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Insuring the deductible: what's the catch? Coverage kicks in only if the damage exceeds the deductible dollar amount.

For many homeowners and small businesses in Florida, the most difficult problem with property insurance isn't just the high premiums. Instead, it is the impact of the out-of-pocket cost of the deductible, if they were a victim and needed to file a claim on their property.

"Over past five years, there have been a combined 7.6 million catastrophic hurricane claims on residential and commercial properties--with losses exceeding $86 million on residential claims alone," said Kenneth Gregg, chairman and CEO of the CITON Group based in Indianapolis.

Especially after catastrophic hurricanes, major property insurers increased retentions or deductibles on property policies in order to shift the risk away from the insurer and on to the property owner because the hurricane losses were so huge. In a few cases, it was either the higher deductible or no coverage at all.

"This particular policy fills a gap for the insured by covering 100 percent of the deductible if the damage exceeds the deductible dollar amount," he said. The policy covers wind damage, not flood losses.

Homeowners and commercial property owners often don't understand how a property, policy works in relation to the deductible specified in the coverage. For example, many homeowners are under the impression that the deductible is a based on the cost of repairing the damaged home. Most deductibles in Florida, Gregg explained range from 2 percent to 10 percent of the value of their property, not 2 percent to 10 percent of the damage."

On a home valued at $335,100 in Palm Beach County, with a 2 percent deductible, the homeowner would need to pay $6,702 before repairs could begin. With CITON's "Zero Select" policy, the premium would amount to an annual payment of $628, or about $52 per month.

That would eliminate the payment of any deductible at the time of filing a claim if the loss reaches a level where primary insurance kicks in. The newly formed company has written more than $30 million in coverage since the product was introduced after the hurricane season last year.

The underlying insurer on the policy is Hallmark Specialty Insurance, an insurer rated AI by A.M. Best Co., and there is reinsurance on a 1-to-100 year catastrophic event.

The key underwriting factors are the total insured value of the property; the property's location; whether the building is residential or commercial; the construction materials used; the size of the deductible on the primary property policy; the age of the property, and the number of floors.


Hallmark is no longer writing the coverage because it had reached capacity, and another carrier with much larger capacity will write the coverage, said Gregg. The new capacity will allow CITON to offer coverage from Texas through New England.

The policy currently covers all of Florida except for Monroe County, which includes the Florida Keys. A policy can also be written in conjunction with Florida's Citizens Property. Insurance Corp., the nonprofit created by Florida in 2002 to provide affordable coverage.

Gregg got the idea for the new coverage after a friend in Melbourne, Fla., suffered through four hurricanes in 2004. Because of the increase in value of his friend's home over the 20 years that transpired between when the home was purchased and when it was damaged, the deductible on the policy was $50,000 before any repairs could even begin--on a home that had only cost $30,000.

Homeowners in hurricane zones, especially in the current recession, "are challenged with enormous financial burdens and don't have that kind of money around" to pay a deductible, Gregg said. For a small business, one huge loss could jeopardize the survival of the entire organization.

Zero Select does have one important shortcoming: It will only pay benefits if the damage exceeds the deductible on the primary policy. If the deductible is $10,000, but the damage if $5,000, then the policy would not pay the claim. The policy therefore works best for the policyholder as catastrophic coverage, where the loss is huge and a portion of the claim must be paid out of the primary coverage. Coverage, however, is not available for mobile homes.

Gregg estimates that commercial property policies now account for more than 60 percent of the total exposure with the balance being residential. In contrast, residential policies outnumber individual commercial policies, but exposure per policy is much lower. The policy for a commercial policyholder also covers business interruption, if that portion of the primary coverage has a deductible.

Implementation of the deductible program is now under way, available through independent agents.
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Author:Roberts, Jack
Publication:Risk & Insurance
Date:Sep 15, 2009
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