AAIS COMMERCIAL OUTPUT PROGRAM DEDUCTIBLE
OPTIONS
(July 2025)
The Commercial
Output Program is designed for the larger and more complex commercial property
accounts. Due to their size or complexity, many of these risks require
deductible options beyond the single deductible in the CO 1000 – Commercial
Output Program – Property Coverage Part. This article will explore those
options and review the following endorsements:
·
CO 1084–Windstorm or Hail Schedule
·
CO 1085–Multiple Deductible Schedule –
Scheduled Perils and Locations
·
CO 1220–Windstorm or Hail Deductible
·
CO 1234–Multiple Deductible – Scheduled
Perils
·
CO 1235–Multiple Deductible – Scheduled
Locations and Property
·
CO 1237–Multiple Deductible – Schedules
Perils and Locations
·
CO 1280–Property and Income Coverage
Deductible
The
standard direct damage deductible is described in the How Much We Pay section
of the CO 1000. The insurance company pays only the amount of the loss that exceeds
the deductible shown on the schedule of coverages. This deductible applies only
once per occurrence and is applied after coinsurance or reporting form penalties.
|
Example:
Maribell Industries has 15 separate
locations. Scenario
1: All locations are within the same
city. A tornado tears through that city and damages all 15 locations. The $1,000
deductible applies only once, as there was a single occurrence. Scenario 2: The locations are spread throughout the Midwest. A
massive wave of thunderstorms tears through the Midwest and damages ten different
locations at different times throughout a 24-hour period. A $1,000 deductible
applies to each location because there were ten different occurrences. |
The standard income coverage part has no
deductible and no waiting period.
The schedule
applies per location. The location number
and its description are entered, and then either a flat deductible is entered,
or a percentage deductible of 1%, 2% or 5% is entered. Only two locations may
be entered on a single schedule, so multiple CO 1084s may be required. This
schedule is used only with CO 1220–Windstorm or Hail Deductible.
This schedule
applies per location. The location number
and its description are entered. The peril to which the scheduled deductible
applies must be described, and then either a flat deductible is entered, or a
percentage deductible of 1%, 2% or 5% is entered. The final entry on the
endorsement is the deductible that applies to all other covered perils.
Only two
locations can be entered on a single schedule, so multiple CO 1085s may be
required. This schedule is only used with CO 1237 – Multiple Deductible –
Scheduled Perils and Locations.
This endorsement is used only when CO
1084–Windstorm or Hail Schedule is attached. The only change to the policy is
in the How Much We Pay Section. The deductible provision in the CO 1000 is
replaced by either the Flat Deductible or the Percentage Deductible sections in
this endorsement.
The
deductible on the schedule (either flat or percentage) applies to damage caused
either directly or indirectly by windstorm or hail.
|
Example: A windstorm tears the roof of a
building, and rain pours in, destroying personal property and the interior.
The damage to the building interior and personal property is not considered
windstorm or hail damage; however, because the damage would not have occurred
without the windstorm first occurring, it is considered part of the windstorm
occurrence and is subject to its deductible. |
Flat Deductible
When the windstorm deductible is based on a
flat amount, no loss is paid until that deductible has been satisfied in a
single occurrence.
Percentage Deductible
When the windstorm deductible is based on a
percentage, the deductible is calculated by multiplying the percentage times
the value of the covered property damaged at the time of loss. The calculated
deductible must be paid by the named insured before the insurance company will make
any payment.
The deductible applies separately as follows:
·
Owned Building or Structure
The specific building that is covered and, if
applicable, any business personal property within that building.
·
Non-Owned Building or Structure
Covered business personal property in a
building, but the building is not covered by this policy.
