Coverage Corner

UNDERSTANDING PROPERTY DEDUCTIBLES TO AVOID SURPRISES AT CLAIM TIME

By Cathy Trischan

A hurricane caused significant damage to three buildings owned by your commercial client. Your insured knows the policy includes a $100,000 deductible for wind damage and is (grudgingly) prepared to pay for the first $100,000 in damage. Imagine his surprise, though, when the claims adjuster explains that the total deductible for this loss is $300,000! The adjuster points to an endorsement that applies the wind deductible separately to each building. The insured and the producer missed this detail, and the agency nervously anticipates the errors and omissions claim it is sure will follow.

In reviewing quotes, the detail of how a deductible applies is sometimes overlooked. Below are some of the things to consider when evaluating deductible options.

FLAT DEDUCTIBLES

With a flat deductible, a set dollar amount is deducted from the amount of the loss. The same deductible may apply to all covered causes of loss, or a higher deductible may apply to certain perils such as windstorm or theft.

PERCENTAGE DEDUCTIBLES

The key to understanding a percentage deductible is to understand what the deductible is a percentage of. While it is possible that the deductible is a percentage of the loss, that approach is not common.

Usually the deductible is a percentage of the property limit or a percentage of the value of the property. But what property? Is it all damaged property, all property at the location, or all property covered by the policy? Some policies even include business income limits or values when determining the percentage.

If the percentage is based on values, are those values as of the inception date of the policy as declared on the statement of values or values at the time of loss? The danger of a deductible based on the value at the time of loss is that the insured is likely unaware of what the dollar amount will be, making it difficult to budget and plan.

COMMON DEDUCTIBLE CONCERNS

Regardless of the type of deductible, it is important to understand how it applies.

In most policies, the deductible applies per occurrence. The problem is that most property policies do not define occurrence. Think back to the litigation surrounding the property claims for the 9/11 attack on the World Trade Center. Two towers were destroyed by two planes – was that one occurrence or two? The answer was both, the court ruled, depending on which of two different policy forms applied.

Some policies apply the deductible separately to each location, to each building, and sometimes even to each type of property at each location or building. It is even possible for separate deductibles to apply to business personal property inside a building and property in the open. If the deductible applies per location, it is important to look for language that might consider each building a separate location, even if those buildings share a location address.

With respect to coverage for certain catastrophe perils, different deductibles may apply depending on the location of the property and are usually based on wind zones/tiers, flood zones, or earthquake zones. If the covered peril is flood, watch for deductibles that are based on the amount of coverage available or recovered under National Flood Insurance Program (NFIP.)

It is also important to know what type of catastrophe the deductible applies to. There is a difference, for example, between a windstorm deductible, a named storm deductible, and a hurricane deductible. After Superstorm Sandy hit the states of New York, New Jersey, and Connecticut in October 2012, the governors of all three states declared that hurricane deductibles should not be applied as the wind speed of the storm was less than 74 mph when it hit land in the state. Windstorm and named storm deductibles, though, did apply.

LIMITING THE EXPOSURE

For insureds who are forced to accept deductibles higher than they would like, deductible buyback policies can help. Imagine an insured covering a $5,000,000 building with a 5% windstorm or hail deductible that is based on the limit of insurance. The insured may not be able to absorb a $250,000 deductible. A deductible buyback policy fills some of the gap – bringing down the $250,000 deductible, for example, to $25,000. When quoting a deductible buyback policy, it is crucial that the producer and insurer understand how the overlying deductible works so that coverage is properly written.

Commercial property deductibles can apply in a number of ways. Paying attention to the deductible details, before coverage is bound, is crucial when evaluating coverage options. Til next time!

Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP is IA&B’s commercial lines education consultant. She works with our CIC and CISR programs, as well as our live CE webinars. Catch her at one of our upcoming courses: IABforME.com/education