearly all types of insurance (commercial or not) can have deductibles.

How Do Insurance Deductibles Work?

Here are some examples of insurance deductibles in action: 

• The insurance you have: Your business has fleet insurance for your delivery trucks. Your fleet insurance has a total coverage limit of $1 million and a deductible amount of 10% per claim.   
• The scenario: One of your vehicles gets into a collision resulting in vehicular damage and one person is injured. The total cost of the truck accident is $140,000. 
• The outcome: You pay 10% of the $140,000 ($14,000) while your fleet insurance will cover the remaining cost. 

There are different types of deductibles that work a bit differently from each other. However, the underlying mechanics remain the same: there’s a set amount you cover and the rest will be paid by your insurance up to the coverage limit of your policy. 

What Is The Purpose of Deductibles in Commercial Insurance?

Since we just covered the topic of “how do insurance deductibles work?” let’s now go over why they’re there in the first place. These are the advantages of having deductibles in commercial insurance: 

Deductibles Can Lower the Premium

Having a high deductible generally means that the insurance premium is low. Conversely, a low deductible equates to a higher premium. Therefore, businesses have a choice of which one they would prefer. This also makes commercial insurance more accessible for businesses of all sizes.

Deductibles Offer Insurance Customization

Commercial insurance is only beneficial when it is able to adapt to the needs of the business. Some businesses may want to be completely cost-free in the face of claims and can afford a higher premium with zero percent deductibles. That can be set up for them. 

Meanwhile, other businesses may want to have a lower premium and savings on the side that can be used for minor incidents. This can be set up as well. There’s fitting customization for every type of business. 

Aside from the amount or percent of deductibles, there are also different kinds of deductibles that can be used, as we will discuss in a later section. 

The Choice Between High Premiums or High Deductibles

As a business owner, you have an assortment of choices when it comes to commercial insurance. Different companies can offer varying deductible types and amounts. Probably one of the major forks in the road is deciding between a high premium or a high deductible. You may also consider a much higher premium with a zero percent deductible. 

When faced with decisions like this, it is best to consult an unbiased independent insurance brokerage firm like Contractors Insurance. Our experts will be able to give you insights on what amount or type of deductible your business will best benefit from. 

Main Types of Insurance Deductibles

1. Flat Deductibles

Having a flat deductible in your insurance plan means that you will cover a specific amount per claim. So for example, if your flat deductible is $2,000 and you need to file an insurance claim, you would first pay $2,000 out of your own pocket. Then, the insurance company takes over the remainder of the cost for that claim. 

2. Percent Deductibles

Percent deductibles work similarly to flat deductibles except that a percentage is stated instead of a fixed amount. This is the type of deductible we used in our earlier example in the section, “How Do Insurance Deductibles Work?”As a refresher, the percent deductible we used was 10% and therefore, 10% of the total cost of the claim was covered by the business before insurance took over the rest. 

3. Aggregate Deductible

Though the aggregate deductible is uncommon, it can be beneficial for some businesses. Instead of having a percent or amount deductible for each and every claim, you will have a set amount (e.g. $10,000) that you must pay for covered claims. It doesn’t matter if this amount is met within one or more claims. 

Once the $10,000 aggregate deductible is met, the insurance company will take over completely and you won’t have any more deductibles for any subsequent claims that same year. 

4. Waiting Periods

This kind of deductible is usually used for business interruption coverage that is typically nestled under commercial property insurance. The waiting period deductible states a set amount of time (e.g. three days) before the business interruption coverage takes effect to reimburse lost income. 

So if a business has a waiting period deductible of three days and is down for five days due to property damage, it means that only the lost income of two days will be reimbursed. 

Get A Customized Insurance Plan That Your Business Can Count On

That wraps up our guide on “how do insurance deductibles work?”. Now that you have a firm grasp of the concept of deductibles, you can take the next step towards having a customized insurance plan that works for you.

Contractors Insurance is an award-winning insurance brokerage firm situated in Ontario, Canada. Our customized commercial insurance plans don’t just give you the most fitting deductibles, they also target the unique risks faced by your business. With our help, your business can get exemplary coverage for the best rates.

Apart from setting up your insurance, our dedicated team is also here to assist you with other insurance concerns such as negotiating premiums, following up on claims, and so on. 

Ready for hassle-free, customized commercial insurance? Contact us today!