Choosing an excess on business liability insurance: when a higher excess pays off
How excesses work on Australian public liability and business insurance, the break-even arithmetic for a higher excess, special excesses and cash-flow checks.
A higher excess pays off only if the premium saving is larger than the extra excess you expect to pay over time. The quick test: divide the annual premium saving by the extra excess per claim. The answer is the number of claims a year at which the two options cost the same. If you would expect fewer claims than that, the higher excess is likely to save money; if more, the lower excess is better. Then check that you could pay the higher excess several times in one year without hurting cash flow, and read whether the excess applies to injury claims, property damage claims or both.
This guide is part of the business insurance quote checklist. Figures are illustrative. The excess decision interacts with the limit, covered in choosing a public liability limit.
How excesses work on liability policies
The excess (sometimes called a deductible) is the part of each claim you pay. On Australian public liability policies:
- the standard excess often applies to property damage claims only, with no excess for personal injury, although some policies apply it to both;
- an excess usually applies per occurrence, so two separate incidents mean two excesses;
- there may be special excesses for particular risks, such as water damage, underground services, work at heights or damage to property being worked on;
- some insurers can ask you to pay the excess to the third party directly, and others pay the claim in full and recover the excess from you.
On professional indemnity and management liability policies the excess often also applies to defence costs, which makes it more important.
The break-even calculation
Illustrative quotes for a plumbing business:
| Option | Property damage excess | Total premium | Saving vs $500 excess | Extra excess per claim |
|---|---|---|---|---|
| A | $500 | $1,450 | – | – |
| B | $1,000 | $1,320 | $130 | $500 |
| C | $2,000 | $1,220 | $230 | $1,500 |
Break-even claim frequency:
- B vs A: $130 / $500 = 0.26 claims a year, or about one property damage claim every 3.8 years.
- C vs A: $230 / $1,500 = 0.153 claims a year, or about one claim every 6.5 years.
If the plumber has made one property damage claim in the past ten years (0.1 a year), both higher excesses are likely to save money on average. If the business has averaged one claim every two years (0.5 a year), the $500 excess is cheaper overall.
Expected annual cost, step by step
Using the same quotes and a frequency of 0.2 property damage claims a year (one every five years), with claims always larger than the excess:
- Option A: $1,450 + 0.2 x $500 = $1,550
- Option B: $1,320 + 0.2 x $1,000 = $1,520
- Option C: $1,220 + 0.2 x $2,000 = $1,620
Option B has the lowest expected cost at this frequency. Option C saves $100 a year against B but costs $1,000 more per claim, so it becomes the cheapest only below $100 / $1,000 = 0.1 claims a year, or fewer than one claim in ten years.
Small claims matter too. If a claim is smaller than the excess, you pay all of it and the insurer pays nothing, which also means a higher excess filters out small claims that might otherwise appear on your claims history.
Cash-flow test
Expected cost is an average. In a bad year you might have two or three incidents. Before choosing a higher excess, check:
- Could the business pay the excess three times in one month?
- Does a client contract cap the excess you may carry? Some head contracts specify a maximum.
- Would a larger excess push you to settle claims yourself, without notifying the insurer? That can cause problems if the claim later grows. Always notify incidents as the policy requires.
Special excesses to look for
| Special excess | Where it appears | Why it matters |
|---|---|---|
| Water damage or escape of liquid | Plumbers, tilers, waterproofers, cleaners | Often the most common property damage claim for these trades |
| Underground services | Excavators, landscapers, fencers, electricians | Damage to cables and pipes can be costly |
| Property being worked on | Trades and cleaners | Some policies apply a higher excess or a sub-limit |
| Heat or hot works | Welders, plumbers, roofers | Fire risk |
| Products | Importers and manufacturers | May differ from the public liability excess |
| Injury claims | Some higher-risk activities | Unusual, but check |
A quote with a low headline excess but a $5,000 water damage excess may be worse for a plumber than one with a $1,000 excess applying to everything. Test the quotes with the liability quote comparison tool, entering the excess that would apply to your most likely claim. The worked quote comparison shows how excess differences change the ranking.
When to keep a low excess
- Your trade has frequent small property damage claims.
- Your cash reserves are thin.
- Your contracts set a maximum excess.
- You are new to the trade and your claims frequency is unknown.
When a higher excess may make sense
- Long history with few or no claims.
- Good cash reserves.
- The saving is large relative to the extra excess.
- Your contracts allow it.
Frequently asked questions
Do I pay the excess if the claim is not my fault?
If the claim is defended successfully and nothing is paid to the third party, policies vary on whether an excess applies to defence costs. Read the excess clause.
Can I change the excess at renewal?
Yes. Ask for quotes at two or three excess levels each year.
Is the excess tax deductible?
An excess paid by a business in connection with its income-producing activities is generally deductible. Check with the ATO or your tax agent.
Does the excess affect GST?
GST and stamp duty are calculated on the premium, so a lower premium from a higher excess also reduces the tax.
Sources
- ASIC Moneysmart — general guidance on how excesses work
- Australian Taxation Office — business deductions
- AFCA — examples of disputes about excesses and policy terms
- business.gov.au — business insurance guidance
