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Unless otherwise agreed, cover shall be subject to the Association’s standard deductibles set out in Appendix V.
A ‘deductible’ is the amount of liability, loss, cost or expense that is insured by the Association which the Member has agreed to bear and which must be exceeded before compensation is payable by the Association to the Member. When the deductible is exceeded, it is only the amount that is in excess of the deductible that is recoverable from the Association. For example, if the Member has agreed to bear a deductible of USD 20,000 and incurs a liability for a claim that is made against him for USD 100,000, the Member is entitled to receive only USD 80,000 from the Association.
A ‘deductible’ should be distinguished from a ‘franchise’. A franchise provides that no claim is paid by the insurer unless it exceeds a specified sum, but that any claim that is made for a sum that exceeds the franchise is paid in full. For example, if the Association has agreed to a franchise of USD 20,000 and the Member incurs a liability for a claim that is made against him for USD 100,000, the Member is entitled to receive USD 100,000 from the Association.
Deductibles reduce the time and expense that would otherwise be spent on handling and processing small claims, and allow the Association to concentrate on larger claims. Deductibles also encourage Members to exercise more care in their affairs since, by agreeing a deductible, they retain a measure of financial responsibility for any loss or liability that may arise.
A list of the standard deductibles for P&I entries and Defence entries that apply from time to time is set out in Appendix V. However, by use of the phrase “unless otherwise agreed”, the Association and the Member are able to agree that deductibles other than the standard deductibles should apply to a particular entry. This flexibility enables the Member to increase or decrease the degree of risk that he wishes to retain and also to modify the premium that is payable. Indeed, Members will often prefer to accept higher deductibles in exchange for the payment of lower premiums if this is acceptable to the Association.