DEFINITION of ‘Buyback Deductible’
An insurance contract provision that allows an insured party to pay a higher premium in order to reduce or eliminate the deductible that the insured would have to pay if a claim is made. A buyback deductible, also called a deductible buyback, can be an add-on to an existing insurance contract, or may be purchased separately.
INVESTOPEDIA EXPLAINS ‘Buyback Deductible’
Buyback deductibles may be used by homeowners who purchase property insurance, especially if the deductible on a claim is set at a high amount. This type of provision limits the first-dollar losses that the insured may experience by reducing or eliminating the deductible.
Insurers generally use deductibles to eliminate their exposure to the first-dollar losses associated with a claim. In order for the insurer to accept a lower deductible it would have to be financially compensated another way. In this case, the compensation is coming through a higher premium. This type of deductible is created through the payment of an incremental premium, which is used in lieu of the deductible that the insured would have to pay if a claim is made.
Provisions may set a per-occurrence limit on the buyback deductible limit. Homeowners may purchase this type of coverage to reduce the financial risk associated with catastrophes, such as earthquakes, hurricanes, and heavy storms. Often this type of coverage will have a higher limit than coverage for non-catastrophe perils.
For example, a homeowner purchases property insurance with a buyback deductible provision providing per-occurrence deductible protection in the case of damage resulting from high winds. Any damage done to the house that is not the result of high winds will not be covered by the provision, and thus, will lead to the standard policy deductible being used. If high winds are found to have caused the damage, the homeowner may see his or her deductible eliminated or reduced.