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What Is a Franchise Deductible?

Article Details
  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 28 June 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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A franchise deductible is a minimum amount of damage that must occur for insurance coverage to become active. The insurer has no liability for damage below the limit. Once damage exceeds the limit, insurers pay claims in full, with no requirement to contribute on the part of the insured party. Policies with this option tend to be large and usually involve commercial concerns. This differs from a standard deductible, where the policyholder must pay a set amount before the insurer will contribute to claims of any size.

Several methods can be used to establish a threshold for a franchise deductible. One is a simple cash amount, based on the industry, the risks, and other considerations. This is typically written into the policy. When damage occurs, the policyholder can receive an estimate on the expense and use this to determine if it qualifies. A lower franchise deductible, where insurance coverage kicks in sooner, tends to be more expensive.

Another option is a percentage basis, using the overall value of the policy as a benchmark. When the company creates a contract, it can determine an appropriate level of coverage to offer, based on the kinds of risks. Some policies are extremely large, as they may have to cover objects like entire ships and their cargoes. The percentage used as the franchise deductible is also determined at the time the policy is written, and can be negotiated for customers willing to pay more for their policies.

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Policyholders have several considerations when they negotiate a contract. If the franchise deductible is too high, they could run into financial problems in the event of damage, because they would be forced to pay out of pocket for expenses they might not be able to cover. Asking for a lower deductible can result in higher fees for the policy, which can add to the cost of doing business. An agent or representative may be able to help a customer decide on the best balance point between adequate coverage and a franchise deductible that is too high.

Companies preparing to take out large insurance policies may want to solicit competitive quotes. These can help them determine which policy offers the best benefits and options. Insurance representatives may be willing to negotiate to keep or attract a big client if another company offers a better rate. Quotes typically expire in a set period of time and it’s important to get information about how long an offer is valid so a company can act to lock in a favorable rate.

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