Non-Proportional CoversCore

Franchise Deductible

Q: What happens to a loss that falls just below a franchise deductible's threshold?

It is not paid at all — Below the threshold, a franchise deductible pays nothing whatsoever — there is no partial payment zone the way an ordinary deductible provides.

All or nothing at the threshold

A deductible that pays nothing below its threshold, but pays the entire loss — not just the excess — once the loss reaches or crosses that threshold.

Open the interactive version → definition, quiz, structure diagram and progress tracking

Definition

A franchise deductible works fundamentally differently from an ordinary deductible. An ordinary deductible always subtracts its amount from any loss, however large. A franchise deductible instead sets an all-or-nothing threshold: below it, the loss is not paid at all; at or above it, the entire loss is paid from the first dollar, with no deduction applied at all. This creates a sharp cliff-edge right at the threshold — crossing it by even a small amount changes the payout by the full deductible amount.

Below the threshold, nothing is paid at all; at or above it, the full loss is paid from the first dollar — there is no partial payment zone the way an ordinary deductible has.
This makes it fundamentally different from an ordinary deductible, which always subtracts its amount from the loss regardless of how large that loss is.
It creates a sharp cliff-edge incentive right around the threshold, since a loss just below it pays zero while a loss just above it pays in full.

Worked example

A marine cargo policy carries a $100,000 franchise deductible: a $95,000 loss is paid $0, while a $105,000 loss is paid in full at $105,000, with no deduction at all.

Scenario · figures in USD

A five-thousand-dollar difference changes everything

A policy carries a $100,000 franchise deductible. Two similar losses occur on different insureds during the year.

Franchise deductible threshold	$100,000
Loss A	$95,000
Amount paid on Loss A	$0 — below the threshold
Loss B	$105,000
Amount paid on Loss B	$105,000 — the entire loss, no deduction applied

So whatA $10,000 difference in loss size produces a $105,000 difference in payout — the franchise deductible's all-or-nothing structure, not the loss size itself, drives that gap.

Check your understanding

How does a franchise deductible treat a loss that falls just above its threshold?

It pays the entire loss in full, with no deduction applied at all. Once a loss reaches or exceeds a franchise deductible's threshold, the entire loss is paid from the first dollar — unlike an ordinary deductible, no amount is subtracted.

What happens to a loss that falls just below a franchise deductible's threshold?

It is not paid at all. Below the threshold, a franchise deductible pays nothing whatsoever — there is no partial payment zone the way an ordinary deductible provides.

Word problem

A policy has a $250,000 franchise deductible. Three losses occur: $240,000, $250,000, and $260,000. How much is paid on each, and why does the middle loss matter so much to how this deductible works?

Show a hint

Remember the threshold itself counts as "at or above" — check whether $250,000 qualifies as reaching the threshold.

Reveal the worked answer

Loss of $240,000: below the $250,000 threshold, so $0 is paid.
Loss of $250,000: exactly at the threshold, which qualifies as "at or above" — the entire $250,000 is paid in full.
Loss of $260,000: above the threshold — the entire $260,000 is paid in full, with no deduction.
The $250,000 loss matters because it demonstrates the deductible's edge case: reaching the threshold exactly is enough to trigger full payment, not just exceeding it.

The $240,000 loss pays $0, while both the $250,000 and $260,000 losses pay their full amounts in full — $250,000 and $260,000 respectively — with no deduction applied to either. The exactly-at-threshold loss confirms that reaching the deductible, not just exceeding it, is enough to trigger full first-dollar payment.