Limits and deductibles can be used to customize coverage and adjust premium pricing of auto insurance policies.
Limits are the caps in dollar value that an insurance company has to pay in the case of an accident settlement. For example, mandatory auto insurance coverage requires $200,000 of third-party liability coverage. If a lawsuit arises from an accident where a driver is at fault, the insurance company will pay up to $200,000 in costs arising from the lawsuit. If the settlement works out to be $300,000, the insurance company still only pays $200,000. The at-fault driver remains responsible for the additional $100,000.
Since this amount is more than the average driver can pay, extended coverage is necessary to protect drivers against such an event. Most drivers in Ontario opt for extended coverage by purchasing additional insurance under their policy. This purchase adds to the total premium.
Deductibles, on the other hand, are an amount the insured driver pays in the event of an accident or loss. Deductibles apply to the optional insurance classes of collision and comprehensive coverage. When a driver carries a policy with a $300 deductible, in the event of a claim, the driver pays the first $300 of costs for repairs or replacements. The insurance company then pays the balance of costs. A driver with a deductible of $1,000 pays that amount before the insurance company pays out.
Choosing a low deductible is more expensive in terms of an insurance policy. Since the insurance company accepts more risk, the driver’s premiums are higher. By assuming more risk with a higher deductible, the driver benefits from lower premiums, although they will be responsible for paying more to repair or replace a car after an incident.