·
In a Vehicle or In the Open
Covered
business personal property in the open or contained within a vehicle.
|
Example:
A windstorm damaged Maribell’s building,
the property inside the building, property that was in the open, and personal
property in a non-owned building. All property was subject to a 3% windstorm
deductible. The loss is calculated as follows: |
||||
|
Item |
Value at time of loss |
Deductible (3%) |
Amount of loss |
Payment |
|
Building and BPP in building |
$1,000,000 |
$30,000 |
$70,000 |
$40,000 |
|
BPP in non-owned building |
$250,000 |
$7,500 |
$35,000 |
$27,500 |
|
BPP in open |
$25,000 |
$750 |
$1,000 |
$250 |
|
Total |
|
$38,250 |
$106,000 |
$67,750 |
|
Maribel was not pleased with the
settlement because they had anticipated a deductible of 3% of the total loss, not the value. They ended up paying a
deductible of 36% of the loss. |
||||
This endorsement does not require a separate
schedule. It replaces the standard deductible provision for all locations. The
first entry on the schedule is the deductible that applies to any peril not
specifically scheduled.
The
next four entries require a peril description, followed by the flat deductible
amount specific to that peril.
|
Example: Quickplus, Inc. stock
is very valuable and attractive to thieves. The pricing for theft is
extremely high, so Quickplus requests a
policy with a $1,000 deductible for all perils except for theft. The theft
peril deductible is $100,000. If a loss occurs, other than theft, the $1,000
deductible applies, but if a theft occurs, Quickplus
must first pay the $100,000 before the insurance company will pay the
remainder of the loss. |
This endorsement is used to provide deductibles
that vary by location and by type of property. It replaces the deductible in the CO 1000.
The
first entry on the schedule is the
deductible applying to those locations
not scheduled on the endorsement. The remaining entries include the location
number, the description of the location (multiple locations can be listed), the
property or coverage at that location subject to the deductible, and the
applicable deductible.
|
Example:
Journey of a Lifetime, Inc. has five locations. Three are retail and two are
manufacturing. They decide that a $1,000 deductible is appropriate for the
retail locations, but a $10,000 building deductible and a $5,000 business
personal property deductible are more suitable for the manufacturing
locations. The entry made on the all other covered
locations not described on the Multiple Deductible schedule is $1,000. The
manufacturing locations' deductibles are entered as follows: |
|||
|
Location No. |
Location Description |
Property/Coverage |
Deductible |
|
1 |
345 Elm, Mainville, KY |
Building |
$10,000 |
|
1 |
345 Mainville, KY |
Business Personal Property |
$5,000 |
|
2 |
92657 Hwy 35, Quincy, IL |
Building |
$10,000 |
|
2 |
92657 Hwy 35, Quincy, IL |
Business Personal Property |
$5,000 |
This endorsement must be used along with the CO
1085–Multiple Deductible Schedule – Schedules Perils and Locations. An entry is
required on this endorsement to specify the deductible that will apply for
locations and perils not specifically scheduled on the CO 1085. This is
important because the deductible specified on the CO 1000 is entirely replaced
by the wording of this endorsement.
The deductible on the CO 1085 schedule (either
flat or percentage) applies to damage at the scheduled location caused by the
scheduled peril. The flat deductible on the CO 1085 schedule applies to damages
from any other covered perils at the scheduled location.
When the percentage deductible is selected, the
deductible is calculated by multiplying the percentage by the value of the
covered property damaged at the time of loss. The calculated deductible must
then be paid by the named insured before the insurance company will pay the
remainder of the loss.
The deductible applies separately as follows:
·
Owned Building or Structure
The specific building that is covered and, if
applicable, any business personal property within that building.
·
Non-Owned Building or Structure
Covered business personal property in a
building, but the building is not covered by this policy.
·
In a Vehicle or In the Open
Covered business personal property in the open
or contained within a vehicle.
This endorsement does not need a separate
schedule because all entries are included on the endorsement itself. A key
difference between it and other deductible endorsements is that it is the only
one offering an income deductible option.
The schedule on this endorsement applies over
all locations. A flat deductible for the Property coverage may be entered.
When
an income coverage deductible applies, one of the following combinations must
be entered:
|
Type of Deductible Entry (on 2nd line) |
Deductible Modification |
|
Flat Dollar |
Dollar Amount |
|
Average Daily Value (ADV) |
Number of Days |
|
Hours |
Number of Hours |
|
Days |
Number of Days |
|
Combined |
A percentage plus a minimum and maximum
dollar amount |
Other coverages and deductibles may be entered.
The Other coverage must be described carefully to prevent any confusion regarding
how the deductible applies.
