Deductible – Per Occurrence or Per Claim?

One of the most well known insurance concepts is the deductible.  They’re easy to understand.  Insurance pays above and beyond the deductible.  Anything that would be otherwise insured that falls below the deductible is our responsibility to pay.  The deductible is the most common way to (attempt to) save money on an insurance policy.  Policy seems too expensive?  Raise the deductible!  Yes, deductibles seem pretty easy to understand, but did you know that there are a couple types of deductibles, and one of them can be devastating in the event of a claim, and a total surprise?  I’ll explain….

Yes, there are two types of deductibles: the “Per Occurrence” deductible and the “Per Claim” deductible.

The Per Occurrence is the type that you think they all are.  It’s the kind that appears on most home, property, and auto policies.   It’s easy to understand.  What is your deductible?  500?  That’s the max you’ll pay when something bad happens.

The other is the Per Claim deductible and it applies only to liability policies, like General Liability or Professional Liability.  This one is a little more complex.  What it means is that you have a separate deductible that gets applied for each party that files a claim against you in a single covered occurrence.

This is how it works:  Let’s say ABC Construction has a General Liability policy with a $2500 deductible.  ABC Construction is installing the plumbing system in a condo building with 12 units.  ABC neglects to properly seal the upstairs master bathroom shower drain in each of the units.  Six months after completing the job, each of the showers begin to leak water into the first floor ceiling below causing about $5000 of damage each.  All 12 condo unit owners file a claim on their condo owners policies for the water damage and after paying for the damage, each of the 12 insurance companies files a subrogation claim against ABC Construction.

If ABC has a Per Occurrence deductible:  ABC’s insurance company will pay $60,000 for the damage minus $2500, which ABC will have to pay.

If ABC has a Per Claim deductible: ABC’s insurance company will pay $60,000 for the damage minus $30,000, which ABC will have to pay.

What?!?!?  $30,000?!?!?  Where does this come from?  There were 12 different claims from 12 different insurance companies for that one occurrence.  Since ABC’s deductible is Per Claim, ABC has to pay $2,500 per claim.

The Per Claim deductible shows up frequently in general liability policies for contractors.  Insurance agents – knowing or unknowing – frequently sell policies with Per Claim deductibles because they’re cheaper than those with Per Occurrence deductibles.   In a competitive bid against for the lowest price, a Per Claim deductible helps.  When a prospective insurance buyer look at two identical polices and the only difference is the price and the tiny wording “Per Claim” or “Per Occurrence” next to the deductible amount, without a proper explanation, which do you think the prospective insurance buyer will take?

We all want to save money, and accepting a higher level of risk through the different deductible options is a fine way to to so.  But unknowingly accepting a higher level of risk, only to find out at claim time that you’ve done so is no way to operate a business.  So I beg: avoid insurance surprises and know what type of deductible you have!