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I think you hear me knockin’ and I think I’m comin’ in:
Percentage-based home insurance deductibles

By Nolan Hester, Insure.com
Last updated Feb. 19, 2010

It can be a personal and financial nightmare when a hurricane pummels your coastal home, a wind storm blows out half your windows or golf-ball sized hail craters the roof.

But that's why you have home insurance, right?

So you call your agent to start a claim, and that's when a new bit of insurance lingo takes you by surprise: percentage-based deductible.

As your agent explains, when your home insurance policy was renewed two or three years ago, it shifted you from paying a flat-rate deductible for damage to paying a set percentage, typically 1 percent of the home's replacement value. So now, instead of paying $500 to $1,000 and leaving the rest to the insurance company as you might do with a car insurance claim, the deductible will cost you $4,000 out of pocket before your home insurance pays a dime.

Welcome to the world of home insurance in the wake of Hurricane Katrina.

The 2005 hurricane that devastated New Orleans and the Mississippi-Alabama Gulf Coast may have also upended your home insurance choices. Katrina cost insurers an estimated $40 billion, says Michael Barry, the Insurance Information Institute's vice president for media relations. "From the insurance industry perspective, 20 years of premiums collected were wiped out by a single event."

Home insurance policies with flat-rate deductibles remain available in many non-coastal areas. But in hurricane-vulnerable states along the Gulf Coast and the entire Atlantic Coast, home insurance companies are shifting policies to percentage-based deductibles as fast as state regulators will allow.

"After Katrina, the whole insurance industry began evaluating their exposure," explains Jerry Hagins, a Texas Department of Insurance spokesman.

The new norm: tiered coverage where a flat deductible might still apply to home damage except for hurricane or wind storm damage. In Texas, many coastal home insurance policies now have three tiers:

• A percentage-based deductible for hurricane damage.
   
• Another percentage-based level for wind and hail.
   
• And yet another deductible for everything else.

While nationally only a quarter of State Farm's home insurance policies have percentage-based deductibles, spokesman Dick Luedke says they are almost universal in hurricane zones -- and often state mandated. "It's a new concept and a lot of people were [more] comfortable with their fixed deductibles." But Luedke says, "It lets us write more policies" instead of pulling out of high-risk states such as Florida, which State Farm considered doing in 2009.

"For some consumers it's making insurance more expensive, and that's a reality of the marketplace," Hagins says. "But what we want is to make sure that in Texas consumers still have choices. It's not in anyone's interest when you don't have a major insurance writer in your state."

As a result, many state regulators see percentage-based deductibles as crucial for keeping home insurance available and affordable.

If your home insurance coverage is $200,000 (the cost to rebuild your house), a 1 percent deductible (the most common) equates to $2,000 upfront at claim time.

Agents encourage clients to update their replacement cost coverage every year but Luedke says it's easy to get behind. With a percentage-based deductible, your coverage stays current because it adjusts automatically. "They're a better way to keep the deductible aligned with the total replacement value of the home."

The reason you buy insurance is to protect yourself from financial hardship, he notes. "If I have to dig into my pocket and pull out a $1,000 to pay for repairs to my home before insurance kicks in, that's not a financial hardship. It's not."

Homeowners can become too focused on the deductible and forget the whole point of insurance, adds Barry. "If a hurricane comes and the roof is blown off, can I pay for that out of pocket?" Some consumers see insurance simply as money going out the door with no financial return, he says. "But in fact, you're paying to transfer the risk to a company that will pay out in the event something bad happens."

About the author: Nolan Hester has worked as an award-winning reporter and editor for newspapers and magazines and as an environmental communications expert for government agencies. He has written about a variety of local and national policy issues.