Q#1. I heard something about a hurricane deductible on policies. What exactly is a hurricane deductible?
A. A hurricane deductible will appear on property policies covering dwellings and commercial residential buildings such as condominiums and apartment houses. It applies only in the event of a named hurricane, which is statutorily defined by F.S. 627.4025 as "... a storm system that has been declared to be a hurricane by the National Hurricane Center..."
Q#2. If a severe summer thunderstorm caused wind damage would that claim be subject to the hurricane deductible?
A. No. Since it's not a named hurricane it would be an "all-other-peril" deductible.
Q#3. If a hurricane were to hit Key West and a non-related thunderstorm damaged a building in Pensacola, would the Pensacola damage fall under a hurricane deductible?
A. That's a $64,000 question that may never be answered until a court case decides the issue. The damage must be "caused by the peril of windstorm during a hurricane." Whether damage in Pensacola was in fact caused by a hurricane which struck Key West is difficult to determine. The cautious approach is to assume the hurricane deductible would apply to such loss, but an argument can be made that the "all other peril" deductible should apply.
Q#4. Is the hurricane deductible mandatory?
A. Yes, for residential (both personal and commercial) risks it is. Every residential risk will have as a minimum two deductibles – "all-other-peril" and "hurricane."
Q#5. Can a company have simply an "all-other-peril" deductible and a "windstorm or hail" deductible?
A. No. As we just stated there must be a "hurricane" deductible for all personal and commercial residential risks.
Q#6. Can a company have three deductibles --- an "all-other-peril" deductible, "hurricane" deductible and a "windstorm or hail" deductible on residential risks?
A. As long as the deductible plan has been approved by the Department, we see nothing in the statute to prevent this.
Q#7. Does this hurricane deductible statute apply to surplus lines?
A. No, it applies only to admitted carriers.
Q#8. How does the hurricane deductible affect commercial non-residential risks such as office buildings and retail shops?
A. There is no hurricane deductible requirement for these type risks. Typically they would have an "all peril" deductible, or some risks may have an "all-other-peril" deductible and a "windstorm/hail" deductible. There is no minimum or maximum deductible required of these risks and the company can use any deductible plan approved by the Florida Department of Financial Services. A "hurricane" deductible could be used, as long as it was approved by the Department.
Q#9. What is the amount of the hurricane deductible?
A. It varies according to whether the risk is commercial residential or dwelling, and also varies according to the value of the dwelling.
Q#10. What is the deductible required on commercial residential risks?
A. The lowest allowable is $500 and the company may require up to 3% of the policy limits. However, if the company uses a 3% deductible they may also offer the insured a 10% deductible. The company may not require the client to take a 10% deductible – it's just permissible to offer these deductibles.
Q#11. Are there any exceptions for a commercial residential risk?
A. Yes. If a commercial residential risk was covered by a policy on August 24, 1992 with a deductible higher than that allowed by the hurricane deductible statute, that policy may keep that higher deductible. However, it must be a "hurricane" deductible and not a "windstorm or hail" deductible
Q#12. If a commercial residential risk was covered prior to August 24, 1992 with a policy providing a "windstorm & hail" deductible can the company still use that deductible in lieu of a hurricane deductible?
A. No. As stated previously, it must be a hurricane deductible.
Q#13. What about personal lines residential risks --- what's required there?
A. It varies according to the limits of dwelling coverage. There are minimums and maximums allowed. Maybe this table will help:
DWELLING LIMITS MINIMUM ALLOWED MAXIMUM ALLOWED $0 -- $50,000 $250 2% $50,001 -- $99,999 $500 2% $100,000 -- $500,000 $500 10% $500,001 and up $500 Unlimited
Q#14. Are there "buy back" options available for personal lines risks?
A. Yes, the options vary by building value.
For risks valued below $100,000 a $500 flat deductible must be offered.
For risks between $100,000 and $249,999 a $500 flat deductible must be offered, except the insurance company is not required to offer a $500 flat deductible if they agree to issue a policy which will not be non-renewed for the purposes of reducing hurricane exposure for one additional renewal period.
For risks of $250,000 and above there is no requirement that a flat deductible be offered, but a 2% deductible must be offered.
Q#15. Are there any exceptions to the deductible requirements for personal lines risks?
