Monday, May 24, 2010

What will your insurance deductible really cost you?


With hurricane season right around the corner (June 1st) and the threat of the BP Oil Spill impacting some of our coastline becoming more likely, the question of whether or not your insurance policy will cover you to the extent you think it will, is timely.

There is much we can talk about in this regard but let’s focus on one area: the hurricane deductible. Association policy deductibles are typically determined by the Board of Directors. The Condominium Act and most association governing documents require that deductibles be consistent with industry standards and prevailing practice for communities of similar size and age and having similar construction and facilities. SB 1196 will remove the current requirement for condominium boards which requires that the notice for the board meeting at which deductibles will be considered state the proposed deductible, the available funds and the board’s assessment authority as well as an estimate of any potential assessment against each unit as a result of the deductible being considered. Obviously, the type and amount of any deductible bear significant consequences for the association’s membership.

Do you truly know what your hurricane deductible is and how it will be applied?

Many associations throughout Florida have exceptionally high deductible amounts that apply to wind-related events. These deductibles may look relatively minor on paper but when applied to a claim for damages, they may completely and utterly wipe out your claim.

In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before the insurer will cover any expenses. Most policies have two types of deductibles: general and windstorm. The general deductible is usually easy to understand and is a flat amount (i.e. $10,000, $20,000 or $100,000 per loss). In the event of a covered loss like a fire or burst pipe, these deductibles are easy to apply. However most association policies often have huge windstorm deductibles that are disguised in the policy.

Most carriers will require the insured to provide an appraisal of the property at various intervals during the insurance process. This means hiring a firm to come out and give a “value” to the property at the expense of the association. Other carriers choose to inspect the property themselves to come to an “agreed” value for the property.

If the deductible language in your association policy is vague or ambiguous, you will eventually run into problems. For example, there is a big difference between a 3% deductible based on the total insured value of the property (TIV) and a 3% deductible based on the “total values at risk”. Some policies are for the TIV per building so in those instances, the value of any given building in the community could drastically affect the value of the claim, especially in associations where buildings of different types and structures are involved. A deductible based on this type of scenario can result in large out-of-pocket expenses for replacing roofs and other major repairs simply because the value of the larger building dramatically affects the amount of the deductible.

What can you do to ensure that you understand what you are getting when you negotiate the deductible for your association policy?

Your first option is to insist on a flat deductible amount so there is no ambiguity. Your second option is to ensure that the deductible is calculated the same way as the risk. In other words, if policy limits are global for the entire association, then the deductible should be applied the same way. Third, if you have a deductible based on a per building calculation make sure you understand that the total possible deductible for the entire association may greatly exceed the percentage that appears on the face of the policy. This is especially true if you have multiple tiers of coverage. Finally, have your policy reviewed by your association attorney BEFORE you sign on the dotted line and suffer a major loss. Ultimately, careful planning benefits the association and the individual members who will have to pay a special assessment if a huge hidden deductible shields the insurance company from paying your association claim.

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