How Does Hurricane Insurance Work?

Hurricane and Named Storm Deductibles
Issue: Hurricane Andrew in 1992 and subsequent hurricanes have caused insurers to take steps to mitigate future losses in hurricane-prone areas. Hurricanes and tropical storms caused $159.1 billion in insured losses between 1994 and 2013, according to the Insurance Services Office. Over the last decade, more and more people and businesses have moved closer to shorelines, and property values have generally increased. As part of a broad effort to keep insurance coverage available and affordable, many insurers have recently added hurricane and named storm deductibles to limit potential losses through higher deductibles.
Hurricane and named storm deductibles were introduced as a risk-sharing mechanism, by having the policyholder bear more of the risks, without raising overall premiums to unaffordable levels. However, insurers and consumers have issues with the use of hurricane deductibles. Insurers are concerned about clarity of state laws and actions of state officials that might limit the use of hurricane deductibles. Consumers are concerned about what to them seems an unjustified cost shifting at a time when they can least afford it. Consumers also complain about lack of meaningful disclosure about the deductibles.
Overview: A deductible is the amount of loss paid by the policyholder before any loss is paid by the insurer. For most “perils” (such as fire damage and theft), the standard deductible is a flat dollar amount (e.g., $500 or $1,000). This means a policyholder would be responsible to pay the flat dollar amount out of pocket for a loss.
In many coastal states, homeowners’ insurance policies also include deductibles that apply only to damage caused by hurricanes. A hurricane, or named storm, deductible is applied separately from standard perils deductibles and is typically a higher dollar amount, meaning a policyholder would be responsible for a larger portion of any loss. It can be expressed as a fixed dollar deductible or, more commonly, as a percentage of the home’s insured value, which can vary from 1% to as high as 10%.
Although definitions vary, a hurricane deductible typically applies to damage solely from a hurricane as categorized by the National Weather Service or U.S. National Hurricane Center. A named storm deductible applies to a weather event declared as a hurricane, typhoon, tropical storm or cyclone by the U.S. National Weather Service, the U.S. National Hurricane Center or the U.S. National Oceanic and Atmosphere Administration, and where a number or “name” has been applied (e.g., Hurricane Andrew, Superstorm Sandy, etc.). Any loss must have been caused or resulted from the named storm event.
Some policies also include a windstorm or wind/hail deductible. These usually apply to any kind of damage from a wind or hail event. For example, if a tree falls on a policyholder’s roof on a windy day, the claim would be subject to the wind deductible. Flood damage, however, is covered only if a separate flood insurance policy was purchased, generally from the National Flood Insurance Program or from a private company.
Whether a hurricane, named storm or windstorm deductible applies to a claim depends on the applicable “trigger” selected by the insurance company. These deductibles apply only if certain parameters spelled out in the insurance contract are met, which are often proscribed or limited in state law. While there are similarities among the state laws, no two laws are identical; triggers vary from state to state, as well as from insurer to insurer.
Nineteen states, including Connecticut and Rhode Island, currently have some form of hurricane or named storm deductible in place. Other states may allow insurers to include hurricane deductibles in property insurance products.