If you live in a part of the country prone to hurricanes, brace
yourself. If it hasn't happened already, your home insurance
company may force you to take a policy with
for damage caused by hurricanes and windstorms.
In the past a typical home insurance policy had a standard
dollar deductible (such as $1,000) for damage caused by fire, theft
and other losses. Your insurer was responsible for paying the rest
of the claim. (See these
home insurance basics
But percentage-based deductibles are flooding the market. These
policies use deductibles based on your home's
So a homeowner with a house insured for $200,000 with a 5 percent
deductible for hurricane losses would have to cough up $10,000 for
repairs before his insurer would begin to pay. These deductibles
generally kick in when a "named storm" hits your area. In other
words, a bad thunderstorm can't trigger a hurricane deductible.
Percentage-based deductibles cost an insurer
but a homeowner
. Homeowners getting new or renewed policies with percentage-based
deductibles aren't paying less in premiums.
Home insurance companies justify using percentage-based
deductibles by asserting that the weather is worsening in the areas
where most people reside.
"Fifty-three percent of the population lives within 50 miles of
a coastline," says Loretta Worters, a spokesperson for the
Insurance Information Institute (III), which represents the
insurance industry. "We're in the midst of a cycle of hurricane
activity that will be more frequent and more intense. We've already
been through Andrea, the first named storm of the season."
Individual insurers didn't respond to requests for comment, or
declined to comment.
The start of it
The hurricane deductible originated in Florida after Hurricane
Andrew in 1992, and became standard in policies throughout the Gulf
States. This deductible is predictably the most common one since
hurricanes and tropical storms represent 42 percent of total
catastrophe losses, followed by tornadoes at 34 percent.
But when major storms began to pummel the East Coast, the
concept spread north.
"Insurers are now expanding the northern boundary of the
'named-storm territory' from Virginia to Maine," says David Finnis,
who covers the property-casualty market for insurance broker Willis
North America. Hurricane deductibles are now in effect in 19 states
and the District of Columbia.
According to the III, these states allow percentage-based home
- New Jersey
- New York
- North Carolina
- Rhode Island
- South Carolina
- Washington, D.C.
But hurricane deductibles couldn't save insurance companies when
Superstorm Sandy hit right before Halloween last year. With winds
just below the 74-mile-per-hour threshold for hurricane status when
it reached land, eight hard-hit states issued "no-hurricane
deductible" decrees, and insurers weren't allowed to impose
percentage-based deductibles. That
cost insurers $25 billion
And hurricane deductibles couldn't help insurers during the
recent spate of 200-mile-per-hour tornadoes, which leveled several
Midwestern towns and cost insurers
more than $4 billion.
As a result, many insurers now put another so-called "wind
deductible" into their homeowners' policies. Simply put: Insurance
won't pay if
wind, hurricane-strength or less, blows the roof off your home, or
if hail shatters your windows and dents your siding, unless the
damage exceeds your percentage-based deductible.
"They will soon be everywhere," complains J. Robert Hunter of
the Consumer Federation of America.
Apples to apples
There's a lot of anger over these percentage-based deductibles,
particularly in Texas, which is already the most expensive state
for homeowners' insurance. (See rankings on the
Insurance Information Institute website
"We have pushed lawmakers to require home insurers to disclose a
dollar equivalent alongside the percentage deductible on the policy
so homeowners can make an apples-to-apples comparison," says Alex
Winslow, executive director of Texas Watch. "And despite industry
pushback, we passed a bill which requires this and are awaiting the
signature of Gov. Perry."
In Sandy-ravaged New York, lawmakers introduced legislation to
cap percentage-based hurricane deductibles at $1,500.
'Paying more and getting less'
Insurers say that percentage-based deductibles benefit everyone.
Without them, home insurance rates would rise in hurricane- and
tornado-prone areas and, if insurers couldn't raise rates enough to
make a profit, they would have to exit some states altogether.
But consumer advocates aren't convinced. "Rates are going up
even with the deductible," says Amy Bach, of the non-profit United
Policyholders group, which represents consumers.
And in Texas, where State Farm, the nation's largest home
insurer, has mandated percentage-based deductibles, premiums have
soared in recent years, says Winslow. "Homeowners are paying more
and getting less."
Property insurance rates rose 5 percent in May 2013, according
to MarketScout, the industry's largest insurance exchange. And,
while property losses totaled $65 billion last year, that figure is
still a 44 percent improvement over 2011, says Willis's Finnis.
More importantly, policyholder surplus (the money with which the
industry pays claims) grew $20 billion from 2011 to 2012.
"The industry is well capitalized to absorb losses," says
Do you have a percentage-based home insurance deductible?
- Reread your policy to see if it contains a hurricane or
windstorm deductible. Insurers involved in Superstorm Sandy or
worried about the next doomsday event might have snuck it in the
deductibles section or put it there awhile ago at your renewal
time without you even knowing.
- Compare this year's and last year's policy to see if the
percentage deductible went up. A 1 or 2 percent windstorm
deductible could now be 5 percent.
- Determine what "triggers" your deductible, such as wind
speed, and if so, for what length of time the wind has to blow at
- Find out if your insurer lets you choose the type of
deductible in your policy, either a percentage-based deductible
or a capped dollar deductible, which often costs more but may be
a better choice if you live in a storm zone.
- See if the insurance company offers any alternatives to the
percentage-based deductible. New Jersey Manufacturers, for
example, is willing to forgo it if the policyholder "hardens his
home" with hurricane straps on the roof rafters, venting,
laminated glazing on the windows and improved garage doors.