How does a percentage deductible function?

A percentage deductible functions by applying a predetermined percentage of the total insured value or the policy limit to the loss amount. This means that for a claims payout, the deductible is directly proportional to the value of the insured property, rather than being a fixed dollar amount or fee.

For instance, if a policy has a percentage deductible set at 5% and the value of the property is $100,000, then the deductible for any claim would be $5,000. This approach can help to align deductible amounts with the actual value of the property, ensuring that policyholders have a stake in smaller claims relative to their overall investment.

This method contrasts with other types of deductibles, such as a flat rate or a franchise deductible, which operate differently. A flat deductible requires the insured to pay a specific dollar amount before the insurance coverage kicks in, regardless of the property's value. Meanwhile, a franchise deductible may cover claims only if they exceed a certain point, thereafter covering the loss up to a limit without requiring additional payment on smaller losses. Understanding how percentage deductibles work is essential for adjusting claims accurately, as they impact the final reimbursement amount and clarify the policyholder's financial responsibility during a loss event.