A. Yes. If a risk was covered on 8/24/92 under a policy having a higher deductible, that deductible may remain in effect. Additionally, if the company had on file a higher deductible program on 6/14/95 they may continue to use that deductible program even if those deductibles are higher than those mentioned in the statutes. The only way to know if these conditions are being met would be to contact the Department of Financial Services or get a written statement from the company explaining their position. Additionally, any higher deductible must be a "hurricane" deductible and not a "windstorm or hail" deductible.
Q#16. What about mobile homes - what's required there?
A. If there is a lien the maximum allowed is 5%. Without a lien the maximum allowed is 10%. There is no requirement to offer either the 2% or the $500 flat deductibles on mobile home risks.
Q#17. Is there a maximum "all-other-peril" deductible allowed for residential risks?
A. No, as long as the rate filing has been approved by the Department of Financial Services. However, the company is required to offer a $500 deductible for "all-other-peril" losses. But … there is an exception to this too. If the company had a higher deductible plan in effect on June 1, 1996 they may continue to use that plan. For example, XYZ Insurance Company was requiring a $1,000 minimum deductible for residential risks before June 1, 1996. They may continue to use that $1,000 "all-other-peril" deductible. However, there must still be a hurricane deductible on the policy.
Q#18. How does the "annual deductible" work under the bill that passed the legislature in 2005?
A. The new law addresses only residential property risks (personal lines and commercial lines) such as homeowners policies, dwelling policies, and condominium association master policies.
For personal lines residential, it applies to new and renewal policies on or after May 1, 2005. It applies only for hurricane losses and not other losses such as fire or tornado damage from non-hurricane related windstorm. For personal lines risks the "single deductible" concept is mandatory, while for commercial residential the insured has a choice of a single deductible or a "per occurrence" hurricane deductible. One deductible per calendar year shall apply for hurricane losses to personal lines property if that property was insured by the same insurer or insurer group. For example, if the policyholder suffers a hurricane loss on June 20 th, changes insurers on July 15 th, and suffers damage from another hurricane on August 19 th, the policy hurricane deductible applies separately to each loss; since the policyholder changed carriers they do not get the benefit of one deductible.
For second and subsequent hurricanes the insurer will apply a deductible that is the greater of remaining amount of the remaining hurricane deductible or the amount of the deductible that applies to "all other peril" losses."
Example #1: Bill's hurricane deductible is $3,000 and his "all other peril" deductible is $500. On June 21 st he suffers $40,000 in damage from a hurricane and is paid $37,000 by the insurer. On July 10 th he suffers $20,000 in damage from another hurricane. Bill's loss is paid subject to his $500 "all other perils" deductible.
Example #2: Bill's hurricane deductible is $3,000 and his "all other peril" deductible is $500. On June 21 st he suffers $2,000 in damage from a hurricane and is not paid by the insurer because his loss is below the $3,000 hurricane deductible. On July 10 th another hurricane causes $20,000 in damage to his house; Bill's claim is paid subject to a $1,000 deductible --- the amount remaining from the first hurricane.
Insurers may require policyholders to report losses that are below the hurricane deductible or to maintain receipts in order to apply such losses to subsequent hurricane claims.
If more than one policy issued by an insurer covers multiple hurricanes, then the higher deductible shall apply. For example, Bill's policy renews on August 1 st and the hurricane deductible increases from $3,000 to $3,100 because his building coverage increased due to inflation. The $3,100 deductible is what applies for Bill's losses during the calendar year. However, if the deductible decreases during the policy term (perhaps the policyholder changes from a 5% hurricane deductible to a 2% deductible) the lower deductible will not apply until January 1 of the following calendar year.
For commercial lines residential, the insurer must offer the insured a choice of a deductible that applies on an annual basis, or a deductible applying to each hurricane. The effective date of this change is January 1, 2006.
Q#19 . Where can I find information about these deductibles?
A. Florida Statute 627.701 contains the information on deductibles. F.S. 627.4025 defines "hurricane" and "hurricane coverage
627.701 Liability of insureds; coinsurance; deductibles.--
(1) A property insurer may issue an insurance policy or contract covering either real or personal property in this state which contains provisions requiring the insured to be liable as a coinsurer with the insurer issuing the policy for any part of the loss or damage by covered peril to the property described in the policy only if:
(a) The following words are printed or stamped on the face of the policy, or a form containing the following words is attached to the policy: "Coinsurance contract: The rate charged in this policy is based upon the use of the coinsurance clause attached to this policy, with the consent of the insured.";
(b) The coinsurance clause in the policy is clearly identifiable; and
(c) The rate for the insurance with or without the coinsurance clause is furnished the insured upon his or her request.
