Hurricane Irma and Tropical Storm Harvey could present the first widespread use of little-known "hurricane deductibles," which allow insurers to shift thousands of dollars of damage costs per home onto consumers.Homeowners' insurance policies in coastal states often allow insurers to charge consumers a higher deductible if certain catastrophes like hurricanes occur.
These deductibles were widely used after Hurricane Katrina in 2005 and have been standard in many states for years. But they have rarely been triggered on a large scale because fewer hurricanes have landed in the U.S. over the past decade.
Harvey made landfall as a Category 4 hurricane last month before weakening to a tropical storm. Irma, a Category 5 hurricane, made landfall in the northeast Caribbean on Wednesday and could reach the U.S. later this week. Florida Gov. Rick Scott on Monday declared a state of emergency in all of the state's 67 counties.
Proponents say hurricane deductibles make insurers more willing to offer policies in high-risk areas and encourage homeowners to take precautionary steps to prevent storm damage.
But consumer advocates say hurricane deductibles can be confusing and prohibitively expensive for homeowners.
Unlike a typical deductible, which requires consumers to pay a flat amount to cover losses before the insurance company will pay out for a claim, these special deductibles are calculated as a percentage. Consumers can be required to pay anywhere from 1% to about 10% of the total insured value of the building or its contents. Insurers will only pay for damage that exceeds the deductible amount.
For example, a homeowner whose house is insured up to $200,000 with a 5% hurricane deductible would be responsible for the first $10,000 of hurricane-related damage to the building.
This type of deductible can be triggered by hurricanes, high wind speeds, earthquakes or other disasters. The triggers vary depending on region and insurer. Nineteen states and the District of Columbia have hurricane deductibles, according to the Insurance Information Institute.
In 2012, Tropical Storm Sandy didn't trigger hurricane deductibles across the East Coast because the storm weakened from a hurricane to a tropical storm before it made landfall.
Harvey, on the other hand, did arrive on Aug. 25 as a hurricane. The Texas Wind Insurance Association, the insurer of last resort on the Texas coast, had received more than 42,000 claims from policyholders as of late Monday, a spokeswoman said. A majority of TWIA residential policies have a hurricane deductible of 1% or 2%.
Allstate Corp. , one of the top home insurers in Texas, had different deductible criteria for policies in different regions, but they were all triggered by Harvey, a spokesman said.
In Florida the typical homeowners' policy has a 2% hurricane deductible, and the average insured value is $250,000, according to a spokeswoman for the state's Office of Insurance Regulation. That means the average Florida homeowner needs to pay about $5,000 to cover the deductible, which "may be problematic for some homeowners," she said.
Some insurers began adding hurricane deductibles to policies after Hurricane Andrew in 1992, the second-costliest hurricane for insurers in U.S. history.
"It was a strategy employed by the national carriers to at least maintain their presence in Florida" as many were sharply cutting back their footprint in the state, said Kevin McCarty, a founder of Celtic Global Consulting LLC and a former Florida insurance commissioner. "It gave insurance companies more capacity to sell additional policies" in Florida, he said.
Many households in the Caribbean islands in Irma's path are uninsured or underinsured compared with U.S. households, meaning that residents could be on the hook for much greater recovery costs.
Hurricane activity has been subdued in Florida over the past decade, so for many homeowners Irma could mark the first time that their hurricane deductibles get triggered.
Yet about one-third of homeowners in five coastal states including Florida and Texas are unaware that hurricane deductibles exist, according to a 2017 survey by the Insurance Research Council. About one-fourth of survey respondents in those states said they didn't know whether their home-insurance policies included hurricane deductibles.
"The problem is, a lot of people end up getting nothing because of percentage deductibles," said Amy Bach, executive director of consumer-advocacy organization United Policyholders. "People tend not to pay attention to their insurance until it's really too late."