This article is the tenth part of a series of 50 policy reviews Professional Indemnity insurance (PI) covers every important aspect of a PI policy in detail. This time, we’ll focus on the deductible and excess clauses, two terms often overlooked but crucial in determining the amount of claims actually paid by the insurance company.
This article was written by Mhd. Taufik Arifin ANZIIF (snr.assoc) CIIB, an insurance broker with over 40 years of experience, together with L&G Insurance Broker, a trusted partner for the best IP protection in Indonesia.
Understanding Deductibles and Excesses in PI Insurance
In Professional Indemnity (PI) policies, two important terms that often cause confusion are deductible and excess. Both refer to the portion of the loss that the insured must cover before the insurance company pays a claim. However, in practice, these terms can differ depending on the regulations and the insurance company.
What is a Deductible?
A deductible is a specific amount that the insured must pay out-of-pocket for each claim. For example, if the deductible is set at IDR 500 million and a valid claim is IDR 2 billion, the insurance company will only pay IDR 1.5 billion. Deductibles are typically used to reduce small claims and ensure clients remain prudent in their professional practices.
What is Excess?
Excess is essentially the same as deductible, but in some jurisdictions it’s used to refer to the initial loss burden borne by the insured. The difference is that some policies use the term “excess” in addition to the limit of liability, meaning the excess value is beyond the coverage limit. This can be very detrimental if not understood from the outset.
Why is it important to understand this clause?
Many professionals focus solely on high liability limits, forgetting to consider the risk of high deductibles or excesses. Ultimately, when a claim occurs, they face significant liability.
This is why the role of an experienced broker like L&G Insurance Broker is so crucial. L&G helps clients understand the details of deductible and excess clauses, negotiate realistic rates, and ensure the policy truly provides protection without leaving any hidden pitfalls that could cost them later.
Types of Deductibles and Excesses in PI Insurance
In Professional Indemnity (PI) policies, not all deductibles or excesses are structured the same way. Each insurance company may use a different format, so understanding the details is crucial to avoid miscalculating risk. Here are some common types:
- Deductible per Claim (Each and Every Claim)
This type is the most common. Each time a claim occurs, the insured is required to pay the stated deductible. For example, if the deductible is IDR 500 million, then for three separate claims within a single period, the total liability could reach IDR 1.5 billion.
- Deductible Aggregate (Aggregate Deductible)
In this model, the deductible applies to the entire policy period. For example, if the aggregate deductible is IDR 1 billion, then if there are multiple claims within a year, the total insured’s liability remains a maximum of IDR 1 billion. This type is more advantageous for insureds with the potential for recurring claims.
- Excess in Addition to Limit of Liability
Some insurance policies set an excess beyond the limit of liability. For example, a policy limit of IDR 10 billion with an excess of IDR 500 million. If a claim of IDR 10 billion occurs, the client will still be liable for the IDR 500 million beyond the policy limit. This model is clearly detrimental if not understood from the outset.
- Franchise Excess
Unlike a regular deductible, a franchise excess means claims below a certain amount are not paid at all. However, if claims exceed that amount, the insurance company pays the full amount without a deductible.
The Role of Brokers
Choosing the right deductible or excess is no simple task. Brokers like L&G Insurance Broker help assess clients’ risk profiles, negotiate the fairest terms, and ensure they don’t fall into burdensome clauses.
The Basis for Balancing in Determining the Amount of Deductible
A deductible, or out-of-pocket risk, is a specific amount the insured must pay each time a claim occurs. The deductible amount should not be determined arbitrarily, as it will affect premiums, cash flow, and policy benefits. There are several key considerations:
- Risk Profile & Claim Frequency
If the risk is high and small claims occur frequently, the deductible is usually set higher to focus the policy on covering large claims. Conversely, if the risk is relatively rare but the impact is significant, the deductible can be set lower.
- Company Cash Flow Capability
Companies with strong liquidity can accept higher deductibles to obtain lower premiums. However, for small and medium-sized businesses, excessively high deductibles can become a financial burden when it comes to claims.
- Contractual & Regulatory Obligations
Some projects (such as construction or consulting services) set a maximum deductible limit to ensure adequate protection for the project owner. Brokers should ensure this figure meets the tender requirements.
- Premium Negotiation
Deductibles are a tool for lowering premiums. The higher the deductible, the lower the premium. However, brokers must find a balance to ensure optimal policy benefits.
Sample case
Legal Consultant: A PI policy has a deductible of Rp100 million. If the average claim is below Rp150 million, this deductible is too high, as the insured would have to cover almost all claims. It would be more appropriate to lower the deductible to Rp50 million.
