Excess (insurance)

An excess is the amount the insured retains on each claim before the insurer's indemnity engages, functioning as a first-loss layer that the insured must absorb either from its own resources or from a separately purchased excess buy-down.

Definition §

In UK liability and property insurance the excess is the amount of each claim that the insured retains. The insurer's indemnity engages on the portion of the claim above the excess and up to the per-claim limit. The excess therefore operates as a first-loss layer below the insurer's exposure. ^[1]

There are two broad mechanisms by which an excess can operate. The first is a deductible-style excess, where the excess is taken off the insurer's payment: the insurer indemnifies the full loss but recoups the excess from the insured, or pays only the balance after the excess. The second is a franchise-style excess, where the insurer pays nothing until the loss exceeds the excess threshold but then pays the loss in full. In modern UK liability practice the deductible style predominates; the franchise style is more common in some marine and goods-in-transit covers. ^[2]

Excesses are usually expressed on an "each and every loss" basis, meaning the insured retains the excess on each claim. Some wordings provide an aggregate excess, where the insured's total retention across the period is capped at the aggregate figure regardless of how many claims arise. Many wordings combine the two — an each-and-every excess subject to an aggregate cap. ^[3]

The interaction between the excess and the aggregation clause is critical. If multiple losses aggregate to one under the policy's aggregation wording, the insured pays one excess; if the losses remain separate, the insured pays an excess on each. ^[4]

Legal / Regulatory basis §

There is no statutory definition of "excess" in English insurance law. The concept is one of contractual drafting governed by the general principles of policy construction reflected in the Insurance Act 2015. ^[5]

Regulatory regimes affect excesses in two principal ways. First, professional regulators sometimes prescribe maximum permissible excesses in regulated minimum policy wordings. The SRA Minimum Terms and Conditions of Professional Indemnity Insurance permit a per-claim excess but in some circumstances cap the excess that may be applied to certain heads of liability. The detail varies and the current rules should always be consulted. ^[6]

Second, the FCA Insurance Conduct of Business Sourcebook (ICOBS) regulates how excesses are communicated and disclosed to consumers in retail markets. ICOBS does not control the level of excess but requires that it be appropriately drawn to the customer's attention. ^[7]

The case law on excesses is mostly embedded in the aggregation cases. The Supreme Court in AIG Europe Ltd v Woodman [2017] UKSC 18 and the House of Lords in Lloyds TSB v Lloyds Bank Group Insurance [2003] UKHL 48 do not focus on the excess itself but the number of excesses payable on a sequence of related claims is a downstream consequence of the aggregation analysis. ^[8]

The Marine Insurance Act 1906 includes statutory rules on partial losses and abandonment that interact with marine deductibles but are largely irrelevant to non-marine excesses. ^[9]

How it works in practice §

In practice the excess is the first figure the insured pays. When a claim is settled, the insured either pays the excess directly to the claimant or pays the insurer the excess (with the insurer having paid the claimant in full). The choice between these two routes is a matter of policy drafting and of operational convenience.

Where defence costs are payable in addition to the limit, the question of whether they erode the excess is important. Some wordings apply the excess to damages only, in which case defence costs are met by the insurer from the first pound. Others apply the excess to defence costs as well, in which case the insured pays the excess against the costs run before the insurer's indemnity engages.

Insureds who consider the standard excess unaffordable can sometimes purchase an "excess buy-down" or "deductible buy-down" policy from a separate insurer, which responds within the excess layer. This converts a high retained risk into an additional premium. The pricing of excess buy-down cover depends on claims frequency and severity history.

The excess interacts with the aggregation clause in a way that is most starkly visible where the insured suffers many small claims arising from a single source. If the claims aggregate, the insured pays one excess and the insurer covers the balance up to one per-claim limit. If they do not aggregate, the insured pays an excess on each — and many small claims may be entirely consumed by the excesses, leaving little or nothing for the insurer to pay. The choice of aggregation wording therefore directly affects the insured's net financial position even where headline limits are unchanged. ^[10]

Common variations §

The most common variation is between each-and-every and aggregate excess structures. An each-and-every excess applies per claim, regardless of the number of claims. An aggregate excess applies once across the period, with the insurer paying the balance of all claims above the aggregate retention.

Some wordings provide a stepped excess: lower for some heads of loss (such as defence costs) and higher for others (such as fraud-related claims). Others provide a higher excess for specified types of risk identified at placement.

A franchise excess provides that the insurer pays nothing on claims below the franchise level but pays in full on claims above it. This is less common in modern UK liability practice but appears in some specialist wordings.

An excess buy-down is a separate policy that sits within the primary excess and provides cover that the primary policy would otherwise leave to the insured. Excess buy-downs are common in regulated PI where the primary excess is dictated by the qualifying minimum.

Example §

A small accountancy firm holds professional indemnity insurance with illustrative limits of £2,000,000 each and every loss and a £20,000 each and every loss excess.

Six unconnected claims are notified during the policy year. Each settles for £80,000. For each claim the firm pays £20,000 and the insurer pays £60,000. Across the six claims the firm retains £120,000 and the insurer pays £360,000.

If the six claims had aggregated to one under the policy's aggregation clause — for example because they all arose from a single defective spreadsheet template used to prepare the underlying client tax returns — the firm would have paid a single £20,000 excess and the insurer would have paid £460,000.

If, alternatively, the firm had purchased an excess buy-down policy covering the first £20,000 of each claim, the firm would have paid nothing on each claim and the buy-down insurer would have absorbed the £120,000 in aggregate retentions (against the additional buy-down premium paid).

These figures are illustrative; the actual position depends on the wording and the facts.

See also §

• /wiki/deductible/ — closely related concept
• /wiki/per-claim-limit/ — the corresponding upper ceiling
• /wiki/aggregate-limit/ — the period-wide cap
• /wiki/each-and-every-loss/ — basis on which excesses commonly apply
• /wiki/aggregation-clause/ — the mechanism that decides how many excesses are payable
• /wiki/professional-indemnity-insurance/ — the line of business
• /wiki/commercial-insurance/ — broader context

References §

1. ↑ Insurance Act 2015 — https://www.legislation.gov.uk/ukpga/2015/4
2. ↑ SRA Minimum Terms and Conditions of Professional Indemnity Insurance — https://www.sra.org.uk/solicitors/standards-regulations/indemnity-insurance-rules/
3. ↑ FCA Handbook, ICOBS — https://www.handbook.fca.org.uk/handbook/ICOBS/
4. ↑ AIG Europe Ltd v Woodman [2017] UKSC 18 — https://www.supremecourt.uk/cases/uksc-2016-0033.html
5. ↑ Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] UKHL 48 — https://publications.parliament.uk/pa/ld200203/ldjudgmt/jd031106/lloyds-1.htm
6. ↑ Marine Insurance Act 1906 — https://www.legislation.gov.uk/ukpga/Edw7/6/41