What is the difference between an excess, a deductible and a franchise?
Three ways of setting an amount the insured bears — and although the first two are used almost interchangeably, the third behaves entirely differently.
Excess. The amount deducted from every claim payment. A £500 excess on a £3,000 claim means £2,500 is paid. Claims below the excess are not worth making, and the excess applies whether or not you were at fault in some policies.
Compulsory excess is set by the insurer; voluntary excess is chosen by the insured to reduce the premium, and the two are added together — which is how people find themselves with a far higher total excess than they intended.
Deductible. Functionally the same as an excess in most usage — the term is more common in commercial and American contexts. In some commercial policies a deductible may operate at an aggregate level across a period rather than per claim, which is a genuine difference worth checking.
Franchise. Behaves differently and is the one people misunderstand. A franchise is a threshold: claims below it are not paid at all, but claims above it are paid in full, with nothing deducted.
So with a £500 franchise, a £400 claim pays nothing and a £3,000 claim pays £3,000 — whereas a £500 excess on the same claim pays £2,500.
Where franchises are used: marine and some specialist policies, and occasionally for time-based cover such as travel delay, where a delay must exceed a number of hours before any benefit is paid — and then the full benefit applies.
Why the distinction matters practically. A franchise creates a cliff edge, which has an obvious consequence: there is an incentive for a claim to be valued just above the threshold rather than just below it, which insurers are aware of.
Other things that affect what you receive:
Average (underinsurance) clauses, reducing payment proportionally where the sum insured was inadequate.
Betterment, where new-for-old is not provided and a deduction is made for wear.
Excess waivers, purchased separately.
Multiple excesses applying to different sections of one policy, and sometimes to one event affecting several sections.
Why higher excesses reduce premiums: small claims cost disproportionately more to handle relative to their value, and a higher excess removes them.
General information, not advice.