Deciphering Wind Deductibles

September 25, 2017

What happens when there are multiple windstorms affecting the same property? What is a wind occurrence? How many deductibles apply to the same type of loss? How do deductibles apply on a blanket policy? These questions and many more arise as Hurricane Irma, Hurricane Jose and Hurricane Maria travel the coastline and hit homes and businesses not just once, but possibly two or more times this season.

In May of this year, the National Oceanic and Atmospheric Administration (NOAA) predicted 2017 is likely to be an above-normal Atlantic hurricane season, and so far, their predictions are materializing rapidly. This year’s season started June 1 and runs through November 30. The NOAA forecasters predicted a 70 percent likelihood of 11 to 17 named storms (winds of 39 mph or higher), of which 5 to 9 could become hurricanes (winds of 74 mph or higher), including 2 to 4 major hurricanes (Category 3, 4 or 5; winds of 111 mph or higher). In their August update, the NOAA increased its forecast to 14-19 named storms, 5-9 hurricanes and 2-5 major hurricanes for this season. Warm water temperatures and vanishing El Nino odds are reasons for the increased numbers.

The Caribbean and surrounding islands and southeastern parts of the U.S. are in the grip of one of the most voracious hurricane seasons on record. People in these areas are not only trying to survive the storms but are looking to a future that promises months or even years of trying to restore what’s been lost of their lives, homes and businesses. Our readers in distress should not have to add confusion concerning policy language and deductibles to their list of concerns. To make things clear we present cases studies showing how to apply deductibles to multiple losses.

When a storm hits, questions often arise regarding the distinction between named storm/named windstorm deductibles, windstorm, or wind/hail deductibles and hurricane deductibles. Distinguishing between these deductibles is important, as they can encompass thousands and even hundreds of thousands of dollars. Distinction between them is particularly important if an insured lives on or owns coastal property.

A deductible is the part of a loss that a policyholder pays out of pocket. Homeowners and commercial property policies (hereinafter referred to as property policies) have at least one deductible and that deductible typically is subtracted from the loss total before the claim payment is made. A standard property policy has a deductible that applies to fire, theft and “all other perils”, also known as the AOP deductible. A blanket property insurance policy covers different types of property at one or more locations and typically has one AOP deductible that applies to the entire blanketed property. Named storm, wind and wind/hail, and hurricane deductibles apply separately for a higher amount than the AOP deductible. The deductibles may be stated on the Declarations as a percentage of values or as a dollar amount. Typically, the deductible will apply only to the damaged building(s) and not the total insurable values at the covered location. Each of these deductible types generally apply per occurrence.

Insurance is regulated by state versus the federal government (except NFIP flood insurance) and many states have different regulations that apply to hurricane and wind deductibles. In addition, when a windstorm causes flood, the damage is considered to be from flood for purposes of coverage and deductibles. The peril of wind becomes a windstorm when given a name by either the National Hurricane Center (NHC) or National Weather Service (NWS).

What constitutes a hurricane may be determined by the policy wording or by state law. Generally, a windstorm is not a hurricane until declared as such by the National Weather Service. There are currently 19 states that have hurricane deductibles: AL, CT, DE, FL, GA, HI, LA, ME, MD, MA, MS, NJ, NY, NC, PA, RI, SC, TX, VA, and Washington DC.

A wind deductible is the broadest deductible as it applies to damage caused by any type of wind (hurricane, tornado, straight winds, etc.). A wind/hail deductible applies to damage caused by wind or hailstones. A windstorm deductible applies only to damage caused by a windstorm, typically referred to as a named storm deductible. A hurricane deductible applies only to damage caused by hurricanes. Hurricane Irma is an example of the distinction between named storm and hurricane deductibles. When Irma made landfall in North Carolina she had been downgraded from a Category I hurricane to a tropical storm. Therefore, a hurricane deductible would apply while Irma was categorized as a Hurricane and a named storm deductible would apply after the downgrade.

Since they are state regulated, hurricane and wind deductibles apply differently by state. For example, in Florida for personal lines and residence properties, the hurricane deductible applies only one time per calendar year, regardless if there are multiple hurricanes.

It is often easier to explain the application of deductibles by example. The following examples explain the application of deductibles for typical claims that might occur in single and multiple storm events, with resulting fire and theft loss.

Loss Scenario 1

Property policy with three locations suffers a loss at two locations from Tropical Storm Jose and has resulting property theft. Property AOP deductible is $500 and named storm deductible is 2% or $1,000, whichever is greater.

Location 1, Building 1: The tropical storm Jose damage is $150,000 and the theft damage total is $5,000.

Location 3, Building 1: The tropical storm Jose damage is $50,000.

The AOP deductible applies per occurrence, and the named storm deductible applies per occurrence. Therefore, there is one occurrence of theft to which the AOP deductible will apply; and one occurrence of a named storm to which the deductible will apply.

Theft loss:

$5,000, less $500 deductible = $4,500 claim payment

Tropical Storm Jose damage:

$150,000+$50,000 = $200,000, less 2% deductible ($4,000) = $196,000 claim payment

Some policies apply the hurricane deductible based on the building value rather than on the damage cost. In this situation, with building values of $500,000 for Location 1, Building 1, and $200,000 for Location 3, Building 1, the 2% named storm deductible would result in a deductible amount of $14,000. This deductible would reduce the claim payment for storm Jose to $140,000. Since there was no damage at Location 2, the building values for that location are not included in the deductible calculation.

Loss Scenario 2

Property policy with one location damaged by Hurricane Irma and having resulting flood damage. Subsequent damage from Hurricane Maria before the Hurricane Irma claim was paid. The AOP occurrence deductible is $5,000 and the Hurricane deductible is 5% per occurrence. Building value is $750,000.

Hurricane Irma damage (occurrence one):

$50,000, less 5% deductible ($2,500) = $47,500 claim payment

Flood damage: $500,000

No payment unless flood insurance purchased

Hurricane Maria damage (occurrence two):

$150,000, less 5% deductible ($7,500) = $142,000

If a policy applies the hurricane deductible based on the building value rather than on the damage cost, then the 5% ($37,500) deductible amount will be deducted from each claim payment.

Loss Scenario 3

Florida property policy written on ISO form with blanket limit of $10,000,000 with $10,000 AOP deductible and 5% Hurricane deductible. Blanket limit comprises five apartment complexes valued at $2,000,000 each. Hurricane Irma destroyed two complexes; resulting fire destroyed two others, and costs for debris removal totaled $200,000. Hurricane Maria destroyed the third complex, and debris removal totaled $50,000. Note that since this is a residential risk in Florida, a calendar year deductible applies to all hurricanes in a calendar year.

Hurricane Irma damage (occurrence one):

$4,000,000, less 5% deductible ($200,000) = $3,800,000 claim payment

Fire damage (two fire occurrences, one for each complex):

$4,000,000, less $10,000 deductible = $1,900,000 claim payment

Debris removal costs:

Only $25,000 debris removal coverage is available under the ISO property form for debris removal that exceeds the limit of insurance on the covered property that has sustained loss or damage. Therefore, the policyholder will not be reimbursed for the additional $175,000 debris removal expense.

Hurricane Maria damage (occurrence two):

$2,000,000 claim payment – since this is the second hurricane within the same calendar year, no additional deductible applies.

Debris removal costs:

$50,000, less 25% of AOP deductible ($2,500) = $47,500 claim payment