By Ina Iyer, Director at Norton Rose Fulbright South Africa Inc, with contributions from Gareth Baines at PARTNER RISK.
The Purpose and Role of Deductibles
Deductibles serve several important purposes in commercial insurance contracts. Per occurrence deductibles, often known as each and every deductibles, help reduce the volume of lower-value claims. For risks that display high-frequency-low-severity behaviour, these deductibles reduce the administrative burden of managing small claims that are often not worth the effort for either party.
Some insured clients prefer to limit their exposure to these retained losses. This is where an aggregate deductible may be introduced. An aggregate deductible caps the total self-insured losses within a policy period. These arrangements may include an inner excess that captures the smallest portion of a claim. The insurer then settles the portion above the inner excess and the per occurrence deductible. Once these retained amounts accumulate to the aggregate deductible limit, the policy responds to the next claim above the inner excess or a separate deductible known as a residual deductible.
Although these structures appear complex, they are familiar to brokers and assist with predictable exposure management and structured risk retention.
Deductibles also influence pricing. Higher deductibles can indicate a client’s financial strength and confidence in their risk management performance. In some cases, underwriters use higher deductibles as a temporary measure where a risk improvement requirement remains outstanding. These may be reduced once improvements are completed. Underwriters should, however, consider the practicality of this approach, since some improvements may require significant capital expenditure and may not be completed during the policy period. A punitive deductible may also have limited relevance in the event of a major loss.
Premium discounts do not always move in line with deductible increases. Pricing curves reflect loss behaviour and the nature of the risk. High-frequency-low-severity risks behave differently from low-frequency-high-severity risks, and premium savings may not be as large as expected despite significantly higher deductibles.
Understanding Deductibles in Commercial Insurance Contracts
Deductibles (also known as excesses, or first amounts payable) are a common feature of insurance contracts. They require the policyholder to bear the first portion of the loss and therefore limit the amount that a policyholder can recover from its insurer. Multiple deductibles can decrease the indemnity payment even further.
Where a single event triggers multiple sections of a commercial insurance contract, deductibles are applied according to what the insurance contract says. Typically, each section carries its own deductible and those deductibles apply separately. However, if the insurance contract contains a coordination clause – such as “one event, one deductible” or “the highest applicable deductible applies” – that clause will govern. Where the insurance contract is unclear, this must be resolved using contractual interpretation principles.
The Typical Market Approach
Commercial insurance contracts are usually multiperil products made up of different sections – property damage, business interruption, liability, electronic equipment, and so on – each with their own covered risks, sum insured, provisions and deductibles.
The ordinary market approach is to treat a loss under each section as attracting the deductible specified for that section. In practice, that means a fire which damages buildings and contents will attract property deductibles under the property section. Any resulting loss of gross profit will attract a deductible under the business interruption section, and any third-party claims would engage the liability section’s deductible separately. This per-section approach reflects the structure and pricing of the insurance contract, where premiums and deductibles are calibrated to the risk involved in each section of cover.
Where the Insurance Contract is Silent
Where there is no express clause limiting the deductibles, each triggered section’s deductible will apply separately. A South African court is unlikely to collapse several deductibles into a single one across different sections just because the losses have an event in common, unless that is what the insurance contract provides for.
Where the Insurance Contract Speaks Expressly
If the insurance contract expressly addresses cross-section deductibles for an event or occurrence from a single cause, that provision governs. Common formulations include: a single deductible across all affected sections, the highest single deductible applying across all responding sections, the application of each section’s deductible in the ordinary way, or the allocation of a maximum amount to be paid by the policyholder for all occurrences during the period of insurance in the form of an aggregate deductible.
Drafting gaps and ambiguous language can produce friction and lead to disputes. There are also often disputes about how many losses, events or occurrences have occurred, and how many deductibles apply in that context.
South African courts use various interpretive tools to assist in ascertaining the intention of the insurance contract when an insurer and policyholder disagree on the meaning. South African courts interpret insurance contracts objectively, giving the words their ordinary meaning in the context of the insurance contract as a whole and its commercial purpose in what is referred to as a ‘unitary exercise’ looking at the words, context and purpose of the insurance contract. A commercially sensible result will be preferred to an unbusinesslike one. An insurance contract is a contract of indemnity, and it must be construed reasonably and fairly to that end. As a last resort, genuine ambiguities must be resolved in favour of the policyholder.
In the deductible context, this can favour a single deductible if the text reasonably bears that meaning and the alternative would create an unexpected or unbusinesslike duplication. Insurers therefore benefit from explicit deductible, and any related coordination, clauses.
Fairness and transparency expectations embedded in policyholder protection rules which apply to natural persons and smaller corporate entities reinforce clear, prominent disclosure of deductible structures, with the result that unclear layering of multiple deductibles for one event risks scrutiny.
Practical Implications for Claims, Drafters and Brokers
In the absence of express coordination, expect per-section deductibles. Where the insurance contract consolidates deductibles across sections, that mechanism will be applied according to its terms, read sensibly, in context and with the purpose of the insurance contract in mind. And where the text is unclear, interpretive principles will push toward a commercially sensible outcome.
Claims professionals handling claims which trigger multiple sections should in the first instance identify the sections which respond to the claim and then quantify the losses per section. They should then apply the deductible specified for each section unless a coordination clause says otherwise, and check for any aggregate deductibles or other deductible-related provisions which might affect the outcome of the claim.
For drafters and underwriters, clarity is crucial. If the intention is ‘one occurrence, one deductible’, say so and define ‘occurrence’ and how that interplays with ‘causes’, ‘events’, ‘losses’ and even ‘hours clauses’ if those terms and provisions are used as well. If the intention is to apply the highest single deductible across affected sections, make it plain. If each section’s deductible must apply, make that explicit. Signposting any coordination rules reduces disputes and promotes fair, predictable outcomes.
Brokers have an important role to play in ensuring that the deductible architecture aligns with their client’s expectations when placing the cover, and that it is correctly implemented at claims stage.