A business insurance deductible is the amount of money that a policyholder and insurance carrier agree upon will be paid by the policyholder in the event of a claimable loss. This amount is paid first by the policyholder before anything is paid out under the policy.
How a Business Insurance Deductible Works
How a business insurance deductible works is that when a policy is purchased, the policyholder and the carrier come to an agreement on the deductible amount. This amount will influence the policy and the policyholder’s insurance experience in two ways.
1. Insurance Deductible and Insurance Premiums
Generally, one of the ways to save money on business insurance is to raise your deductible amount. The rule of thumb is the higher the deductible, the more this will reduce the premium a policyholder has to pay. The reason for this is, as you increase the cost of your deductible, you are agreeing to take on more risk and will likely file fewer small claims because of the out-of-pocket expense to the policyholder.
2. Insurance Deductible and Insurance Claims
While having a higher deductible will likely help you save money on your premium, it will still cost you money if you have to file a claim. When you file a claim, the insurer will investigate the loss and determine if coverage applies. If coverage applies, your deductible will then come into play. If the loss is less than the cost of the deductible, you handle the claim out of pocket. If the loss is greater than the deductible, the carrier will issue payment minus the deductible.
Let’s say that to save money, you select a deductible for your business owner’s policy of $2,000. Now, there is a wind storm that causes some damage to your roof. You file a claim, but the damage is minor and the total cost is $1,850. In this scenario, you would handle the claim entirely on your own.
But given the same example, after appraising the damage, the cost to repair the roof is $10,000. In that case, the carrier would issue a payment of $8,000 ($10,000 minus your $2,000 deductible).
It is important to note in the above examples, the deductible will apply each time a policyholder has to file a claim. For business insurance, there is no scenario where the deductible has been “met” and, afterward, the policyholder no longer has out-of-pocket expenses.
Types of Business Insurance Deductibles
- Flat deductible is the most common type of small business insurance deductible. It is where the policyholder pays a single agreed-upon amount.
- Waiting period deductible is a less common type. This is used for business income loss claims and refers to a period a business must be shut down before it can qualify for lost business income benefits.
- Percentage deductible is also less common for small business insurance deductibles. While you will often encounter this for a homeowner’s policy, it is unlikely you’ll run into it for business insurance. If you do, then it is likely for a commercial property policy. It is one where you agree to pay a certain percentage of the loss or the property value, usually 3% to 5%.
Types of Insurance Policies With an Insurance Deductible
Insurance deductibles are found in all types of insurance: health, personal auto, homeowners, and small business. But while each line of insurance uses the term deductible, it is applied differently.
For small business insurance, the following types of insurance carry a deductible:
- Commercial property
- Professional liability
- Inland marine
- Cyber liability
- Commercial auto
- Business owner’s policy (BOP)
Far less common for carrying a deductible is general liability insurance. However, some insurers may offer it with one.
How To Determine Your Business Insurance Deductible Amount
When determining the deductible, it is important to consider the risks of your business and the amount you can afford to pay. The deductible is determined by both the policyholder and the carrier. Typically, the carrier will provide deductible amounts as different options that the policyholder can then choose from.
The business insurance deductible is an important part of a business insurance policy because it impacts the premium, limits, and out-of-pocket expense for a business. So, ensure you are giving full thought when selecting the amount, and keep in mind that the deductible is often considered part of the limits of the policy.
Frequently Asked Questions (FAQs)
The business insurance deductible is the amount a policyholder must pay out of pocket in the event of a claimable loss. This amount must first be paid by the policyholder before the carrier would pay out on the loss.
Generally, yes, business insurance is tax deductible. As a business expense, insurance is something that can usually be written off. However, it is important to double-check with local, state, and federal tax guidelines.
Yes, a deductible is applicable regardless of who is ultimately responsible for the loss. Depending on the nature of the loss, the insurer may try to recover your expenses during the subrogation process, but it is safe to always assume that when you file a claim, you will be responsible for the deductible.
Bottom Line
While it is easy to not give much thought to your business insurance deductible, it can cost you when you have a claim. A commercial insurance deductible is the amount a policyholder owes when a claim is filed. If your business has several claims in one year, the deductible can end up costing a business.
Simply Business is an online digital broker that can generate quotes from multiple top-rated providers. It also gives you the ability to tailor quotes in real time, including adjusting the deductible. If you are looking to save money on business insurance, check out Simply Business today to compare quotes.
