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5 months ago

Understanding Hurricane Percentage Deductibles

When it comes to hurricane damage insurance claims, understanding the policy wording is essential. Confusing wording can make it difficult to decipher and apply to your loss - so we've put together a brief guide to hurricane percentage deductibles to help you in the event of a loss.

Key takeaways:

  • Wind damage deductibles are categorized as “hurricane” and “windstorm or wind/hail”.
  • Percentage deductibles typically vary from 1-5% of a property’s insured value.
  • There is a common misconception that this percentage applies to the loss sustained.

When damage occurs from hurricanes, policyholders are faced with hurricane deductibles, which are common in states along the Atlantic and Gulf Coasts. The meaning of “hurricane” may be determined by the policy wording or by state law. Generally, a windstorm is considered a hurricane only if it is declared as such by the National Weather Service. Though percentage deductibles have been used over the years, after Hurricane Andrew in 1992, percentage deductibles became more popular in policies, especially after Katrina in 2005 dealt out $125 billion in damage.

The common misconception is that the percentage applies to the loss sustained when, in fact, the percentage deductible is a factor of the total insured value (TIV). The policy wording can be confusing, making it difficult to decipher and apply to your loss. Sigma7’s forensic accounting team are here to help you understand these deductibles and how they will apply should you be impacted by a hurricane.

Here are a few items to look for in your policy: 

  • The following notice may appear on your policy cover – Florida information: “THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU.”
  • The percentage may be based on various parameters. It may be per location or be more defined by structure. When it’s applied by structure, it can be more advantageous for policyholders since the percentage would apply only to that structure’s TIV.
  • It may pertain separately to property and time element losses of affected location(s), or it may combine business interruption and property. It is important to understand your specific policy’s wording to accurately calculate your out-of-pocket expenses before insurance kicks in. Further, contingent losses may again involve a separate percentage deductible.
  • Percentage deductibles are often associated with a minimum deductible and, less commonly, a maximum deductible.

Here are a few examples of policy wording related to CAT loss deductibles: 

  • When a % deductible is stated above, whether separately or combined, the deductible is calculated as follows:
    • Property Damage – % of the value, per the Valuation clause(s) of the PROPERTY DAMAGE section, of the property insured at the location where the physical damage happened.
    • Time Element – % of the full Time Element values that would have been earned in the 12-month period following the occurrence by use of the facilities at the location where the physical damage happened, plus that proportion of the full Time Element values at all other locations where TIME ELEMENT loss ensues that was directly affected by the use of such facilities, and that would have been earned in the 12 month period following the occurrence.
  • As respects property located in high-hazard zones for earth movement:
    • Property Damage: 5% per location, Time Element: 5% per location
    • The above are subject to a minimum deductible of USD500,000 or, if applicable, the location deductible for Property Damage and Time Element combined per location, and a maximum deductible of USD15,000,000, combined all coverages, per occurrence.
  • When a % deductible is stated above, whether separately or combined, the deductible is calculated as follows:
    • Property Damage – % of the value, per the Valuation clause(s) of the PROPERTY DAMAGE section, of the property insured at the location where the physical damage happened.
    • Time Element – % of the full Time Element values that would have been earned in the 12-month period following the occurrence by use of the facilities at the location where the physical damage happened, plus that proportion of the full Time Element values at all other locations where TIME ELEMENT loss ensues that was directly affected by the use of such facilities, and that would have been earned in the 12 month period following the occurrence.

Deductibles for CAT losses have become more complex over the years. Interdependent operations spread the impact of loss across the organization, so it’s increasingly challenging to have confidence in the preliminary evaluation, especially when informing key stakeholders. Those who have had losses know, with hindsight, there are gaps in understanding and initial questions that are critical to the deductible evaluation. Our advice is to avail yourself of a candid, independent review from the start so that whether you have a recoverable claim or not, you’ll be informed and prepared.

To understand more about the intricacies of your policy relating to hurricanes or other categories of risk, don’t hesitate to get in touch. 

Author: Jeff Esper

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