Review your insurance policies now

Monday, August 20, 2007

Hurricane season is a good time to for home and business owners review their insurance policies now to learn what coverages and deductibles apply to damage from hurricanes and windstorms, suggests the Insurance Information Institute.

A standard homeowners policy deductible is usually $500 or $1,000, and homeowners can save on insurance premiums with a higher deductible. However, if a storm is severe, a much higher windstorm or hurricane deductible may apply. Deductibles typically range from 1%-5% of the replacement cost of a home, but could go as high as 25%. For example, a 2% deductible on a home with an insured value of $100,000 would be $2,000. The deductible depends on many factors that differ from state to state, and sometimes from insurer to insurer. These factors include the home’s proximity to the shore, its insured value and the “trigger”—how strong the storm must be for the hurricane deductible to go into effect.

Insurers in 18 hurricane-vulnerable states now use percentage deductibles on homeowners insurance policies as opposed to a dollar deductible, to limit their exposure to catastrophic losses from natural disasters. Percentage deductibles are sometimes mandatory and may apply to an entire state or just part of it. In some states or portions of a state, policyholders have a "buy back" option—paying a higher premium in return for a traditional dollar, rather than a percentage, deductible.

Triggers vary by state and insurer and may apply when the National Weather Service (NWS) "names" a tropical storm, declares a hurricane watch or warning, or defines the hurricane's intensity. Triggers generally include a timing factor, such as damage occurring within 24 hours before the storm is named or if a hurricane makes land up to 72 hours after the hurricane is downgraded to a lesser storm or a hurricane watch cancelled. Read your policy carefully and make sure you understand what your trigger for a windstorm or hurricane deductible is. If you are uncertain, speak to your insurance agent or a company representative.

Other Things to Consider

Hurricanes can cause flooding but while standard homeowners, renters and business insurance policies cover wind and rain damage from hurricanes, they do not cover flooding. Flood insurance is available from the National Flood Insurance Program, a division of the Federal Emergency Management Agency, and can be purchased through insurance companies or agents. For more information, see www.floodsmart.gov.

The “comprehensive” portion of automobile insurance policies covers losses due to flooding, but not all drivers purchase comprehensive coverage. People often buy comprehensive coverage to protect cars when they are new but drop it as the vehicle's market value declines.

For a business, the costs of a disaster can extend beyond the physical damage to the premises, equipment, furniture and other business property to the potential loss of income while the premises are unusable. A businesses disaster recovery plan should include a detailed review of the business’s insurance policy to make sure there are no gaps in coverage. In addition to building and property coverage, the policy should include business interruption insurance, extra expense insurance and law or ordinance coverage.

Business interruption insurance (also known as business income insurance) provides coverage for lost revenue and normal operating expenses if the place of business becomes uninhabitable after a loss, or during the time repairs are being made. Extra expense insurance provides coverage for the extra expenses incurred after a disaster, such as temporary relocation or leasing of business equipment in order to avoid or minimize the suspension of operations during the time that repairs are being completed to the normal place of business. Ordinance or law coverage is in place to cover the costs of rebuilding or repairing the building so that it is in compliance with the most recent local building codes.

Even if the basic business policy covers expenses and loss of business income, it may not cover income interruptions due to damage that occurs to a key customer or supplier or to a utility company. This additional coverage can also be added to an existing policy.

More information on wind and hurricane deductibles can be found on the Insurance Information Institute’s website.

For more information about disaster preparedness, go to the Insurance Information Institute's Disaster Insurance Information website.