by DiTesco

Created on: February 24, 2009   Last Updated: March 02, 2009

Excess (or deductible) and Franchise are usually terms utilized by Insurance Companies as a form of providing a limit to their potential liabilities, should a claim arise. Both can fixed or variable, depending on the type of risk assumed and the sum insured. An Insurer, in some cases will not underwrite an Insurance Policy without containing one of these provisions. This is particularly true in some "lines Of Business" such as "Transportation of Goods", "Automobile" and certain "ALL Risks" Insurance Policies. Obviously, the insurance premium you will be paying for, will also depend on these factors, when calculated.

By definition: A franchise is a provision in the insurance policy whereby the insurer will not pay unless damage (or loss) exceeds the franchise amount, whereas, excess (deductible) is a provision in the insurance policy whereby the insurer will pay any amounts of damage that exceed the excess (deductible) amount.

As an example, we can use the following:

Franchise:

You are transporting goods and your insurance has a Capital Insured for $50,000. The insurance policy contains the franchise provision that claims must exceed 10% (or $5000). Say you had an accident while transporting your goods and the total value of your loss is $4000. Under this circumstance, you are responsible for the entire $4000 and the insurance company will not pay you anything on this loss. On the other hand, if the total value of the damage to your goods were $8000, the insurance company is responsible for the entire $8000, and you will receive this amount if full.

Excess (or Deductible):

Following the same example as above, the difference being that your insurance policy contains the excess (deductible) provision that the insurance company will not pay the first 10% ($5000). On the first scenario, you are responsible for the $4000 in it's entirety and the Insurance Company will not pay you anything (same as franchise). However, in the second example (loss at $8000), you will be responsible for the first $5000 (your deductible) and will therefore receive only $3000 from your Insurer.

The above explains the difference between an excess and a franchise type of provisions for an Insurance policy. You should carefully consider which option you believe will be better for you. Remember that your premiums will vary in accordance with what you choose. The "Franchise" type will be a better choice, however, in most occasions it will certainly cost you more.

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