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Edited by: Kimberlee Leonard
 and Reviewed: Kimberlee Leonard

Guide to Commercial Property Insurance Deductibles

Author: | Aug 18, 2023

Editorial Note: We earn a commission from partner links on Go Sifter Advisor. Commissions do not affect our editors’ opinions or evaluations.

From destructive fires and severe storms to vandalism and theft, property damage is an unfortunate reality that can bring any business to its knees. Commercial property insurance deductibles play a crucial role in determining the financial responsibility of policyholders in the event of a covered loss. They represent the amount that policyholders must pay out of pocket before the insurance coverage kicks in. Understanding these deductibles is essential for businesses to manage their insurance costs and coverage effectively.

Statistics paint a compelling picture of the urgency for commercial property insurance. According to a recent study by the Insurance Information Institute, property damage is one of the leading causes of financial loss for businesses worldwide. Statistics reveal that the financial impact of commercial insurance losses in 2021 was a staggering $184.9 billion in the United States.

The severity of these losses becomes apparent when considering the nature of property damage incidents. Fires, for instance, according to the National Fire Protection Agency, are responsible for substantial damage, with over 1.3 million fires reported in commercial properties each year. This results in billions of dollars in property damage, lost inventory, and business interruptions.

But fires are just the tip of the iceberg. Other perils, such as natural disasters, burst pipes, or even acts of vandalism, can wreak havoc on your business premises. With an increasing number of extreme weather events in recent years, the risk of property damage has escalated significantly.

To mitigate the financial burden of property damage, businesses turn to commercial property insurance. This type of insurance provides coverage for physical structures, equipment, inventory, and other business assets, protecting you against a wide range of perils.

However, it’s crucial to grasp the concept of deductibles in commercial property insurance.

What Is a Commercial Property Insurance Deductible?

A commercial property insurance deductible is the amount you, as the policyholder, agree to pay out of pocket before your insurance coverage kicks in. For instance, if you have a $5,000 deductible and suffer $15,000 in property damage, you would be responsible for the initial $5,000. The insurance company, on the other hand, would cover the remaining $10,000.

The choice of your commercial property insurance deductible plays a pivotal role in determining your policy’s cost and coverage limits. It also influences the financial burden you may face in the event of a claim. Opting for a higher deductible typically results in lower insurance premiums, but it also means assuming a greater portion of the risk when damage occurs. Conversely, a lower deductible may increase your premiums but reduces your immediate out-of-pocket expenses in the event of a claim.

By striking the right balance, you can tailor your deductible to suit your business’s unique needs, financial capabilities, and risk tolerance. This requires careful consideration of factors such as your industry, location, property value, and historical data on property damage incidents.

What are the Common Deductibles in Commercial Property Insurance?

Commercial property insurance deductibles offer policyholders a range of options and the utmost flexibility:

  • Flat Deductibles – In commercial property insurance, insurers commonly encounter flat deductibles. They specify these deductibles as fixed dollar amounts for each loss. When a policyholder files a claim, the insurer subtracts this predetermined deductible from the insured amount. They then pay out the remaining sum based on the extent of the damage and the claim’s value.
    For instance, let’s assume you have commercial property insurance with a coverage amount of $500,000 and a flat deductible of $5,000. If your property suffers fire damage amounting to $75,000, the insurer will calculate the payment as ($75,000 – $5,000) = $70,000.
    It’s important to note that flat deductibles typically apply to individual incidents separately. So, if your property experiences a fire incident and another, such as a vehicle crashing into it, both within the policy period. The insurer will treat these as distinct events and adjust the deductible accordingly for each occurrence.
  • Percentage Deductible –Insurance companies commonly employ a percentage deductible for catastrophic incidents that result in significant losses, such as hurricanes or earthquakes. In this type of deductible, they calculate the amount to be paid as a percentage of either the insurance limit or the property’s value.
    For instance, let’s assume your commercial property has a policy coverage of $500,000. Further it sustains $125,000 worth of damage due to an earthquake. If you have agreed to a 15% deductible, you will be responsible for paying $500,000 x (15/100) = $75,000. In contrast, the insurer would cover the remaining amount, which is $125,000 – $75,000 = $50,000.
    Businesses typically tailor their insurance coverage to align with the specific risks they face. For example, those located along the Atlantic and Gulf coasts might opt for hurricane coverage.
  • Waiting Period – A waiting period, also known as a cooling period, is often incorporated into commercial insurance policies. This period must elapse before the policy becomes effective, particularly concerning the loss of business income resulting from damage. Insurance policies typically impose a 3-day waiting period, during which the loss of income is not covered. After this initial waiting period, the insurer begins considering and processing claims related to the incident.
  • Aggregate deductible – Under this deductible option, the policyholder pays a fixed amount out of pocket during the policy period. For example, if the aggregate deductible is $15,000 and the business suffers two losses of $2,500 and $8,000 each, the insurer will not pay any amount. However, if there is a third loss of $10,000, the insurer will pay ($2,500 + $8,000 + $10,000) – $15,000 = $5,500.
  • Franchise deductible – A franchise deductible sets a minimum threshold for a loss to qualify for insurance coverage. In other words, if the commercial property insurance policy has a franchise deductible of $7,500. As a result, any loss amounting to $7,000 or less would not be eligible for a claim. However, a loss of $7,500 or higher would meet the established limit, allowing for a full claim to be processed.