(2) Unless the office determines that the deductible provision is clear and unambiguous, a property insurer may not issue an insurance policy or contract covering real property in this state which contains a deductible provision that:
(a) Applies solely to hurricane losses.
(b) States the deductible as a percentage rather than as a specific amount of money.
(3)(a) A policy of residential property insurance shall include a deductible amount applicable to hurricane losses no lower than $500 and no higher than 2 percent of the policy dwelling limits with respect to personal lines residential risks, and no higher than 3 percent of the policy limits with respect to commercial lines residential risks; however, if a risk was covered on August 24, 1992, under a policy having a higher deductible than the deductibles allowed by this paragraph, a policy covering such risk may include a deductible no higher than the deductible in effect on August 24, 1992. Notwithstanding the other provisions of this paragraph, a personal lines residential policy covering a risk valued at $50,000 or less may include a deductible amount attributable to hurricane losses no lower than $250, and a personal lines residential policy covering a risk valued at $100,000 or more may include a deductible amount attributable to hurricane losses no higher than 10 percent of the policy limits unless subject to a higher deductible on August 24, 1992; however, no maximum deductible is required with respect to a personal lines residential policy covering a risk valued at more than $500,000. An insurer may require a higher deductible, provided such deductible is the same as or similar to a deductible program lawfully in effect on June 14, 1995. In addition to the deductible amounts authorized by this paragraph, an insurer may also offer policies with a copayment provision under which, after exhaustion of the deductible, the policyholder is responsible for 10 percent of the next $10,000 of insured hurricane losses.
(b)1. Except as otherwise provided in this paragraph, prior to issuing a personal lines residential property insurance policy on or after January 1, 2006, or prior to the first renewal of a residential property insurance policy on or after January 1, 2006, the insurer must offer alternative deductible amounts applicable to hurricane losses equal to $500, 2 percent, 5 percent, and 10 percent of the policy dwelling limits, unless the specific percentage deductible is less than $500. The written notice of the offer shall specify the hurricane or wind deductible to be applied in the event that the applicant or policyholder fails to affirmatively choose a hurricane deductible. The insurer must provide such policyholder with notice of the availability of the deductible amounts specified in this paragraph in a form approved by the office in conjunction with each renewal of the policy. The failure to provide such notice constitutes a violation of this code but does not affect the coverage provided under the policy.
2. This paragraph does not apply with respect to a deductible program lawfully in effect on June 14, 1995, or to any similar deductible program, if the deductible program requires a minimum deductible amount of no less than 2 percent of the policy limits.
3. With respect to a policy covering a risk with dwelling limits of at least $100,000, but less than $250,000, the insurer may, in lieu of offering a policy with a $500 hurricane or wind deductible as required by subparagraph 1., offer a policy that the insurer guarantees it will not nonrenew for reasons of reducing hurricane loss for one renewal period and that contains up to a 2 percent hurricane or wind deductible as required by subparagraph 1.
4. With respect to a policy covering a risk with dwelling limits of $250,000 or more, the insurer need not offer the $500 hurricane deductible as required by subparagraph 1., but must, except as otherwise provided in this subsection, offer the other hurricane deductibles as required by subparagraph 1.
(4)(a) Any policy that contains a separate hurricane deductible must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU." A policy containing a coinsurance provision applicable to hurricane losses must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A CO-PAY PROVISION THAT MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU."
(b) Beginning October 1, 2005, for any personal lines residential property insurance policy containing a separate hurricane deductible, the insurer shall compute and prominently display the actual dollar value of the hurricane deductible on the declarations page of the policy at issuance and, for renewal, on the renewal declarations page of the policy or on the premium renewal notice.
(c) Beginning October 1, 2005, for any personal lines residential property insurance policy containing an inflation guard rider, the insurer shall compute and prominently display the actual dollar value of the hurricane deductible on the declarations page of the policy at issuance and, for renewal, on the renewal declarations page of the policy or on the premium renewal notice. In addition, beginning October 1, 2005, for any personal lines residential property insurance policy containing an inflation guard rider, the insurer shall notify the policyholder of the possibility that the hurricane deductible may be higher than indicated when loss occurs due to application of the inflation guard rider. Such notification shall be made on the declarations page of the policy at issuance and, for renewal, on the renewal declarations page of the policy or on the premium renewal notice.
