Franchise deductible refers to a kind of deductible in which a minimum amount of loss must occur in order for insurance coverage to become active. Once the deductible is met, insurance covers the entire amount of the loss. If the amount of damages is less than the required deductible, the insured party is responsible for payment.

Franchise Deductible

"Franchise" is an insurance term that refers to the minimum financial responsibility of an insurance company. If covered under an insurance policy with a franchise deductible, the insured party is liable for damages less than the set franchise value, or franchise deductible. However, when the losses are greater than the franchise deductible, the insurance company provides full coverage, or the entire amount of the loss. A "franchise" exists when an insurer is not held liable for loss that doesn't exceed an agreed amount, but becomes liable for the entire sum of a loss that does exceed the predetermined amount.

The term "excess" defines the amount of a claim covered by the insurance company. Losses equal to the excess amount are not covered by the insurer. On the other hand, when losses are more than the limit, the insurance company becomes liable. An excess exists when the insured party agrees to be responsible for a set amount of loss, and the insurance company is only responsible for covering amounts over the agreed amount of loss. The terms "franchise" and "excess" are included in insurance policies to clearly define and reduce the monetary obligations of insurance companies.

Franchise Deductible vs. Ordinary Deductible

With an ordinary deductible, the amount of money stated in the policyholder's contract that must be paid before the insurance company contributes to the claim. In an ordinary deductible, the loss amount is subtracted from the deductible in order to determine payment. If that amount is less than the deductible, the insurance company will not cover any of the damages.

A franchise deductible differs from an ordinary deductible in regards to coverage protection. A claim must exceed a fixed dollar or percentage amount for the insurer to be responsible. When the loss is more than the franchise deductible, the insurer must pay the loss in full. This differs from an ordinary deductible, where even if the losses exceed the deductible, the policyholder must still pay the amount of the deductible before the insurer will contribute to claims of any size. Companies that have opted for insurance options with franchise deductibles are usually very large and typically involve commercial concerns.

Determining Deductibles

Insurance companies aim to avoid, or at least minimize, their exposure to risk. This applies even more than usual when these companies are insuring businesses in the retail sector, where goods are more frequently damaged than in other areas of business. Deductibles are determined by the insurance company assessing potential risks, the current state of the business market, and other industry factors. A deductible aims to save insurance companies money by freeing them from having to respond to minor losses, which in turn motivates insured parties to try to avoid losses. Once the insurance company has determined a specific dollar or percentage amount for the deductible, both parties must agree on the dollar number or percentage, which should be clearly defined in the insurance policy.

Risks that insurers face, and may consider in determining a deductible, include:

  • Property damage:
    • Fire.
    • Loss to personal property or building.
    • Theft of equipment or property.
    • Loss of a computer or intellectual data.
  • Business liability:
    • Accidents in the workplace.
    • Advertising slander.
    • Loss of business income.
  • Business product liability:
    • A defective or harmful product.
    • Product recall.
    • A product's potential to cause damage.
  • Business auto liability:
    • Employees traveling in company-owned vehicles.

Negotiating Contracts

When negotiating a contract, policyholders should consider several factors:

  • The amount of the deductible.
    • A high deductible could be costly in the event that it is not met.
    • A lower deductible may include more policy fees that will increase overall policy cost.
  • The different coverage plans available, in order to find the right amount of coverage with an affordable deductible.
  • Quotes from other insurance agencies, which can be used as a means to negotiate a better contract.

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