Residents and businesses in Texas and Florida are now digging their way out of the wreckage of Hurricanes Harvey and Irma. But if they believe that the worst of their traumatic experiences are over, they might be surprised when they encounter another ominous threat …
The Hurricane Deductible!
Indeed, many individuals are about to grapple with one of the costliest features of their property insurance contracts. Although they are probably aware of the standard deductible clauses in their agreements, they may not be aware that damages caused by hurricanes are subject to much higher deductibles.
How much higher? Well, with a standard deductible clause in place, an insurer might typically deduct $500 or $1,000 from its payment. But with a hurricane clause, it might deduct as much as 10% of the value of the damaged structure from its payment.
So for a $500,000 residential home with $100,000 of personal property within it, the deductible would not be $500 or $1,000. It would be $60,000. And for a $5 million business property, it would be half a million dollars!
Why do insurers insert such clauses into their contracts? Naturally, they say that their policies are more reasonably priced with such clauses within them, and that they share those benefits with their policy holders in the form of lower premiums. But many policy holders may not possess tens of thousands of dollars, and certainly don’t possess hundreds of thousands of dollars, to make up the difference.
This type of clause illustrates why so many companies decide to self-insure against the risk of damage, instead of relying on policies that are issued by commercial insurance companies. To be fair, though, many insurance companies assert that they couldn’t afford to offer hurricane coverage at all without the higher deductibles.
It’s easy to offer advice like “individuals should be expected to know the terms of the insurance contracts that they sign.” Indeed, it’s very hard to argue with such truisms. But when insurance policies are filled with many pages of legal jargon, it can be difficult for policy holders to decipher them.
So what advice might be helpful to a policy holder? For starters, if an individual is purchasing property that resides in a hurricane zone, he should consider establishing a cash fund that can cover the hurricane deductible. In our above examples, the resident of the home might maintain a $60,000 savings account, and the business might maintain a $500,000 sweep account.
But what if that’s simply not possible? Then lines of credit with comparable borrowing limits might be useful. And as a last resort, alternative debt vehicles with higher interest rates might be necessary.
And what if an individual’s credit rating is so poor that he cannot secure a debt vehicle or line of credit? What if he cannot pull together a sizable pool of cash?
Unfortunately, it would probably be very risky for such an individual to obtain a hurricane insurance policy. If at all possible, he might try to avoid owning any property at all in a hurricane zone.