How Does a Commercial Property Insurance Deductible Work?

Here’s how a commercial property insurance deductible works in detail:

  • Deductible Amount: The policy documentation specifies the deductible amount, which is typically a fixed dollar amount. For example, if the policy has a deductible of $10,000, the policyholder must pay the first $10,000 of any covered loss or damage.
  • Deductible Application: When a covered loss occurs, the policyholder is responsible for paying the deductible amount directly to the insurer. Alternatively, they may also pay the deductible to the service provider handling the claim. The policyholder makes this payment before the insurer reimburses the remaining portion of the claim.
  • Deductible per Occurrence: The deductible is usually applied per occurrence or per claim. Multiple losses within the policy period are assessed individually to determine if each surpasses the deductible. If a loss falls within the deductible, the policyholder is responsible for paying that portion of the loss. Only losses exceeding the deductible are eligible for reimbursement by the insurer.
  • Aggregate Deductible: Commercial property insurance policies may sometimes have an aggregate deductible. With an aggregate deductible, the policyholder is responsible for paying the cumulative total of covered losses up to the deductible amount. Once the aggregate deductible is met, the insurer fully covers any subsequent losses.
  • Insurer Responsibilities – Once the deductible is satisfied, the insurance coverage comes into effect. The insurer then pays the remaining portion of the covered loss or damage up to the policy limits.
  • Benefits of Higher Deductibles: Policyholders can often choose higher deductible amounts to lower their insurance premiums. By assuming more financial responsibility upfront, policyholders can reduce the insurer’s risk exposure and potentially obtain more affordable premiums.

Who Determines Your Deductible Amount?

You and your insurance provider often collaborate to determine the deductible amount. In certain types of insurance, the insurer establishes a minimum deductible and offers you the choice of higher deductibles.

Opting for a higher deductible generally results in a lower overall premium. However, this also implies a higher out-of-pocket payment before insurance coverage takes effect.

For instance, let’s consider errors and omissions insurance. The minimum deductible might be set at $500. However, to reduce your costs, you may agree to select a deductible of $1,000, $2,000, $3,000, or even as high as $10,000. As you increase the deductible, you take on more personal risk but pay a reduced premium for your policy.

Can One Insurance Policy Have Multiple Deductible Types?

Yes, an insurance policy can have multiple types of deductibles for commercial property insurance. The specific details and terms of the policy will determine the permissibility of multiple deductible types.

Commercial property insurance safeguards buildings, equipment, inventory, and more from covered events like fire, theft, and natural disasters.

Depending on the insurance policy and the insured’s needs, insurers may apply different types of deductibles. These deductibles can be specific to various property types or tailored to address specific risks. For example, an insurance policy could have separate deductibles for building, equipment, and inventory damage.

Multiple deductible types allow for more tailored insurance coverage that aligns with the insured’s specific risk exposures and priorities. Review policy documents, and discuss with your provider to understand deductible types and their application to your commercial property insurance.

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