(5)(a) The hurricane deductible of any personal lines residential property insurance policy issued or renewed on or after May 1, 2005, shall be applied as follows:
1. The hurricane deductible shall apply on an annual basis to all covered hurricane losses that occur during the calendar year for losses that are covered under one or more policies issued by the same insurer or an insurer in the same insurer group.
2. If a hurricane deductible applies separately to each of one or more structures insured under a single policy, the requirements of this paragraph apply with respect to the deductible for each structure.
3. If there was a hurricane loss for a prior hurricane or hurricanes during the calendar year, the insurer may apply a deductible to a subsequent hurricane which is the greater of the remaining amount of the hurricane deductible or the amount of the deductible that applies to perils other than a hurricane. Insurers may require policyholders to report hurricane losses that are below the hurricane deductible or to maintain receipts or other records of such hurricane losses in order to apply such losses to subsequent hurricane claims.
4. If there are hurricane losses in a calendar year on more than one policy issued by the same insurer or an insurer in the same insurer group, the hurricane deductible shall be the highest amount stated in any one of the policies. If a policyholder who had a hurricane loss under the prior policy is provided or offered a lower hurricane deductible under the new or renewal policy, the insurer must notify the policyholder, in writing, at the time the lower hurricane deductible is provided or offered, that the lower hurricane deductible will not apply until January 1 of the following calendar year.
(b) For commercial residential property insurance policies issued or renewed on or after January 1, 2006, the insurer must offer the policyholder the following alternative hurricane deductibles:
1. A hurricane deductible that applies on an annual basis as provided in paragraph (a); and
2. A hurricane deductible that applies to each hurricane.
(6)(a) It is the intent of the Legislature to encourage the use of higher hurricane deductibles as a means of increasing the effective capacity of the hurricane insurance market in this state and as a means of limiting the impact of rapidly changing hurricane insurance premiums. The Legislature finds that the hurricane deductibles specified in this subsection are reasonable when a property owner has made adequate provision for restoration of the property to its full value after a catastrophic loss.
(b) A personal lines residential insurance policy providing hurricane coverage may, at the mutual option of the insured and insurer, include a secured hurricane deductible as described in paragraph (c) if the applicant presents the insurer a certificate of security as described in paragraph (d). An insurer may not directly or indirectly require a secured deductible under this subsection as a condition of issuing or renewing a policy. A certificate of security is not required with respect to an applicant who owns a 100 percent equity interest in the property.
(c) A secured hurricane deductible must include the substance of the following:
1. The first $500 of any claim, regardless of the peril causing the loss, is fully deductible.
2. With respect to hurricane losses only, the next $5,000 in losses are fully insured, subject only to a copayment requirement of 10 percent.
3. With respect to hurricane losses only, the remainder of the claim is subject to a deductible equal to a specified percentage of the policy dwelling limits in excess of the deductible allowed under paragraph (3)(a) but no higher than 10 percent of the policy dwelling limits.
4. The insurer agrees to renew the coverage on a guaranteed basis for a period of years after initial issuance of the secured deductible equal to at least 1 year for each 2 percentage points of deductible specified in subparagraph 3. unless the policy is canceled for nonpayment of premium or the insured fails to maintain the certificate of security. Such renewal shall be at the same premium as the initial policy except for premium changes attributable to changes in the value of the property.
(d) The office shall draft and formally propose as a rule the form for the certificate of security. The certificate of security may be issued in any of the following circumstances:
1. A mortgage lender or other financial institution may issue a certificate of security after granting the applicant a line of credit, secured by equity in real property or other reasonable security, which line of credit may be drawn on only to pay for the deductible portion of insured construction or reconstruction after a hurricane loss. In the sole discretion of the mortgage lender or other financial institution, the line of credit may be issued to an applicant on an unsecured basis.
2. A licensed insurance agent may issue a certificate of security after obtaining for an applicant a line of credit, secured by equity in real property or other reasonable security, which line of credit may be drawn on only to pay for the deductible portion of insured construction or reconstruction after a hurricane loss. The Florida Hurricane Catastrophe Fund shall negotiate agreements creating a financing consortium to serve as an additional source of lines of credit to secure deductibles. Any licensed insurance agent may act as the agent of such consortium.
