What is a first dollar deductible?

Insurance Q&A: “What is a first dollar deductible?”

You’ll need to pay close attention to this post. The term “first dollar” can mean more than one thing in the insurance world.

One explanation is relatively straightforward and easy to understand. The other…not so much, and a lot of differing opinions materialize as to the exact definition and how the coverage works.

The easier of the two concepts typically relates to personal lines insurance, whereas the more difficult version deals with professional liability insurance.

Likely, you are here to read about the easy to understand definition, so here goes.

What is a first dollar personal lines policy?

A first dollar personal lines insurance policy is one where an insurance deductible does not apply. This may be a health insurance or property and casualty insurance policy, such as an auto or homeowner’s insurance policy.

The insurer assumes payment once an insurable event occurs. Even though there is no deductible, the amount the insurance company will pay is usually lower compared to similar insurance plans that have a deductible. The monthly premium for the first dollar plan will be higher.

So, first dollar plan is typically more expensive than a similar deductible plan. If the costs are similar, then the first dollar coverage will usually have lower payout limits. Due to this, a first dollar policy is not a popular plan compared to a deductible plan. First dollar coverage policies have a higher premium cost because insurance companies carry a greater risk for insuring items.

Typically, insurance policies have a deductible clause. With a health insurance plan, this is the amount of money you are responsible to pay before coverage “kicks in.” A first dollar health insurance coverage will have low limits because there’s a cap on the maximum amount the insurer can cover.

For example, you may have a $1,000 deductible, which means the first $1,000 worth of doctor visits and medical bills you incur during a policy term is paid out of your own pocket. Anything above that amount is paid by the insurance company (subject to any co-pay).

On a property insurance policy, the deductible is a predetermined amount of money the insurer will subtract from the overall amount of money they pay out for property damage.

Perhaps your roof was damaged by hail. If your roof sustains $10,000 in damage, you may receive a check for $9,000 from the insurer after your $1,000 deductible is taken into account.

With “first dollar” insurance coverage, you don’t pay a dime when visiting a doctor or filing an insurance claim. The insurer simply coughs up the money and you’re squared away (a co-pay may still apply on the health insurance policy).

However, those who criticize first-dollar plans point out that this type of coverage places unnecessary strains on the health system and and increases the prices because people tend to misuse or overuse health services.

But good luck finding a property insurance policy with no deductible. It’s almost unheard of. If you can find one, expect to pay an outrageous premium.

What is a first dollar commercial lines policy?

This one is a little different and a little more complicated. Basically, “first dollar” on these types of policies, professional liability for example, refers to how liability limits are split between defense costs and actual damages awarded as a result of being found negligent for a loss.

A first dollar defense policy refers to one in which attorney fees for your defense in court are not subtracted from the policy’s overall liability limit.

For example, if you have a $1,000,000 liability limit and are found negligent in a particular claim, your policy would pay out up to $1,000,000 in actual damages IN ADDITION to your defense costs.

Without first dollar coverage, your total liability limit would include defense costs. This could present a significant financial problem for you if the “injured” party in your lawsuit was awarded $1,000,000 in damages and your defense costs amounted to $200,000.

You would be on the hook for the $200,000 of remaining damages after your attorney fees are subtracted from your overall liability limit.

Wait, There’s More

So, does the example above mean there is no deductible? Not necessarily. There may still be a deductible, depending on the outcome of the suit filed against you.

If the suit is dropped or you are not found negligent, there is no deductible with the first dollar defense policy. The insurer pays for the defense costs in full.

On the other hand, if you are found negligent and damages are awarded to the injured party, your normal deductible would apply…first dollar coverage or not.

It is more common for damages to be awarded than not, so many insured opt not to pay the additional insurance premium for the first dollar coverage, as it’s assumed a deductible will be applied by the time it’s all said and done.