There are many things to consider when purchasing a home, including making sure that your new investment is properly insured. Many factors are considered in determining how a home is insured, one of the most critical being where the home is located. Is your new home located in a coastal area? If so, there are obstacles that must be contemplated and understood when choosing your homeowner’s insurance carrier—one of which is the difference between a “wind” and “hurricane” deductible.
Due to the greater risk of hurricanes in our region, policyholders must now share more of the hurricane risk with insurance companies. Many of the homeowner’s insurance policies issued in the eastern coastline of the United States contain “hurricane deductibles.” But do you know whether your policy has a hurricane deductible? And do you even know what a hurricane deductible is? Let’s begin the discussion with a very important question:
What is a ‘Hurricane Deductible’?
A deductible is the amount deducted from an insured loss when a claim is paid by the insurance company. A deductible can be either a fixed dollar amount, or a percentage of the total amount of insurance on a policy (usually the “building limit”). That percentage, along with details about a policy’s hurricane deductible, usually appears on the first page of your policy. However, in some contracts the terms and conditions relating to this matter are not
as noticeable.
While standard homeowner’s deductibles for fire, theft and many other types of losses included in the policy are stated as dollar amounts (such as $500, $1,000, or higher), hurricane and wind deductibles are generally calculated as a percentage, and vary from 1 percent to 5 percent of the home’s insured value. For example, if a home is insured for $900,000 and the policy includes a 5 percent wind deductible, the first $45,000 of any covered wind claim must be paid by the policyholder (5 percent X $900,000 = $45,000).
Every state’s insurance department will have its own rules that insurance companies must adhere to. States that allow insurance companies apply hurricane deductibles onto homeowner’s policies are Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas and Virginia.
In some coastal areas with high wind risk, insurers may require hurricane deductibles higher than 5 percent, the institute says. And some states let policyholders choose higher hurricane deductibles to reduce their premiums. Whether a hurricane deductible applies to a claim depends on the specific “trigger” picked by your home insurance company or state insurance department.
These triggers vary by state and insurer. They usually apply when the National Weather Service upgrades a tropical storm to a hurricane, issues a hurricane watch or warning, or defines a hurricane’s intensity.
As a result of the storm activity of recent years (including Hurricane Irene in 2011 and Superstorm Sandy in 2012), many homeowners insurance carriers now include a “wind” or “hurricane” deductible. In fact, many insurance carriers slipped in the change in deductibles with little notification to policyholders.
What is the difference between a “wind deductible” and a “hurricane deductible”? In addition to understanding how a deductible applies to your claim, it is critical to understand the difference between a wind and a hurricane deductible.
A hurricane deductible applies to damage sustained from a hurricane. Some insurance companies include a specific mile-per-hour wind speed, while others state that the hurricane must be designated as such by the National Weather Service or the National Hurricane Center. As a result, this form is more appealing.
A wind deductible is more penalizing than a hurricane deductible. A wind deductible applies to any wind damage, and is not limited to a storm that meets the definition of a hurricane or a particular “mile-per-hour” wind speed requirement. This form will impose the larger out of pocket cost to the policyholder for any and all wind claims.
Let’s look at how these two types of deductibles can affect the same claim.
Scenario 1: 5 percent hurricane deductible. A home is insured for $900,000 with a $1,000 Standard Property Policy deductible for all covered losses except for hurricane losses, which apply a 5 percent deductible. A tree falls on the roof on a windy day (not designated a hurricane). As the wind event does not meet the definition of a hurricane, a $1,000 deductible would apply.
Scenario 2: 5 percent wind deductible. In this instance, the above wind damage claim would be subject a 5 percent deductible, hence the out-of-pocket cost to the homeowner would be $45,000 (5 percent of $900,000).
As the above scenarios illustrate, there is a significant difference between a wind deductible and a hurricane deductible—which could have a significant impact on the amount of claim dollars a homeowner would receive and their out-of-pocket expense with a wind/hurricane-related event.
For this reason, it is important to review your insurance with an insurance professional who will ensure that your home is properly insured with the best terms and conditions available in
the marketplace.
It is very important for all property owners to read and understand the terms and conditions on their policy. Homeowners who have questions about their insurance policy should contact their insurance agent or company representative. By the way, standard homeowner’s insurance policies cover wind damage from a hurricane but don’t cover flood damage. Flood insurance must be purchased separately.
