How Deductibles Impact Business Insurance Premiums: Finding the Right Balance for Your Company

Deductibles are how much you need to pay before insurance kicks in. For businesses, deductibles can impact your premiums and coverage. Some businesses feel forced to choose higher deductibles because of a bad claims history. Others can save money because their industry sees infrequent claims.

Let’s go over the different business insurance deductible types, how deductibles and premiums are connected, and how to choose the right deductible for financial stability and risk tolerance.

Understanding Business Insurance Deductibles

Definition and purpose of a deductible

If an insurance policy comes with a deductible, that is how much your business needs to pay out-of-pocket before insurance will kick in. Essentially, the deductible is your share of expenses when an incident occurs.

For example:

You buy commercial liability insurance with a coverage limit of $1,000,000 A frequent customer slips and falls at your store. He sues your business for the injury, citing that the floor was cluttered The settlement for the medical expenses is $250,000. The deductible for your general liability insurance is $10,000. You pay $10,000. The insurance pays $240,000 In this case, if the settlement was $5,000, insurance would not have covered a cent

Not all business insurance policies have a deductible. You can read the policy declarations and details to see whether yours does.

Different types of business insurance deductibles

Per-claim deductible: A deductible applied to each individual claim.

Aggregate deductible: The total deductible amount for the policy term.

Percentage deductible: A percentage-based deductible usually uses a percentage of either the loss or the total value of the damages. Often used for property or catastrophe coverage.

Straight deductible: This amount is subtracted from each separate occurrence.

Basket deductible: A single deductible designed to fund losses from multiple risks.

Loss only deductible: AKA first dollar defense. There is no deductible for the defense costs, but a deductible will apply to settlements. Some states mandate liability insurance to use a loss only deductible.

How deductibles apply to different types of coverage

Business insurance deductible may apply differently depending on what policy your business carries. Here are common business insurance policies and how deductibles usually work for them:

Commercial property insurance deductibles: Deductibles offered can vary depending on your business property’s value, location, and type.

Business liability insurance deductibles: Commercial liability insurance deductibles have many variations. For example, legal malpractice insurance policies often offer special supplementary payments coverage that may not be subject to a deductible.

Workers’ Compensation Deductible Policy: Employers can choose a workers’ compensation program that comes with risk sharing deductibles. These deductibles may be underwritten as per-claim, per-claimant, or per-occurrence.

Most business insurance policies will have deductibles, whether it’s workers’ comp, liability, commercial auto, or a BOP (business owners' policies).

The Deductible–Premium Relationship

Minimizing costs is important for all business stages, but new business owners in particular face the trouble of how much insurance is truly necessary and what deductible makes sense.

Let’s review the relationship between deductibles and premiums and what business owners should know.

How higher deductibles typically lower premiums

A higher deductible means that if a small-scale incident occurs, the insurance company might not even need to lift a finger. As a result, insurance companies will offer lower premiums if your business opts for a higher deductible.

How lower deductibles increase premiums but reduce out-of-pocket costs

Companies that expect to have frequent small claims may want to choose lower deductibles. If cash flow and credit are a struggle and every unpredictable incident would devastate your business, lower deductibles may also be a good idea.

Insurer perspective

Let’s talk about the insurance company’s perspective on why deductibles affect pricing. Insurers wouldn’t do it if it didn’t make financial sense for them. Well, the number one reason is risk sharing. Essentially, it puts some of your business’ skin in the game so you will be more diligent about preventing incidents and mindful about filing insurance claims.

Having deductibles ensures that businesses won’t file a claim for every tiny thing. Imagine if a broken $10 pen required an insurance adjuster’s attention–that would be quite costly for business insurance companies.

Examples of cost differences at varying deductible levels

Insurance companies price business premiums depending on multiple complex factors, including property location, industry, malpractice risks, and more. Let’s take an example of how and why a company might take on different risks and premiums.

Construction Company:

• Buys a general liability insurance policy with a $1 million coverage limit per occurrence
• Has an annual revenue of $1 million

The construction sector is extremely dangerous. Workers’ compensation claims are frequent, and can be very expensive due to the physical risks involved in the industry. The company can choose between:

Pros and Cons of High vs. Low Deductibles

High Business Insurance Deductible

Pros:

• Lower premiums
• Encourages fewer small claims
• Predictable long-term cost savings if there is no incident

Cons:

• Higher out-of-pocket costs
• Potential cash flow strain after numerous incidents
• Insurance might end up being useless if you only have small claims

Low Business Insurance Deductible

Pros:

• Lower immediate claim costs
• Easier budgeting for unexpected losses

Cons:

• Higher premiums
• Potentially more frequent claims

Factors to Consider When Choosing a Deductible

Industry-specific risk exposure

Business owners and risk mitigation strategists should look at their specific industry risk exposure.

Industries where small, inexpensive incidents are rare will likely be able to take advantage of higher deductibles.

Industries where small claims are common likely need lower deductibles. Even though the premium adds up over time, frequent small incidents can take a toll on cash reserves, accumulating debt and making the business struggle constantly. Any business that has a brick-and-mortar store front or property will be exposed to frequent issues, such as broken equipment, kitchen fires, and theft.

