With Texas still dealing with the remnants of one major hurricane and Florida about to contend with another, Thursday’s Wall Street Journal called considerable attention to hurricane deductibles:
These deductibles were widely put in place after Hurricane Katrina in 2005 and have been standard in many states for years. But they have rarely been triggered on a large scale because few hurricanes have landed in the U.S. over the past decade.
The Journal article called them “little known provisions that allow insurers to shift thousands of dollars of damage costs” onto homeowners. Most industry experts would quickly point out that this reduces premiums – by hundreds of dollars a year in hurricane-prone states like Florida.
A recent poll by the Insurance Research Council found that about a third of coastal residents were unfamiliar with hurricane deductibles. (The flip side, of course, is that two-thirds were familiar with them – less than anyone would like but comparable to what the public understands about other insurance concepts.)
The concept is simple: To limit their exposure to catastrophic losses from hurricanes, insurers in coastal states sell homeowners insurance policies with percentage deductibles for storm damage instead of the traditional dollar deductibles, which are used for other types of losses such as fire damage and theft.
The deductible is a percentage of the insured value of the home.
Here is an example of how a percentage deductible works: if a policyholder has a $5,000 covered loss and a 2 percent deductible and the insured value of the home is $200,000, then the insurance company will pay $1,000. The remaining $4,000 is he amount of the deductible (2% of $200,000 = $4,000).
Beyond the simple concept are many permutations from state to state. The deductible is reviewed by state insurance departments and may be subject to various laws and regulations. The details are spelled out on the declarations page of homeowners policies, generally one of the first pages of the document. (It will be clearly marked near the top.)
Below is a primer on deductibles and specifics for Florida and Texas – two states where the deductibles may become an issue in the coming weeks.
By Florida law, application of deductible is triggered by windstorm losses resulting only from a hurricane declared by the National Weather Service. Such deductibles apply for damage occurring from the time a hurricane watch or warning is issued for any part of Florida, up to 72 hours after such a watch or warning ends, as well as any time hurricane conditions exist throughout Florida.
Deductibles are set by law and may only apply once during a hurricane season. All insurers must offer deductible of $500, 2 percent, 5 percent and 10 percent of the policy dwelling or structure limits, with percentages based on the home’s total value. Regardless of percentage, the deductible must be stated in the policy as a dollar amount. This is true for both private insurers and the state-run Citizens Property Insurance Corp., which insurers many homes in high-risk areas. See website for details.
Texas insurance policies differ from most states because they can offer three types of deductibles: one applied to typical losses like fire; one applied to losses from nonhurricane windstorms and hail; and one applied to hurricane losses.
The hurricane deductible is calculated as percentage of dollar amount of coverage on a dwelling. The trigger varies by insurer, but is generally when the National Weather Service issues a hurricane watch or warning and it remains in effect for a specified amount of time after storm has passed. Intensity of hurricane may also affect the trigger.
Some insurers require a hurricane deductible to be a percentage of the insured value, but by law it must be shown on the insurance policy as a dollar amount.
Beach or FAIR Plan
The Texas Windstorm Insurance Association (TWIA), provides wind and hail coverage when it is not available in the insurance marketplace for 14 counties. The Texas FAIR plan operates statewide, but cannot provide wind and hail coverage in areas that are eligible for inclusion in the TWIA. TWIA covers only 14 coastal counties and five communities in Harris County [Galveston Bay].
The deductibles can vary by the type of residence:
- Residential Dwelling or Farm and Ranch Dwelling – Standard deductible is 1 percent (with $100 minimum); Optional deductibles range from $100 to $250 and from 1.5 percent to 5 percent.
- Mobile Home deductibles are 1 percent (with $250 minimum) – For property located inland of the intracoastal waterway or seaward of the intracoastal waterway and protected by an approved seawall; or 2 percent (with $250 minimum) for property located seaward of the intracoastal waterway and not protected by an approved seawall. See website for details.