This deductible section replaces the deductible
section in the CO 1000. The Property Coverage deductible in the Schedule
applies to the coverage in the CO 1000, and the Income Coverage deductible
applies to the coverage in the CO 1001.
Dollar Deductibles
When
a dollar amount is shown on the schedule,
no loss is paid until the loss exceeds that amount.
|
Example:
·
Property Coverage
deductible: $1,000 ·
Income Coverage
deductible: $5,000 A loss occurs, resulting in a property
loss of $6,000 and an income loss of $2,000. The insurance reimburses $5,000
for the property damage but covers nothing for the income loss since it did
not meet the deductible. |
Multiple of Average Daily Value Deductibles
When
the Average Daily Value (ADV) deductible is selected, the deductible is
calculated as follows:
·
The
first step is to determine the ADV based on the operating expenses that would
have been incurred during the restoration period, had no loss occurred.
These operating expenses include net income,
payroll expenses, interest, and any other expenses that continue during the
restoration period.
·
To
compute the ADV, divide the total operating expenses by the number of days in
the restoration period.
·
Next,
multiply the ADV by the number of days specified in the deductible schedule to
calculate the deductible dollar amount.
The
insurance company will only pay for losses that exceed this deductible amount.
It
is important to note that the insurance company will not cover operating
expenses that were not earned due to the loss or any additional shutdown days
that occur during the restoration period.
|
Example: Property
Coverage deductible: $1,000 Income
Coverage deductible: 5 ADV A loss occurs, resulting in a property loss of
$10,000, and the business must be closed for 10 days. ·
The operating
expenses for those 10 days are $20,000 ·
The ADV is $20,000
operating expenses divided by 10 days = $2,000 ·
Multiply $2,000 by
5 ADV = $10,000 The insurance company pays the following: ·
$9,000 for the
property damage loss ($10,000 - $1,000) ·
$10,000 for the
income loss ($20,000-$10,000) |
Time Deductibles
When
the time deductible applies, all losses incurred during that time, as listed on
the schedule, are the insured's responsibility. The insurance company starts
paying after the specified number of hours or days. When days are used, one day
equals 24 consecutive hours.
|
Example: Property
Coverage deductible: $1,000 Income
Coverage deductible: two days A loss
has occurred, resulting in property damage of $15,000, and the business must
remain closed for three days. The incident took place on a Friday night, but
the business does not operate on weekends. The
insurance company will pay $14,000 for the property damage loss, which is
calculated as $15,000 minus a $1,000 deductible. Since the business was not open during
the first two days, there was no loss of income during that period. The only
income loss occurred on Monday, and that entire amount will be covered by the
insurance. |
Percentages
of Loss Deductibles (Combined)
When combined
deductibles apply, a percentage needs to be entered on the endorsement form. This
will be used to calculate the deductible amount based on the loss incurred.
Additionally, a maximum dollar amount deductible and a minimum dollar amount
deductible will need to be entered on the endorsement.
NOTE: The form does not indicate where the minimum and maximum deductible need
to be entered.
When a loss occurs,
the total amount of the loss (before considering coinsurance and the
deductible) is multiplied by the entered percentage to determine the deductible
amount. This computed deductible amount is then compared to the minimum and
maximum deductibles as follows:
·
If the calculated amount is less than the minimum
deductible, the minimum deductible will apply.
·
If the calculated amount exceeds the maximum
deductible, the maximum deductible will be applied.
|
Example: Monty’s policy contains
a combined deductible of 3% with a minimum of $500 and a maximum of $5,000. A
loss occurs, and the business is closed for 45 days. The total amount of the
income loss is $70,000. The
deductible is computed as .03 X $70,000 = $2,100. Since the calculated
deductible is more than the minimum deductible and less than the maximum
deductible, the computed deductible is used, and the total paid is
$70,000-$2,100 = $67,900. |
NOTE: Two important
points:
1) The Combined or Percentage of Loss Deductible does not state that it is
only for income coverage, but the schedule only permits such entry for the
income coverage.
2)
The percentage is not of the
total values, but instead, it is based on the actual loss. This differs from the
windstorm and hail percentage deductible that applies to total values at the
time of the loss.