Industries where claims are frequent (regardless of incident scale):

• Industries that use commercial auto insurance
• Hospitality
• Construction
• Retailers
• Brick and mortar shops
• Delivery services
• Property management and real estate

Industries where claims are rare but large:

• Lawyers, architects, and consultants
• Errors & omissions and malpractice claims that can cost millions
• Healthcare industry
• Tech, software, and cybersecurity

Cash flow and cash reserves

The impact on cash flow from both deductibles and incidents is a huge point of worry. Any time an incident occurs and you need to pay up to the deductible, it can unexpectedly affect your business growth and reinvestment capabilities.

If your business has a steady cash flow, a higher deductible may be better. Your cash reserves will be enough to deal with any small incidents of a couple hundred dollars.

Claim history and frequency

If you know that you’re unlikely to file frequent claims, a higher business insurance deductible can help you save money. This is true as long as you do have some emergency savings or cash reserve. That way if a small issue comes up, such as an employee shattering your set of plates, you can afford the replacement without long term consequences.

On the other hand, businesses that have a complicated and frequent claims history may have a harder time picking the right deductible. If your insurance company knows about your claims or accident history by reviewing your loss runs, premiums can become very expensive. To counter the high premiums, you would need to opt for higher deductibles. Yet that means you frequent small claims won’t be covered.

Regulatory or contractual requirements

Industries have different regulations and laws, either federal or state. For example, different states have their own workers’ compensation requirements.

Business size and type

The size and type of business you’re running can also affect your insurance choices.

Small businesses: Cash flow is usually very tight for small businesses and startups. You just started, growth and efficiency are crucial. A good deductible is generally a low one because any surprise at this stage can destroy your entire business, causing bankruptcy or hurting your potential for years.

Medium-sized businesses: You have some cash reserves now. Still, incidents can sting and cause meaningful setbacks. It’s time to adjust your insurance strategy by choosing higher deductibles for rare risks, but lower deductibles for frequent ones like commercial property.

Enterprises and corporations: Corporations may choose to self-insure certain risks. High deductibles of $100,000 or more may be chosen to maximize savings, slashing premiums lower. This is only possible because large businesses are able to absorb the higher out-of-pocket expenses using their substantial cash reserves.

Multi-policy bundling and how deductibles work across policies

Bundling insurance is usually convenient and affordable. It is also a good way to simplify the deductibles by streamlining them across the board.

Still, it is important to read your policy bundling details. Not all bundles share a single flat deductible. Insurance companies may also choose the most common deductible for the average company, which could be ill suited for your particular needs and risks.

Make sure to double check if your deductible is separate or shared.

For shared single deductibles, one event that triggers multiple types of insurance coverage could allow you to pay only a single deductible. This is more common for auto and property insurance policies because a single disaster could damage property and hurt people at the same time.

Risk tolerance

Finally, your risk tolerance is your subjective view on how much risk the business should take. Business owners who are more risk-averse tend to prefer lower insurance deductibles, that way claims don’t catch them off guard. Business owners who are more comfortable with risk to help save money over time may benefit from choosing higher deductibles.

Real-World Scenarios

A small retail shop needs to choose between a $500 vs. $2,500 property insurance deductible. The company just started recently and has limited cash reserves with only $1000 set aside for emergencies. The insurance premium for a $100 deductible costs $2,000 a year, which seems like a lot for the retailer. A $10,000 deductible costs only $100 a year.

The retailer ends up choosing the cheap insurance with a high deductible since it only costs $100 a year. Unfortunately, petty theft and damages ends up costing them thousands of dollars by year end. Insurance refuses to cover any of them because none of the incidents reached the per-claim deductible of $10,000.

In another world, this retailer did save on insurance premiums in that year because only a single big incident occurred. A lower deductible would have been pointless in the end. But that is the nature of insurance–you need it to cover whatever risks that are most likely and catastrophic.

Strategies to Manage Deductible Costs

Creating a “deductible reserve” fund

Businesses can improve their ability to deal with accidents by creating a deductible savings fund. The amount inside the fund should exceed the deductible amount(s) of your policies. That way if an emergency arises, you will always be able to afford the deductible, allowing your insurance to cover the rest of the applicable expenses.

Risk management practices to reduce claim likelihood

Risk management goes a long way. Cultivating a workplace culture that encourages quick incident reporting and safe practices can ensure that your business never misses an insurance reporting deadline. By meeting insurance deadlines and lowering the chances of frequent incidents through safety measures, you can reduce how much you pay on deductibles and insurance in the long run.

Negotiating deductible terms with your insurer or broker

Businesses should speak with their insurance agents and risk management strategists to decide on what is the best deductible amount. Some companies also benefit from unusual deductible types, such as percentage deductibles or shared deductibles across all coverage.

Conclusion

A low business insurance deductible means small claims will be covered. That’s useful for industries where frequent incidents occur. Small businesses and startups may also want a low deductible.

Larger businesses can assess their risk and choose higher deductibles for good coverage with cheaper premiums.

Think about your deductible–premium trade-off before choosing your business insurance policies. The right deductible mainly depends on your ability to cover out-of-pocket costs without disrupting cash flow and operations.

Find the best business insurance with the right deductible today.