How Do Policy Limits and Deductibles Affect My Claim?

A typical property insurance policy limits the value of the particular property insured through deductibles and policy limits for claimed losses. The precise wording of these provisions differs widely. Consequently, it is important to carefully read any language in a policy concerning limits and deductibles.

The policy limit is the maximum amount of money that an insurer will pay when the insured pursues reimbursement.  It is not the amount that the insured automatically receives when the insured property is damaged.

In California, policies require an insurer to pay a different amount depending upon the type of loss.  In a total loss situation, where none of the property remains, the insurer pays the lesser of the fair market value of the property prior to damage, or the cost to replace it.

In a partial loss situation, where some of the property remains, the insurer pays the Actual Cash Value (“ACV”) and where the policy allows for it the Replacement Cost Value (“RCV”).  ACV is the estimated cost to repair or replace, minus a deduction for physical depreciation, and is paid before repairs.  RCV is the cost to make covered repairs and is made after repairs are made.

A deductible is the amount the insured must pay from their own pocket in the event of a covered loss. The insured must pay this amount before the insurance company will pay anything. Keep in mind that deductibles may or may not affect the limits of the available coverage. For example, some policies require the insured to pay for a portion of the coverage (e.g., the first $15,000 on a $100,000 policy) instead of any losses. However, it is more common for the insurer to assume liability in excess of the deductible. In these cases, where losses exceed policy limits the insurer is liable up to the full policy limit.