3. Any person qualified to act as a trustee for any purpose may issue a certificate of security secured by a pledge of assets, with the restriction that the assets may be drawn on only to pay for the deductible portion of insured construction or reconstruction after a hurricane loss.
4. Any insurer, including any admitted insurer or any surplus lines insurer, may issue a certificate of security after issuing the applicant a policy of supplemental insurance that will pay for 100 percent of the deductible portion of insured construction or reconstruction after a hurricane loss.
5. Any other method approved by the office upon finding that such other method provides a similar level of security as the methods specified in this paragraph and that such other method has no negative impact on residential property insurance catastrophic capacity. The legislative intent of this subparagraph is to provide the flexibility needed to achieve the public policy of expanding property insurance capacity while improving the affordability of property insurance.
(e) An issuer of a certificate of security may terminate the certificate for failure to honor any of the terms of the underlying financial arrangement. The issuer must provide notice of termination to the insurer within 10 working days after termination. Unless the policyholder obtains a replacement certificate of security within an additional 20 working days after such notice, the deductible provision in the policy must revert to a lower deductible otherwise offered by the insurer and the policyholder is responsible for any additional premium required for a policy with such deductible.
(7) Prior to issuing a personal lines residential property insurance policy on or after April 1, 1997, or prior to the first renewal of a residential property insurance policy on or after April 1, 1997, the insurer must offer a deductible equal to $500 applicable to losses from perils other than hurricane. The insurer must provide the policyholder with notice of the availability of the deductible specified in this subsection in a form approved by the office at least once every 3 years. The failure to provide such notice constitutes a violation of this code but does not affect the coverage provided under the policy. An insurer may require a higher deductible only as part of a deductible program lawfully in effect on June 1, 1996, or as part of a similar deductible program.
(8) Notwithstanding the other provisions of this section or of other law, but only as to hurricane coverage as defined in s. 627.4025 for commercial lines residential coverages, an insurer may offer a deductible in an amount not exceeding 10 percent of the insured value if, at the time of such offer and at each renewal, the insurer also offers to the policyholder a deductible in the amount of 3 percent of the insured value. Nothing in this subsection prohibits any deductible otherwise authorized by this section. All forms by which the offers authorized in this subsection are made or required to be made shall be on forms that are adopted or approved by the commission or office.
627.4025 Residential coverage and hurricane coverage defined.--
(1) Residential coverage includes both personal lines residential coverage, which consists of the type of coverage provided by homeowner's, mobile home owner's, dwelling, tenant's, condominium unit owner's, cooperative unit owner's, and similar policies, and commercial lines residential coverage, which consists of the type of coverage provided by condominium association, cooperative association, apartment building, and similar policies, including policies covering the common elements of a homeowners' association. Residential coverage for personal lines and commercial lines as set forth in this section includes policies that provide coverage for particular perils such as windstorm and hurricane or coverage for insurer insolvency or deductibles.
(2) As used in policies providing residential coverage:
(a) "Hurricane coverage" is coverage for loss or damage caused by the peril of windstorm during a hurricane. The term includes ensuing damage to the interior of a building, or to property inside a building, caused by rain, snow, sleet, hail, sand, or dust if the direct force of the windstorm first damages the building, causing an opening through which rain, snow, sleet, hail, sand, or dust enters and causes damage.
(b) "Windstorm" for purposes of paragraph (a) means wind, wind gusts, hail, rain, tornadoes, or cyclones caused by or resulting from a hurricane which results in direct physical loss or damage to property.
(c) "Hurricane" for purposes of paragraphs (a) and (b) means a storm system that has been declared to be a hurricane by the National Hurricane Center of the National Weather Service. The duration of the hurricane includes the time period, in Florida:
1. Beginning at the time a hurricane watch or hurricane warning is issued for any part of Florida by the National Hurricane Center of the National Weather Service;
2. Continuing for the time period during which the hurricane conditions exist anywhere in Florida; and
3. Ending 72 hours following the termination of the last hurricane watch or hurricane warning issued for any part of Florida by the National Hurricane Center of the National Weather Service.
Copyright Florida Association of Insurance Agents 7/13/06
David Thompson