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What’s an insurance excess?

13/02/2012

An insurance excess is the amount you pay towards a claim.

Sometimes called a ‘deductible’ (although strictly speaking a deductible isn't the same thing), an insurance excess is the amount you pay towards the value of a claim.

It's called an excess because the insurer is liable for payments in excess of the first part of a claim and up to the limit of cover.

Here’s a quick example:

Your office is flooded and you claim for damages totalling £2,000. Your policy excess is £250, which you pay, and your insurer settles the remaining £1,750. Straightforward enough.

Why does your insurance excess matter?

Pretty much all insurance policies have an excess, unless your insurer deems the risk of a claim or its likely value low enough to do without one. Employers’ liability insurance is the one business insurance policy that never has an excess.

Although in some cases you can choose your excess, the amount is more usually set by the insurer. It’s not an arbitrary figure though – insurers take into account things like the nature of the risk or the historical frequency and value of claims covered by that type of insurance.

For example, a portable equipment policy (for laptops etc) might have a relatively high excess – say £250 or £500. Things like mobile phones and laptops get lost, damaged and stolen all the time so the excess is set deliberately high to deter a high number of low-value claims.

Although that sounds unfair, it does actually make sense.

Because aside from the insurer’s losses from making settlements, claims cost money to process. And the more claims there are, the more the insurer loses. These losses have to be recouped from somewhere and the inevitable outcome would be cost increases for all policyholders, regardless of claims history.

So, to avoid this happening and to keep prices fair, insurers set the excess at a level high enough to make policyholders think twice before regularly claiming for low values.

Higher or lower?

If you’re shopping around for insurance you’ll probably be familiar with the relationship between the excess and the premium.

In simple terms, the higher the excess, the lower the premium (and vice versa). If you’re willing to pay more towards a claim, your insurer will (usually) reduce the premium.

If you’re unlikely to claim on your insurance, it’s probably better to have a higher excess. It’s a small risk but it means you’ll pay a lower premium in the short-term. Just bear in mind that you’ll have to shell out more if you do make a claim.

The professional indemnity insurance excess difference

What you might not be aware of is how the excess applies to professional indemnity insurance claims.

Because professional indemnity claims usually involve complicated allegations of negligence, your insurer has to use the expertise of a legal team to defend you – usually their own.

And because a professional indemnity policy can be triggered solely by an allegation of negligence (and these often go nowhere), claims are frequently closed off without the insurer having to pay anything else.

The good news is, if the only costs to your insurer are their own legal costs, you don’t pay a thing. The excess usually only applies if you’re found liable and your insurer has to pay your client compensation.

But even if you do have to pay the excess, it’s still going to be a much lower figure than you’d pay if you didn’t have insurance. In our experience, you'd be looking at a bill for many £thousands rather than just a few £hundred.

Image used under license from Shutterstock.

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