Claims Excess or Claims Franchise?

As part of our ongoing insurance how-to series we continue to explore the terminology and practices used in the Insurance world.

Today we’ll be explaining Claims Deductions; we’ll break down the Claims Excesses and Claims Franchises that are applied by Insurers and explain why they use them.

We will explore:

  1. What is an Excess and why do Insurers apply them?
  2. How does an Excess affect my claim?
  3. What is a Franchise and why do Insurers apply them?
  4. How does a Franchise affect my claim?

What is an Excess and why do Insurers apply them?

A Claims Excess is the amount that your Insurer will deduct from a Claim that you make under your insurance policy.

Some policies which have a number of sections may have a number of different Excesses applying – these will normally apply to different types of claim that may occur.

They are normally applied to help Insurers avoid the costs incurred in dealing with very minor incidents where the amount being claimed is less than the administration costs involved in dealing with the processing of a Claim.

Increased Excesses are sometimes applied to reflect an increased risk in a certain area of the coverage applied.

For example if the premises being covered are located in a very high risk flood area Insurers may well impose a flood excess which is much greater than their standard one.

How does an Excess affect my Claim?

A Claims Excess will be automatically deducted from any payments that Insurers make to you in settlement of a loss that you have incurred.

If the amount of the Claim is less than the Excess then no payment will be made at all.

If the amount of the Claim is greater than the Excess then you will receive the balance of the amount due.

For example if you have a Theft Excess of £250 on your policy and have a Break In which involves losses and damages of £1,000 you will receive the balance after deduction of the Excess, in this case £750.

What is a Franchise and why do Insurers apply them?

Some Insurers feel that to totally exclude an amount from a claim is a little harsh and adopt a different approach by applying a Franchise.

A Franchise will apply to the policy in the same way and for the same reasons as an Excess but in the event that a Claim exceeds the Franchise the full amount of the loss will be paid.

How does a Franchise affect my Claim?

If you have a very small claim which is below the policy Franchise then there will be no difference in the way that the two systems are applied – in neither case will any amount be paid.

However if the loss is above the Franchise limit the amount will be paid in full.

For example if there is a Theft Franchise on the policy of £250 and a Break In occurs which results in £240 of damage no amount will be paid.

If the loss reaches £260 the full amount of £260 will be paid – there will be no deduction made.

This still means that Insurers do not have to deal with very small losses below the Franchise limit but that if a more significant loss occurs the Insured is not penalised in any way.

This alternative approach can often be highlighted in marketing as a good sales point, although in recent years it is becoming a little less common, particularly outside of commercial insurance; this is perhaps because it can be easily missed by consumers.

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  1. As a consumer, my gut feeling is that I would be willing to pay a premium to waive an excess in favour of a minimum claim amount.

    However, I assume I’m right in thinking that something like the aforementioned Franchise is entirely pointless in the case of insuring fixed value item(s).
    Either it’s over the limit and is covered or it’s under the limit and not covered. In which case there’s no point in having the cover.

    I would guess this type of claim mitigation is in decline more due to the fact that for a given claim amount the insurer will pay out more than with the Excess system.

    Can you provide any insight into why this model is not used more often?

    It would seem to favour consumers like myself…

    Maybe I’ve just answered my own question.

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