Insurance can give your small business peace of mind when things go wrong. But remember to factor in the insurance deductible in your policy if you want to avoid another unwanted surprise.

There are different types of deductibles for small business insurance – they are necessary – but how much your deductible is can vary depending on your coverage.

What Is a Business Insurance Deductible?

A deductible is your share of the cost for damage or loss when you file a claim with your insurance provider.

What is a deductible for small business insurance?

For example, suppose your commercial property incurs water damage, but the damage is limited. In that case, it might not make sense to file a claim if the value of the damage is less than the deductible.

A deductible can help keep your premium low. If you want a lower annual insurance premium, select a higher deductible. Remember that if you opt for a higher deductible to reduce your premium, you’ll need the cash to pay it when you make a claim.

Are There Different Types of Deductibles?

Just as there are different types of business insurance products, there are different types of deductibles. So, while aiming your insurance premium as low as possible makes sense, having a low deductible and paying a slightly higher premium may be worthwhile, depending on your coverage needs.

Deductibles vary based on the type of insurance. Here are a few common ones:

  • Standard deductibles are fixed-dollar amounts that apply to each claim filed. For example, a commercial property policy with a $2 million coverage limit may have a $1,000 deductible.
  • Percentage deductibles usually apply to residential homeowner policies and reflect a percentage of the home’s insured value, but they can also apply to commercial property insurance. For example, if your property is insured for $500,000 and the policy has a 2% deductible, your claim payment would be reduced by $10,000.
  • Split deductibles are different deductibles for different types of claims. For instance, a policy might split by having one deductible for commercial property damage claims and a separate deductible for third-party liability claims.
  • Waiting period deductibles apply to some types of insurance, such as business interruption insurance. In other words, after paying your deductible, there’s a brief waiting period before your insurance kicks in, meaning the policyholder is responsible for their expenses during that time.
  • Per occurrence deductibles are common in general liability insurance. It applies separately to each covered incident or insurable loss. For example, with general liability insurance, a deductible might apply to each separate claim for third-party bodily injury or third-party property damage.

A policy’s terms stipulate there’s no deductible if your claim is above a certain amount. That information is usually found on the declarations page of your policy.

What Business Insurance Policies Have Deductibles?

Most types of small business insurance have deductibles, including general liability insurance, commercial property insurance, commercial auto insurance, and professional liability insurance.

Know that insurance that covers property loss or damage won’t cover your liability should someone sue for the same incident. The deductibles for each type of coverage will be different or sometimes non-existent.

How Does a Business Insurance Deductible Work?

If the deductible is a set amount, it will be shaved off the top of a claim payment. For example, if you experience a fire that inflicts $10,000 of property damage, and your deductible is $500, your insurance provider would cut you a cheque for $9,500. 

If you want to reduce the deductible so your out-of-pocket costs are lower at the time of the claim, you need to be prepared to pay a higher annual premium.

Deductibles generally apply to property damage but not liability. So, for instance, if you lose inventory in a fire, your claim to recoup the value of that lost inventory is subject to a deductible. But if you’re sued by an employee injured in that fire, your liability insurance comes into play, and you may not have a deductible to pay.

How to Choose a Business Insurance Deductible

Choosing an insurance deductible for your small business should reflect the type of business you’re running and the risks you face. 

When choosing a business insurance policy deductible, stay focused on what you are prepared to pay out of pocket for any one loss. The deductible is your monetary responsibility, and aligning a deductible with your financial position as a business is the most recommended approach for balancing costs now and in the future. Doing so will ensure you are not caught off-guard by the size of your deductible when filing a claim

Another way to look at it is that every claim must be at least double the size of the deductible to justify submitting that loss.

Why Are Deductibles Necessary?

A deductible is in place to make sure insurance pays for substantial losses, not minor ones. It’s how insurance providers ensure policyholders share the cost of claims. Requiring policyholders to contribute a portion of the claim amount encourages responsible behaviour and discourages frivolous or small claims. 

There are other reasons why deductibles are necessary, including:

  • Deductibles mitigate the behavioural risk of moral hazards

Deductibles encourage policyholders to take precautions and only file claims with significant losses. They help ensure policyholders take active roles in safeguarding their properties and minimizing risks, thereby avoiding filing claims.

  • Deductibles cushion insurance providers against financial stress

Whether caused by a catastrophic event such as a wildfire or tornado or an accumulation of small losses, without a deductible, an insurer would be on the hook to cover the cost of every minor claim. That could place an insurance provider in a precarious financial position.

  • Deductibles keep insurance premiums affordable

Deductibles help insurers control their exposure to losses. By doing so, it allows them to offer more affordable premiums to policyholders.

Put Protecting Your Business and Assets First

As a small business owner, you need more than one type of insurance to cover your operations fully. Deductibles are just one of many things you must consider. 

No matter where you’re at when it comes to finding the right small business insurance, the Zensurance broker team can get the low-cost coverage your business needs and provide you with deductible options that make sense for you.

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About the Author: Jon Hogg

Jon Hogg is the Senior Team Lead, Renewals, at Zensurance.