Let’s not kid ourselves: The insurance claim process is stressful. And the fact that you’re probably only going through it because something bad has happened probably makes it worse! Read on to learn more about sublimits and deductibles in insurance policies and how to make sure you’re protected to the fullest extent.

What Is a Sublimit in an Insurance Policy?

A sublimit in an insurance policy is the maximum amount the policy covers for a specific type of loss covered under the policy’s overall limit. It’s essentially a limit within a limit.

For example, let’s say your homeowner’s insurance has a policy with a sublimit of $2,000 for computer equipment. If your fancy gaming PC costs $3,000, the policy only covers up to a maximum of $2,000 due to the sublimit on computer equipment.

What’s the Difference Between a Sublimit and a Deductible?

A deductible is the amount the policyholder must pay before the insurance policy kicks in to cover the remainder of the loss (up to the policy’s sublimit on that particular kind of loss). In our computer example above, for a policy with a $2,000 sublimit on gaming equipment, you might also have a $250 deductible. If your $3,000 gaming computer is stolen, you would pay your $250 deductible, and the insurance company would cover the remaining $1,750 (up to the $2,000 sublimit).

How Can Sublimits Impact Your Deductible?

Sublimits can greatly impact the amount of both the deductible you owe and the amount to be paid out of the insurance policy. If the sublimit is applied to the total loss before the deductible, it’s possible that the policyholder’s loss is not covered. Most adjusters, however, apply the sublimit to the loss after the deductible is applied.

Let’s continue with our example of a $3,000 gaming computer with a $250 deductible and a $2,000 sublimit. In most cases, the amount due to the policyholder is calculated by applying the deductible to the loss before considering the sublimit. This is what we did above; in this case, we would calculate the loss at $3,000 minus the $250 deductible, making a loss of $2,750. To quote a 2009 discussion from the Big “I” Virtual University, “the deductible applies to the insured’s loss, not the special limit.” 1

Since the sublimit is $2,000, in this case, the policyholder would receive the full sublimit. This is what many adjusters call “absorbing the deductible”; it’s what happens when the sublimit is less than the total loss minus the deductible.2 If, however, the sublimit is applied to the loss amount before the deductible, the policy pays out less money. For our computer, the $2,000 sublimit is now applied directly to the $3,000 loss; in this equation, the loss is now calculated at $1,000. The policyholder must then pay the deductible of $250; and now the policyholder is only owed $750.

If this seems a little strange, we’d agree; we wrote about a similarly counterintuitive case in the past.

You can see how important it is to know both the existence of any sublimits in your policy and when your insurance adjuster is applying the sublimit to your deductible. The FC&S Expert Coverage Interpretation warns that it is important to read the policy form carefully to determine how the deductible applies to sublimits.

Common Issues Applying Sublimits to Deductibles

Another problem arises in determining from what amount the deductible should be subtracted. The following question was submitted to the FC&S editors from a subscriber who wasn’t sure where the deductible fit, if at all:

‘Our insured had a leaky shower stall — the liner under the shower pan was installed incorrectly. The cost to remediate the resulting mold damage was $14,000, and water caused $1,700 in damage.

Under the HO 00 03 10 00, with mold endorsement HO 04 05 12 02, I believe the mold coverage would extend up to $10,000 and absorb the deductible in the uninsured portion of the mold loss. Would the $1,700 be covered and would the $500 deductible apply to that part of the loss?’

Traditionally, adjusters apply the deductible to the actual amount of loss, which worked to the insured’s advantage. In this instance, the total amount of the loss is $15,700. Using the method we applied in our first computer example, $500 would be subtracted from the total amount of $15,700. Then the $10,000 limit for the mold damage would apply, and the water damage would be covered in full.

However, the HO 00 03 10 00 contains a provision that instead calculates loss by applying the sublimit before the deductible. The form says, ‘Subject to the policy limits that apply, we will pay only that part of the total of all loss payable under Section I that exceeds the deductible amount shown in the declarations.’ Thus, the deductible would come off the amount actually payable, not the total amount of loss.

This can get even more complicated when there are questions as to what actually caused the damage. We have another post describing the aftermath of Hurricane Sandy, when the courts debated whether wind or flood actually caused much of the damage of the storm surges. In this case, the court ruled that “storm surge caused by Superstorm Sandy should not trigger flood sublimits in PSEG’s insurance policies, as the term ‘storm surge’ was included in the definition of a ‘named windstorm’ in the policies.”

The Bottom Line

Always remember that sublimits on loss should be measured on the total amount of loss. Otherwise, they can be used in a measure that “absorbs” part or all of the deductible, resulting in less money paid to you out of your policy.

1 “It’s clear in the policy that the deductible is applied to the insured’s LOSS, not the sublimit (see faculty comments below). I don’t recall ever seeing any standard HO or auto policy with sublimits where the sublimit is applied to the loss before the deductible.

Consider an HO policy with a $200 sublimit for money and a $250 deductible. Let’s say the insured keeps $500 in petty cash on hand, and it’s destroyed in a fire. The proper way to adjust this loss is to apply the deductible to the loss so that, in the absence of a sublimit, the insured loss is $250 ($500 loss minus $250 deductible). THEN the sublimit is applied so that the insured receives the full $200 sublimit and must pay the $50 uninsured portion out of pocket.

Following the logic of the adjuster and his supervisor in your auto loss, in the HO loss cited above, the insured receives nothing. The adjuster would claim that the $200 sublimit is applied to the $500 loss to get an insured loss of $200…applying the $250 deductible at that stage results in a payment of nothing to the insured. Since $250 is the minimum deductible under most HO programs, it makes no sense at all to have a sublimit in the policy of $200, knowing that the insured can never collect a penny on loss to that type of property. It’s just common sense.

The same approach is commonly applied to unscheduled jewelry losses under an HO policy. Let’s say a ring is stolen valued at $2,500. The sublimit is $1,500 and the deductible is $250. The insured would receive $1,500…a $2,500 loss minus the $250 deductible is $2,250, so applying the sublimit gives the insured a $1,500 recovery.

…

The policy clearly and unambiguously states that the deductible applies to the insured’s loss, not the special limit. I’ve NEVER seen a homeowners or auto policy of any carrier where the deductible is applied to a special sublimit. This is basic licensing school stuff…do you by any chance live in a state where there are no educational requirements for adjuster licensing or CE? Let us know if the company continues to take this position.”

https://www.independentagent.com/vu

2 I have previously written about the concept of the deductible being absorbed because the total loss is greater than the policy limit in, When Calculating Insurance Payments, Take The Deductible From The Repair Value And Not The Policy Limits, and Subtract Deductibles From Repair Or Replacement Values—Not From Policy Limits.

Further Resources on Insurance Coverage Law

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