Insurance Deductible in Relation to Policy Premium and Claims


This article discusses an insurance policy deductible as it relates to a claim involving your insured automobile.


What is an insurance policy deductible


A deductible is an option which may be selected by an insured if their automobile policy includes physical damage coverage. If the insured has a physical damage loss which is covered by the policy, the deductible represents an amount of money the insured agrees to pay to repair damages to their auto before the insurance company has any liability for additional damage. Many insurance companies offer several deductible options. For example, an insured may choose a $500 physical damage deductible. This means that in a covered loss, the insured will pay the first $500 to repair damages to their insured auto and only then will the insurance company consider additional payment for any damage exceeding $500. Deductibles do not apply to liability or medical coverage. Some people refer to deductibles as self-insurance.


Why would an insured choose a deductible?


By selecting a deductible, an insured accepts responsibility for some of the cost of repairing damage in a covered claim, up to the amount of the deductible. In return, the insurance company charges a lower premium for the coverage since they are not responsible for the entire loss amount in a covered claim. The higher the deductible selected by the insured, the lower the cost of insurance (premium).


The cost of insurance is also reduced because the administrative expenses associated with processing a claim may be avoided. If the loss (and claim) is less than the policy deductible an insured may personally pay to repair the damages and not involve the insurance company. In this instance the deductible eliminates both the amount the company would have paid for repairs and the administrative costs, thus allowing for a lower premium.


For example, if an insured loss is less than the deductible, some of the administrative costs that may be avoided by the insurance company include:


  • The labor cost for the carrier to take the claim report and set up a file.


  • The cost to have an inspector examine the vehicle and write up an estimate.


  • The cost to prepare and mail paperwork necessary to resolve the claim.


  • The cost to comply with state regulations on claims handling.


  • The cost for the adjuster to collect the facts of loss, review documentation, determine liability and damages.


  • The cost to issue and mail payments.


  • The administrative cost to manage payments and the required financial documentation.

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