Construction Company: A project worth Rp 500 billion (approximately US$50 million) with the potential for large claims. A deductible of Rp 250 million is considered reasonable, as the company can afford the initial claim burden, while the policy protects against large claims worth billions of rupiah.
Tech Startup: With limited cash flow, choosing a deductible that’s too high can be dangerous. A deductible of Rp 25 million is more realistic to keep the policy functioning during small to medium claims.
👉With the right balance, deductibles can be a premium control tool without compromising the effectiveness of protection. Experienced brokers like L&G Insurance Broker are ready to help determine the most appropriate rate for your business.
Deductible & Excess Case Study in PI Insurance
Deductible and excess clauses often seem simple, but in practice, they can be the deciding factor in whether a claim actually saves a business or leaves it with a significant financial burden. Let’s look at some real-life examples across various professions.
Case 1: Law Firm with High Deductible
A law firm in Jakarta had a PI policy with a limit of Rp 20 billion and a deductible of Rp 1 billion per claim. In 2023, the firm was sued by a client for a contractual error, resulting in a claim of Rp 2.5 billion. The insurance company agreed to pay the claim, but reduced the deductible by Rp 1 billion. Ultimately, the firm received only Rp 1.5 billion. The Rp 1 billion expense remained the sole responsibility. If the deductible had been negotiated lower from the outset, this expense could have been minimized.
Case 2: Auditor with Aggregate Deductible
An independent auditor purchased a PI policy with an aggregate deductible of Rp 1 billion. During the year, he faced three separate claims of Rp 2 billion, Rp 3 billion, and Rp 1.5 billion, respectively. Because the aggregate deductible only applies once, the auditor covered the total of Rp 1 billion, with the remainder paid by insurance. This model significantly protects a profession with the potential for repeat claims.
Case 3: Engineering Consultant with Excess Beyond Limit
An engineering consultant signed a PI policy with a limit of IDR 10 billion and an excess of IDR 500 million “in addition to the limit.” In 2022, a project claim amounted to IDR 10 billion. Although the full limit was used, the client was still required to pay an additional IDR 500 million beyond the policy. This nearly bankrupted the consultant. The error occurred because the client did not understand the details of the excess clause.
Case 4: Doctor with Franchise Excess
A specialist doctor has a PI policy with a franchise excess of Rp 200 million. A malpractice claim worth Rp 150 million was rejected in full because it didn’t exceed the limit. However, a subsequent claim worth Rp 500 million was paid in full by the insurance company without any deductions. Franchise excess can be advantageous when large claims occur frequently, but detrimental for smaller claims.
Conclusion of the Case Study
- High deductibles can erode policy benefits.
- Aggregate deductibles are more efficient for professions with recurring claims.
- Excess beyond the limit is very dangerous if not understood.
- Franchise excess must be considered according to the profession’s risk pattern.
The Role of L&G Insurance Broker
All of the cases above demonstrate that understanding deductibles and excesses requires specialized expertise. L&G Insurance Broker, with over 40 years of experience, consistently ensures clients are not trapped by detrimental clauses. L&G assesses risk profiles, negotiates reasonable deductibles, and ensures that PI policies truly protect against significant financial risks.
Conclusion and Recommendations
From the discussion of the basic balances used to determine the deductible amount, it can be concluded that the deductible is not merely a formality in an insurance policy, but rather a crucial instrument that must be determined strategically. The deductible serves as a risk-sharing mechanism between the insured and the insurer. A higher deductible can lower premiums, but the company also assumes greater initial risk.
The three main factors to consider are:
- Risk profile & claims frequency – whether small claims are more frequent or infrequent but have a large impact.
- Financial capacity – how strong the company’s cash flow is in covering its own risks.
- Contractual & regulatory obligations – are there any requirements from the project owner or industry regulations.
Recommendation
In order to make optimal decisions regarding deductibles, companies should:
- Conduct a comprehensive risk analysis, by calculating claim patterns over the past few years.
- Calculate the company’s financial capacity to bear its own risks, so as not to create excessive burdens.
Engage an experienced insurance broker like L&G Insurance Broker, who has a deep understanding of international standards and local regulations. A broker can help negotiate a balanced deductible—keeping premiums low while ensuring maximum coverage.
Ultimately, the primary goal of determining deductibles is to create effective, balanced, and sustainable coverage. With the right strategy, companies can save costs without sacrificing business security from the risk of lawsuits or major claims.
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