The 2012 Hurricane Season Has Begun: Do You Understand Your Hurricane Deductible?

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“With hurricane season beginning this month and lasting until the end of November, it is important for homeowners to determine whether a hurricane deductible applies to their policy,” said Jeanne M. Salvatore, senior vice president and consumer spokesperson for the I.I.I. “Hurricane deductibles were put into place to make more private insurance coverage available at competitive rates. With the increase in coastal development, as well as the risk of more severe and costly hurricanes, consumers are now sharing more of the potential catastrophe risk with insurance companies.”

 

Eighteen coastal states allow insurers to incorporate hurricane deductibles into their homeowners policies: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas and Virginia.

 

While traditional, standard homeowners deductibles for fire, theft and other disasters listed in the policy are usually a flat dollar amount, such as $500 or $1,000, hurricane deductibles are generally calculated as a percentage and typically vary from 1 to 5 percent of a home’s insured value. So, if a home is insured for $300,000 and the policy on the structure has a 5 percent deductible, the first $15,000 of a claim must be paid by the policyholder in the event there is a windstorm or hurricane strong enough to meet the hurricane deductible threshold as described in the homeowners policy.

 

Hurricane deductibles are triggered only when certain criteria are met (e.g., after the National Weather Service has determined a Category 1 storm made landfall). The hurricane deductible triggers vary by state and insurer and usually apply when the NWS officially names a tropical storm, declares a hurricane watch or warning, or defines a hurricane’s intensity. Due to these differences, homeowners should check their policies and speak to their agent or insurance company representative to learn exactly how their particular hurricane deductible works.

 

In some states, coastal homeowners insurance policyholders may have the option of paying a higher premium in return for a traditional dollar deductible, depending on how close to the shore their residence is situated. In high-risk coastal areas, insurers often require the inclusion of a hurricane deductible before selling a homeowners insurance policy.

“Everyone, no matter where they live, should make sure they understand what is and is not covered under their home insurance policy,” said Salvatore. “Homeowners who have questions about their insurance policy should contact their insurance agent or company representative. They can explain hurricane deductibles and other parts of the policy.”

 

The Origins of Hurricane Deductibles

 

 

Hurricane Andrew caused $15.5 billion insured losses in 1992, the most expensive storm ever for insurers, with claims costing nearly four times as much as 1989’s Hurricane Hugo. It soon became apparent through an assessment of catastrophe-risk computer modeling, and residential development patterns, that home insurers were far more vulnerable to significant weather-related claims payouts than they had previously thought. Some of the largest insurers, for example, found it difficult to secure the reinsurance (insurance for insurance companies) coverage they needed to protect their bottom line because reinsurers were unwilling to assume so much risk. To get coverage from reinsurers, insurers agreed to reduce greatly their potential maximum claims payouts from hurricanes by requiring their policyholders to bear a greater share of the cost.

 

RELATED LINKS

Consumer Article: Understanding your Home Insurance Deductible

Issues Update: Catastrophes and Insurance Issues

Issues Update: Hurricane and Windstorm Deductibles