Insurance Academy

Pay Attention to the Hurricane Deductible

By Patrick Wraight | September 12, 2018

It’s hurricane season.

I’ll wait for your shock to subside. If you live in a coastal state from Texas on the Western Gulf Coast to Virginia, you already knew it was hurricane season. I’m just reminding those who don’t live in the area, or who aren’t Weather Channel aficionados (and why not?). Yeah, I’m a Cantore fan. So what?

Since we’re all watching the National Hurricane’s website, it’s worth discussing something that will affect several of our customers over the next few weeks; hurricane deductibles. For today’s discussion, I’ll be using a carrier’s proprietary Hurricane Percentage Deductible form.

If you have customers that might have hurricane deductibles on their property, you should go RIGHT NOW and look up their policy, get really familiar with that form and prepare to make a phone call. This is not a time to simply take someone’s word for it. Go. Get. The. Policy. (and read it, please.)

It’s important to pay attention to form titles. This is a hurricane percentage deductible. It is not a windstorm or hail percentage deductible. ISO has published a Windstorm or Hail Percentage Deductible endorsement (CP 03 21). There are important differences between the forms. What’s the difference? I’ll quote the ISO CP 03 21 to start.

The Windstorm or Hail Deductible, as shown in the Schedule and set forth in this endorsement, applies to covered loss or damage caused directly or indirectly by Windstorm or Hail. This Deductible applies to each occurrence of Windstorm or Hail.

That endorsement establishes a deductible that applies to the peril of windstorm or hail. Now, let’s look at our Hurricane Percentage Deductible endorsement.

The Hurricane Deductible, as shown in the Schedule and set forth in this endorsement, applies to covered loss or damage caused directly or indirectly by each occurrence of hurricane.

Did you notice the significant difference? The Windstorm or Hail Percentage Deductible applies to any loss or damage by any loss by and windstorm or hail. The Hurricane Percentage Deductible applies only to loss or damage by hurricane. That’s a big difference. By applying the percentage deductible to the peril of windstorm or hail, you have the potential for more restrictive coverage than the hurricane percentage deductible.

Windstorm or hail aren’t defined in the policy. They are terms that have been established over time. Hurricane is another thing entirely. Since it is an insurance form, we will have to define what a hurricane is since we are making a clear difference between windstorm and hail and hurricane.

Under the terms of this endorsement, a hurricane is a storm system that has been declared to be a hurricane by the National Hurricane Center of the National Weather Service. The duration of the hurricane includes the time period in “your state”:

  1. Beginning at the time a hurricane watch or hurricane warning is issued for any part of “your state” by the National Hurricane Center of the National Weather Service;
  2. Continuing for the time period during which the hurricane conditions exist anywhere in “your state”; and
  3. Ending 72 hours following the termination of the last hurricane watch or hurricane warning issued for any part of “your state” by the National Hurricane Center of the National Weather Service.

As used in this endorsement:

“Your state” means the state in which the scheduled premises are located.

That definition is important because as soon as the NHC issues watches or warnings in ANY PART of the state, the hurricane percentage deductible applies for any loss that might be attributed to the hurricane. As I’m writing this on Tuesday afternoon, there are hurricane watches posted from southern South Carolina to southern Virginia. You can be sure that the insurers writing hurricane coverage in those areas are already working to calculate hurricane deductibles.

It’s also important to note that this is a hurricane deductible. I know that we already established that, but it can’t be mentioned too much because it’s not a tropical storm deductible or named storm deductible. It applies to the hurricane event. You should also pay attention to the details of the definition of a hurricane because Hurricane Florence is forecast to be downgraded soon after making landfall. Even when it is renamed Tropical Storm Florence, the hurricane deductible may still apply.

The hurricane (according to the policy) is still a hurricane as long as any hurricane watch or warning exists in the state and for 72 hours after the last watch or warning expires. That means that even though it was barely a tropical storm when it impacted your customer, that hurricane deductible will apply. That could be a serious difference in deductible as we will see in more detail soon.

That’s not the only part of the endorsement that you need to be looking at. There’s another item that you must check. How does the hurricane deductible apply? Let’s look back at our Hurricane Percentage Deductible endorsement.

We will apply the calculations below to determine the amount, if any, that we will pay for loss or damage.

  1. Calculation of The Deductible – All Policies
  2. A Deductible is calculated separately for, and applies separately to:
    • Each building that sustains loss or damage;
    • The personal property at each building at which there is a loss or damage to personal property;
    • Personal property in the open.

If there is damage to both a building and personal property in that building, separate deductibles apply to the building and to the personal property.

I know you saw that. The commercial entity that owns this policy must be aware that their hurricane deductible applies to each building and to the personal property that is in each of those buildings. This is potentially a big deal. Let me give you an example from the policy that I’m reading right now. We’re going to ignore any coinsurance provision for this example (although you can’t ignore coinsurance ever, really, don’t ever do that).

Building 1: Building Limit: $500,500 Personal Property Limit: $90,900

Building 2: Building Limit: $125,000 Personal Property Limit: $2,800

Building 3: Building Limit: $252,000 Personal Property Limit: $12,600

5% Hurricane Deductible

Our insured suffers a loss from Hurricane Florence as follows:

Building 1 building damage: $100,000

Building 1 personal property damage: $10,000

Building 2 building damage: $20,000

Building 3 building damage: $25,000

Total amount of damage: $155,000 (it could have been a lot worse)

Now let’s apply the deductibles and find out how much of each of this loss is payable by the insurer.

Building 1 personal property deductible: $4,545 What’s paid: $5,455

Building 2 building deductible: $6,250 What’s paid? $13,750

Building 3 building deductible: $12,600 What’s paid? $12,400

What was the total of the loss? $155,000 What’s the total paid? $106,580

You have to remember that your insured will think that only one deductible will apply to this loss because that’s the way it’s always worked. That might be what you told them because that’s the way you’ve always seen it work. Hurricane deductibles are different. VERY. Different.

They had losses of $155,000 and they might be figuring that they’ll have to pay the largest deductible, which will be a lot anyway. What do you think they’ll say when they get the loss settlement letter from the carrier offering $106,580 instead of the $129,975 that they’re expecting?

Let’s make the scenario just a little worse and say that the insured assumed that they had a $500 deductible because that’s what someone told them, or that’s what they say somewhere. How are you going to explain that after they claim?

Remember that this is a sample hurricane deductible form that one carrier uses. There are others out there. This is an admitted carrier’s endorsement that’s been filed and approved by several state departments of insurance. Can you imagine what the hurricane deductible form might look like if your customer’s buildings are written on an E&S policy?

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at pwraight@ijacademy.com.

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