De-mystifying insurance jargon… excesses, deductibles, and franchises

Written by Alison Waters - Commercial Placement Manager.

Whether you’re employed to handle your company’s insurances or are simply reviewing your own home or motor insurance, you’ll probably have heard the term “excess”.”

You might also have heard the word “deductible” but you’re not really sure what the difference is. And what is a “franchise” and how does that work?

Let’s start with understanding what each of these terms means and look at how they might affect an insurance claim.

Excess – this is the amount of money or contribution that you’ll will need to pay in the event of a claim. Excesses are most commonly applied to losses where there is damage to property, but they’re rarely applied to losses for bodily injury.

Excesses tend to be quite low, and a standard commercial package policy might contain an excess of £250 or potentially £500. Some perils attract a higher excess due to the potential for larger claims – for example, subsidence – where the standard excess is often £1,000 or £2,500.

In terms of how this works in practice, if you make a claim for £2,000 and you have a £500 excess, then quite simply the settlement you receive from your insurance company will be £2,000 less the £500 excess, resulting in a figure of £1,500.

Deductible – a deductible works in the same way as an excess, but this tends to be the terminology used for larger amounts, usually upwards of £10,000, or a percentage of every claim. Often, larger companies don’t want to make claims for small losses, so they’ll fund these themselves. Usually, this can result in a saving as insurers will reduce their rating on the basis that they won’t have to fund these small claims, reducing their own handling costs too. 

The calculation is the same as it would be for applying an excess; a claim for £50,000 with a £10,000 deductible in place will result in a loss settlement of £40,000.

Franchise – a franchise works differently to an excess, as once the franchise level is exceeded, the claim is settled in full. 

For example, if a policy contains a franchise of £1,000 and the claim amount is £800, then nothing will be paid. If the claim is £1,500, then the full £1,500 will be paid without any deduction.

Monetary franchises are less common these days, but time franchises are often found in business interruption policies. For example, insurers may apply a time franchise of 24 hours against the denial of access extension. If the interruption lasts for less than 24 hours then no claim will be paid, but once the 24-hour franchise period is exceeded, then the loss of income will be dealt with in full from the moment the interruption occurred.If the interruption lasts for less than 24 hours then no claim will be paid, but once the 24-hour franchise period is exceeded, then the loss of income will be dealt with in full, from the moment the interruption occurred.

What is the right level of “excess” and how can you decide what will work for you?

Above the ‘standard’ policy excess, it is entirely your decision as to what level of excess you’re comfortable taking, and it’s worth weighing up the premium saving versus your loss history to decide whether the saving is going to be beneficial.

For example, take a business that pays a premium of £50,000 and is considering a £5,000 excess. That business has had ten claims in the past year which has resulted in a total amount paid by insurers of £25,000.  

Their insurers will only allow a saving of five per cent from the premium for taking the increased excess, which equates to £2,500. So, taking a £5,000 excess is unlikely to be cost-effective as the business will need to fund the balance of the costs themselves, far outweighing the savings.

If, on the other hand, there has only been one loss at £1,500, then this option will offer a small saving overall.

As with any decision such as this, being guided by your insurance broker and assessing the costs and benefits is key. At Howden, our experience in working with commercial and corporate customers means we are perfectly placed to advise you of the best option for your business based on your priorities and needs.