Weather conditions are changing. As a result, wind and hail deductibles are becoming increasingly common in commercial property insurance.  Insurers are also tightening their underwriting rules.

In this article, we’ll discuss three common types of deductibles on commercial property.

  • The flat or per occurrence deductible
  • The per location deductible
  • The percentage deductible

Per Occurrence Deductibles, Per Location Deductibles, or Percentage Deductibles

When a loss like a hurricane hits commercial real estate, any of the above deductibles may apply depending on which deductible you choose or which deductible the insurer requires.

Per occurrence deductible – Most policyholders rely on a flat or per occurrence deductible on commercial property, such as $1,000. The per occurrence deductible is one deductible for all buildings, no matter how many buildings you insure. If you have a location with five buildings and a tornado damages all five, you have only one deductible despite the damage to more than one building. However, this option is not available in all states and may depend on your property’s location.

Per location deductible – In some states, a commercial property owner or manager may choose a per-building deductible or per-location deductible. Location deductibles apply based on that location’s total insured value. A per-building deductible applies to the building hit by losses. Most wind and hail deductible endorsements remove the per occurrence deductible and apply the per-location or per-building deductible.

Percentage deductible – Many commercial properties have a percentage deductible, especially for wind and hail damage. The percentage deductible is often higher than a per building deductible. The insurer can impose a percentage either to the building limit of insurance or the loss amount. Policy language will dictate how the insurer applies the percentage deductible.

Wind and Hail Deductibles

The International Risk Management Institute defines wind and hail deductibles as follows. They are “a separate, higher deductible provision that applies to loss caused by wind or hail.” Often, the insurer states this deductible as a percentage of the property’s dollar value. In some Atlantic and Gulf coast states, insurers also require a higher percentage deductible if the storm has a name (usually referred to as a “named storm”).

Whether the carrier offers the per occurrence, the per location deductible or percentage deductible, a higher deductible generally leads to lower premium. However, when a wind and hail deductible is applied, it sometimes indicates that the insured property has a high likelihood of experiencing a loss and thus the underwriter cannot even consider the risk without imposing the higher deductible.

Here is one example of a percentage deductible from Florida. The repair estimate after a wind loss on a Tampa commercial building is $150,000. A 5% wind and hail deductible is $7,500 versus your fixed deductible of $1,000 for all other perils.

Wind and hail deductibles are most common in the Great Plains and Midwest states including Colorado and Texas where hailstorms are most prevalent.

A Brief History of Wind and Hail Deductibles

Why do insurers impose a separate wind and hail or named storm deductible? Hurricane Andrew, which struck Florida in 1992, changed the game for insurers. Andrew unleashed destruction from the Bahamas through Florida and Louisiana, causing over $41 billion in damages. Underwriters had underestimated the losses they would face after the damage from this type of Category 5 hurricane. In cases like this, reinsurers help support the primary insurer’s share of losses. After Andrew, reinsurers insisted on change. Going forward, primary insurers had to decrease reinsurers’ share of possible losses.

The National Association of Insurance Commissioners offers two reasons for the shift to wind and hurricane deductibles.

  1. The population move in the last decade closer to shorelines
  2. The overall increase in property values

Wind and hail deductibles are common now. They help keep insurance affordable and they make sure policyholders bear the burden of their claims.

Nineteen states now allow some type of hurricane or named storm deductible. The Insurance Information Institute offers a thorough discussion of wind and hail deductibles in commercial property insurance.

Are Wind and Hail Deductibles by Percent Always Undesirable?

With weather undeniably worsening and 29% of the US population exposed to coastal threats, percentage deductibles can impact many policyholders. Insurers explain the deductibles as cost savers because they keep insurance affordable for all policyholders. A percentage deductible places more cost on property owners exposed to higher risks. It avoids spreading the cost to non-exposed states. Arizona, for example, rarely has hail or high-wind events. State insurance commissioners of lesser weather-exposed states do not want their state’s policyholders to shoulder an unfair burden.

However, policyholders with a percentage deductible may be unprepared for the additional costs. It’s easier to rely on a fixed deductible for your budget. A percentage deductible tied to the loss amount is an unknown cost, increasing with the size of the loss.

Higher Commercial Property Losses May Push Carriers into Higher Percentage Deductibles

Reinsurers began raising commercial property rates in 2017. They were responding to catastrophes including

  • hail damage across the US,
  • named storm losses in the southern states,
  • earthquake losses in Mexico and
  • wildfires in California.

With risks on the coasts, insureds saw double-digit property rate increases for 2018.  In addition, insurers began to tighten underwriting and impose less desirable terms and conditions.  Another concerning factor for insurers was the insurance to value at the time of the loss. They found that many properties were underinsured which led to more insurers imposing coinsurance conditions, thus penalizing insureds when they do not purchase sufficient limits for their property.

Working with an experienced commercial property insurance broker can help you better manage your risk. Depending on the carrier you choose and an early-to-market approach when you renew, you’ll stand a better chance of paying lower premiums while still avoiding higher deductibles. An experienced broker can also help you navigate policy provisions and coverage restrictions that can impact your profitability.

Our experience managing commercial real estate property risks can help you better manage your real estate portfolio exposures. Contact us at this link.