In a commercial insurance policy, what does the term 'excess' refer to?

In a commercial insurance policy, the term 'excess' refers to the amount that the insured agrees to pay out-of-pocket before the insurer settles a claim. This concept serves as a form of cost-sharing between the policyholder and the insurer, encouraging the insured to take care in mitigating risks, as they will bear some of the initial financial responsibility in the event of a claim.

When a claim occurs, the excess amount is deducted from the total claim amount that the insurer would otherwise pay. For example, if a policy has an excess of $1,000 and a claim of $5,000 is made, the insured will pay the first $1,000 while the insurer will cover the remaining $4,000. This mechanism is common across insurance policies as it can also help to lower premiums, as a higher excess often results in lower insurance costs.

In contrast, the other options address different insurance components. The amount payable by the insurer pertains to the total reimbursement after applying any excess, while the total insured value refers to the maximum payout limit of the policy. Premiums submitted for the policy denote the fees paid for the coverage but do not relate to the satisfaction of a claim. Understanding the concept of excess is crucial for policyholders