Thanks to Hurricane Matthew, 2016 was the first time in more than 10 years many of us have filed wind storm claims. Some learned their deductibles are more complex than they may have thought!
Prior to the early 2000’s, we commonly saw “flat” deductibles for ALL covered perils, including wind storm events. A flat deductible is a specific dollar amount - typically $2,500 or $5,000. Insurance companies then started looking more closely at high risk perils, such as earthquake (in California) and wind storm (in Florida), and applying percentage deductibles to them in lieu of flat deductibles.
How the Percentage Deductible works
Unlike the flat deductible, the percentage deductible is a percentage of the building’s insurable value. For example, if you have a 5% deductible on a $1,000,000 building, then your deductible is $50,000 (5% of $1,000,000). Assume the building suffers $75,000 in hurricane damage. The insurance company will pay out $25,000 ($75,000 in damage minus the $50,000 deductible = $25,000 insurance payment). This is a big difference from the flat dollar amount deductible, which again, is typically $2,500 or $5,000 per claim.
For Florida condominium associations, the percentage deductible almost always applies to Hurricane, Wind Storm, and Hail - while the flat deductible applies to other covered perils, such as Fire or Vandalism.
With this in mind, here are The Five Things Every Condominium Association Must Understand About Their Hurricane Deductible:
#1 Understand What The Percentage Actually Applies To
We sometimes fall into the habit of assuming the “Percentage Deductible” applies only to hurricanes. But this isn’t true. Your percentage deductible may be broader than that and apply to all "Named Storms”. This would include both Tropical Storms and Hurricanes, and is not as advantageous to the association as a pure “Hurricane” Deductible. The percentage deductible may also apply to “Other Wind” which can include tornados. Some insurance policies also apply the percentage deductible to Hail damage. It’s important to look at the exact wording in the deductible section of your declarations page. The key words to look for are: Hurricane, Named Storm, Wind, Other Wind, and Hail.
#2 Make Sure Your Deductible is Applied Per Structure, Not Per Total Insurable Value.
If your association has more than one structure, does your percentage deductible apply to each structure, or to the Total Insurable Value (TIV)? For example if you have five (5) $1,000,000 buildings, you will want to make sure your percentage deductible applies per structure (1 million), not per Total Insurance Value (5 million). The difference is $50,000 vs. $250,000! This is very important, especially if you suffer damage to only one building.
#3 Your Percentage Deductible Changes When Your Insurable Value Changes
Florida Statute 718 requires condominium associations to have an updated appraisal every 36 months. It’s assumed that your premium will increase as your insurable values increase, but don’t forget your percentage deductible also increases. For example, when a building’s insurable value increases from $1,000,000 to $1,200,000, the deductible will also increase by $10,000! (Assuming a 5% deductible).
#4 Beware of the ‘Minimum' Deductible!
We commonly see minimum deductible clauses in the deductible verbiage of a policy. Common amounts are $25,000, $50,000, or $100,000. This means that even if the cost of your damage surpasses the deductible threshold, you will still need to meet the minimum deductible amount before the insurance company pays anything out to you. This is especially important to consider should you have damage to a smaller structure, such as a club house or pool building.
#5 Take Advantage of the "Calendar Year” Option
I recommend all associations take advantage of the Calendar Year option. This means that if we have multiple storms in one year, the percentage deductible will be applied only one time within the calendar year. The first hurricane has a deductible; the second hurricane is free!
Wrapping It All Up
Taking the above points into account, it’s easy to see that percentage deductibles are much more complex than they appear to be. To illustrate this point, here are two actual deductible clauses I’ve come across very recently:
•“Wind & Hail Deductible: 3% of the total insured value, subject to a $50,000 minimum”
•“Hurricane Deductible: 2% of the insured values per building, subject to a $25,000 per occurrence minimum as respects Calendar Year Hurricane and Wind Driven Rain. $10,000 per occurrence as respects All Other Windstorm and/or Hail”
Is it easy to interpret what they’re trying to say? Not easily! My point in all this is to say - don’t assume 3% is 3% and 5% is 5%. There’s much more to your deductible than just a percentage. Look closely at your policy and factor in the five items I have discussed. Doing so will put you in a better position to understand the application of your deductible and how a claim might affect your community.
Questions? If you have any questions or would like me to review your association’s insurance coverage, please contact me by e-mail at Kirk [at] WrenInsuranceAgency [dot] com. When you contact me, I will share with you a BONUS #6 to keep in mind regarding your Percentage Deductible.