Back to Basics, Part Four: What is a Deductible?
Now that you speak the language of insurance, you know that a deductible is the amount of money you are expected to pay in the event of a claim. If you were thinking “I thought there was more to it than that…” good job! You are correct – it is more complicated than that.
A deductible is the amount of money you are expected to pay if you make a claim on your insurance policy, but, while basically all policies have deductibles, not all coverages are subject to a deductible, and not all deductibles work the same.
Coverages without Deductibles
On the majority of home, condo, tenant, auto, and boat policies, there is no deductible applied to liability coverages. Whether it is third-party liability claim on your auto insurance policy when you are found at-fault for an accident, or your personal liability coverage on your home insurance policy if someone is injured on your premises, you do not have to pay a deductible for liability claims. For commercial policies, however, there is usually a deductible for liability coverage.
If you are found not at-fault for an automobile accident, you will not have to pay a deductible to have your vehicle repaired.
Special items specifically added to personal residential policies (e.g. jewelry, art, collections) may not be subject to deductibles either, depending on how your policy is set up. The cost may be more expensive, but many insurance companies offer the option to add these items to the policy with a lower deductible or no deductible at all.
Identity theft coverage, a popular addition to many home, condo, and tenant insurance policies, usually does not have a deductible.
How Do Deductibles Work?
Most policies have one main deductible that applies to everything except the things it doesn’t. Water coverages, including flood, tend to have higher deductibles. It is common to see a policy with a $1,000 deductible for fire, theft, and windstorm damage, have a water damage deductible that is twice that much (or more!). This is due to of the increasing frequency and severity of water damage claims – by increasing water damage deductibles, insurance companies can reduce the amount they have to pay for this type of claim.
Because you are helping to limit the amount insurance companies have to pay in the event of a claim, increasing your deductible saves you money. The amount of savings depends on a number of factors, but can be substantial on some policies.
In B.C., earthquake deductibles are often the highest of a policy’s deductibles. Because the risk is so great – we have all heard that we are due for a “Big One,” and that when it hits it could be catastrophic – the deductible is higher. In addition to being higher, deductibles for earthquake damage are usually not flat amounts like deductible for other perils. While a policy’s fire deductible might be $1,000, earthquake deductibles come as percentages. On Vancouver Island, earthquake damage deductibles are usually 10%-15%. Of what, you ask? Of the insured value of the damaged property. So if you have a 10% earthquake deductible on a building covered for $850,000, your deductible for damage to that building is $85,000.
If you live in a condo building, the strata corporation might assess the unit owners part (or all) of their insurance policy’s deductible. There is coverage for this under most condo unit owner insurance policies (for more information on how that works, click here).
Occasionally, a deductible you pay for a claim will be reimbursed to you. If you make a claim for damage to your property, and a lawyer can prove the damage was caused by the negligence of a third party, they may be able to recover their costs. This process is called subrogation, and, when successful, can result in your deductible being reimbursed.
How Do I Know What Deductible is Right for Me?
The right deductible for you is one where you find a balance between saving enough premium each year, and having enough money to pay it, should you need to make a claim.
Increasing your deductible to save money can be a good option, as making smaller claims is usually not recommended (your premium increases when you make claims, and if you make a lot of them, sometimes restrictions are placed on your policy). However, remember to not increase the deductible so high that you would be unable to pay it if you were to make a claim!
Step one is knowing what your deductibles are, and finding out if there are other options. Start by reviewing your policy, and talking to your broker to get more information.