What is the purpose of the deductible in a Dwelling Policy?

The purpose of the deductible in a Dwelling Policy is to represent the amount that the policyholder must pay out-of-pocket before the insurance coverage kicks in and the insurer starts to pay for a covered loss. This amount is essentially the threshold that must be met, ensuring that the insured shares in the cost of a loss. Deductibles help to mitigate moral hazard by discouraging policyholders from filing claims for minor damages, as they will be responsible for that initial cost.

When a claim is made, the total cost of the loss is calculated, and the deductible is subtracted from that amount to determine what the insurance company will pay. For instance, if a covered loss incurs expenses of $5,000 and the deductible is $1,000, the insurance company would pay $4,000 after the deductible is applied. This mechanism also helps to keep premiums lower, as higher deductibles generally lead to reduced premium costs. However, the primary role of the deductible is to establish that shared financial responsibility before the policy benefits are accessible.