Excess or deductible in Insurance. Is it different in Health, Motor and Fire Insurance?

In nearly all forms of insurance line of business we hear the terms of excess and deductible very often. These are the two important terms which policyholder should know to avoid any surprises at the time of the claim. Excess and deductible both in layman terms means the amount one needs to spend from his own pocket before the insurer settles the claim from its accounts. Thus, in case any insured event occurs which results in a claim liability for the insurer the insured or policyholder need to bear this expense called as excess or deductible and that too prior to any claim payment by the insurer.

This is a condition precedent to the insurance contract which basically means that until the excess payment is made by the insured there is no claim liability on the part of the insurer. It will be no different to say that for this portion of risk which is mentioned in the policy as excess or deductible the insured bears its own risk or self-insured for this amount. Any claim amount below the excess or deductible amount will be fully borne by the insured and the insurer will not step in to make a good for any damage or loss occurred.

It is a good thing to impose an excess or deductible on the part of the insurer for a few reasons. First, it cut shorts on smaller claims which are of low-ticket size. In absence of any deductible or excess these claims will be in abundance and will lead to high claim administration costs for the insurer.

Another advantage is the implementation of deductible or excess reduces moral hazard to a great extent. If the insured is knowing that in event of each and every claim, he need to spend something out of his pocket, a natural tendency of cautiousness come on his part to safeguard the insured asset.

Excess and deductible are used interchangeably in the insurance parlance and we have also done the same till now in our article but there is a minor difference between the two. A deductible reduces the maximum pay out in case of a claim but the excess doesn’t. We will understand the same by help of an example where in the standard fire and special policy for everything else being same how the pay-out varies by application of excess in the first and deductible in the other:

Situation 1: A fire policy with sum insured of 500k and excess of 5k. If the loss is 250k the insurer will pay out 245k and if the loss is 550k the insurer will pay 500k which is the full sum insured under the policy.

Situation 2: Same fire policy with sum insured of 500k and deductible of 5k. If the loss is 250k the insurer will pay out 245k and if the loss is 550k the insurer will pay 495k which is the deductible less full sum insured under the policy.

As we know now the minor difference between excess and deductible which arises in case of maximum claim pay-out, we also know that why imposing any of the two is good to the insurer for claim control. Another point to note is whether an excess or deductible is applicable on your policy it will be very clearly stated in your policy wording. Below we discuss how an excess or deductible is applied on different policies of motor health and fire.

Motor insurance: Motor insurance policy own damage section has a compulsory deductible mentioned in all India motor tariff which is Rs 50 for two wheelers, Rs 500 or 1k for private cars depending upon cubic capacity, and ranging from 5k to 2k for commercial vehicles. There is also a provision of opting for a voluntary deductible of Rs 2.5k to 15k which provides a premium discount of 750 to 2.5k on own damage premium.

Health insurance: Health insurance may have the concept of excess, deductible and co-payment.

Fire insurance: There may be an excess or a deductible. It may be in the form of a specified percentage of claim amount or a specified percentage of sum insured subject to a minimum and maximum amount. The minimum and maximum amount may vary with the sum insured amount for each location.

In consequential loss insurance there is concept of time excess which is the number of days beyond which if any business interruption persists the claim will be honoured under the policy. Any claim where the business restores to its state where it was before the insured peril strikes. Within the time excess specified in the policy the claim will not be honoured by the insurer. Travel insurance also has the concept of time excess applicable over few sections.

Similar concept of excess, deductible and time excess will be seen across all forms and sections of property insurance policies like engineering insurance, burglary, Money, fidelity guarantee, home appliances etc. All liability insurance policies like Commercial general liability, errors and omissions, directors and officers, employment practices etc. will surely have an excess or deductible which one needs to look out while purchasing such insurance.

In some policies like personal accident there is no concept of excess or deductible. In some other lines of businesses also there may be a no excess policy but these will definitely cost a higher premium.

 

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