Many Homeowners Unaware of Deductible Formula

Higher deductibles sting homeowners

By M.P. McQueen
Sunday, Aug. 12 2007

A growing number of homeowners face sharply higher costs as more insurers change how they calculate deductibles, especially for damage caused by windstorms and other natural events.

The newer method of figuring deductibles is based on a percentage of the insured value of your house — typically between 1 percent and 5 percent, and even higher in earthquake zones.

With house prices having soared in many areas in recent years, this often works out to be far more costly to the homeowner than the traditional flat-dollar method of figuring deductibles, by which you pay the first $1,000 or so of home repairs.

As a result, homeowners increasingly are on the hook for thousands of dollars in repairs before the insurer pays any part of a claim.

Percentage deductibles were first widely implemented in earthquake insurance in the West in the early 1990s, and later spread to hurricane and windstorm coverage in the South.

Now, millions more homeowners are being affected as insurance companies, including State Farm Insurance Cos., Allstate Corp., Travelers Cos. and others, expand percentage deductibles for damage from high winds in the Northeast and from tornadoes and hail in the Midwest.

Insurance agents are concerned about a possible consumer backlash in areas where percentage deductibles are relatively new because, they say, many customers don’t understand the terms.

When insurers add the new deductibles, they explain them at renewal on the “declarations page” of the policy and sometimes in a separate notice, but many homeowners don’t bother to read them.

In many Northeastern states, the new deductibles weren’t in effect the last time the region suffered a direct hurricane hit in 1991, so many homeowners don’t know what to expect.

Paula Aschettino, a 60-year-old real estate broker in Cape Cod, Mass., said she was surprised to discover that her insurance policy covered none of the $7,500 cost of removing dozens of fallen trees after a freak windstorm in late 2005.

When she called her agent to report the damage, she says, he reminded her that she had a 2 percent wind deductible on her policy. As a result, she was responsible for $12,000 of repairs before the company would pay a penny. Aschettino said some dead trees still lie on her property because she can’t afford to remove them all.

“Part of the problem is, you don’t know what the hell you have (in your policy). People don’t pay attention because it is so frustrating,” Aschettino said.

As natural disasters threaten to drive up property losses in many parts of the country, insurers increasingly are passing along more of the financial risk to policyholders. Many insurers that initially required wind and hurricane deductibles of 1 percent in coastal areas have recently raised them to as much as 5 percent, while also introducing the deductibles farther inland.

So far, only a tiny fraction of policies use percentage deductibles on standard perils such as fire and theft.

But insurance regulators and experts say they expect percentage deductibles will continue to spread through the industry and affect many more homeowners on their standard policies, as insurers seek to limit the cost of claims. Already, some insurers have started offering percentage deductibles as an option for homeowners who want to reduce the size of their premiums.

“We definitely are seeing a trend that they are moving to percentage deductibles rather than an actual (flat-dollar) amount,” said Sandy Praeger, president-elect of the National Association of Insurance Commissioners. She said percentage deductibles help insurers stabilize rates.

Homeowners should check with their agents about whether they’ve had new deductibles added to their policies. They also should ask if their coverage for damage from windstorms, earthquakes or other disasters has been dropped entirely. Allstate, for example, has dropped earthquake coverage in many states and wind coverage in shoreline communities from Florida to Texas.

Homeowners can try to shop around. In some states, like New Jersey, some insurers allow homeowners to choose whether to accept a separate percentage deductible for hurricane damage, or pay a higher premium to avoid it, except in certain coastal areas where the deductible is mandatory.

With wind damage, the level of storm severity that triggers percentage deductibles varies among insurers and states. In the Northeast, many insurers’ deductibles are set to kick in with damage caused by the lowest grade of hurricane, known as a Category 1.

But other insurers have more sweeping wind deductibles. In Massachusetts, insurers can require a separate deductible for any type of wind damage, whether from a gusty nor’easter or a full-blown hurricane.

In New York, some insurers’ deductibles can be triggered if your neighborhood gets hit by winds, regardless of their speed, if they are part of the tail end of a hurricane that may have made landfall in another state hundreds of miles

Even homeowners many miles from the coast increasingly are contending with percentage deductibles. Allstate announced recently that it would impose a mandatory 5 percent hurricane deductible throughout New Jersey as policies come up for renewal.

In the Midwest and Great Plains, insurers increasingly are imposing separate percentage deductibles for damage from high winds and hail. Texas, Oklahoma, Kansas and Nebraska average six or more hailstorms a year, often resulting in extensive damage to windows, roofing and siding.

Hank Andrae, 55, a retired Air Force veteran in Jefferson City, Mo., said he recently learned of changes to his policy that included a separate wind-hail deductible of 1 percent of the $657,000 insured value of his home, or $6,570,
compared with a flat $500 deductible previously. Andrae has since switched to
another insurer that doesn’t impose a separate wind-hail deductible.

Good post thanks James … Cookie

State Farm forced me to a 1% wind/hail deductible 10 years ago when we sold our old home and bought a new one. That was after having State Farm for 20 years with the same fixed dollar deductible. We still have friends who have a State Farm fixed dollar deductible because they are in the same home but if they move they will be forced to change over.

Very good post James, thank you, I think I’ll check my policies.


Baaarry interestink…

Tanks. :wink: