BusinessReport.com

There’s nothing quite like surviving a hurricane only to discover a gaping hole in your insurance policy.

A collective gasp could almost be heard in post-Gustav Baton Rouge as the nasty realization sank in: that in many cases, homeowners were on the hook for thousands of dollars of damage because of a new kind of deductible, the “named-storm deductible.”

This rude awakening prompted an outcry that almost guarantees legislation next year aimed at giving some kind of relief to residents who felt ambushed by the named-storm deductible contained in their insurance policies—as high as 5% in some cases.

Industry and government people note that homeowners’ shock in discovering the day after Gustav their policies’ deductibles left them a lot more exposed than they thought could have been avoided had policyholders simply familiarized themselves with the details of their policies beforehand. The deductible is clearly outlined in large type on the front page.

“Read your policy,” says Ed O’Brien, deputy commissioner of Property and Casualty for the Louisiana Department of Insurance.

It’s good advice that policyholders have been ignoring since time immemorial. Named-storm deductibles might not be such a surprise if another Gustav hits—or worse—though they still won’t be popular. They kick in when a storm’s winds reach a sustained speed of 39 mph, at which point the National Hurricane Center gives it a name. Variations on the theme are the windstorm deductible and the hurricane deductible.

Named-storm deductibles aren’t new, though insurers have turned to them increasingly in the past several years, encouraged by heavy losses inflicted by hurricanes Katrina and Rita in 2005. Named-storm deductibles reduce an insurer’s exposure by limiting what it has to pay for, just like any deductible. The percentage is based on what the insurer decides is the replacement value of the property. Before named-storm deductibles came along, homeowners paid a $500 or $1,000 deductible.

O’Brien says the Legislature had nothing to do with mandating them, contrary to popular belief. But neither did the Legislature do anything to prevent them. The Department of Insurance, for its part, can’t tell an insurer not to impose a named-storm deductible, since they’re legal.

“We can only deny a 5% deductible if it’s illegal, not just because we think it’s excessive,” O’Brien says.

Kevin Cunningham, spokesman for the American Insurance Association, says policyholders normally would come out ahead through named-storm deductibles since—ideally—they lead to lower premiums.

Multiple major storms in recent history, however, might have skewed that equation somewhat. Nevertheless, named-storm deductibles generally mean lower premiums and more policies being written, and more incentive for other insurance companies to start doing business in Louisiana. Cunningham says creating laws to regulate premium rates or deductibles will only drive insurers away and tighten the market.

But legislation is coming, like it or not.

Rep. Charles “Chuck” Kleckley, a Lake Charles Republican and chairman of the House insurance committee, says his committee is scrutinizing the high deductibles. For example, Allstate’s is 5%. Others are lower; Farmers Insurance is zero.

Kleckley’s committee is also looking at the feasibility of going to a single deductible per hurricane season, as opposed to different deductibles for each named storm. Kleckley says consumers “should have alternatives,” but warns again acting rashly.

“There are some things that we can do and still maintain affordability and availability,” he says. “We don’t want to go to the extreme that Florida did because of the exposure that they have put on their citizens and policyholders. We think that’s dangerous ground to tread on, and we want to stay away from that.”

What did Florida do that was so terrible? In 2004, after the state was ravaged by five named storms—Bonnie, Charley, Frances, Ivan and Jeanne—Florida legislators clamped down on premiums and deductibles. This has forced a growing number of insurers to pull out of the market, Cunningham says, noting “Florida is a really good example of what not to do.”

“They are absolutely leaving because they’ve tightened up so much that it makes it almost impossible for them to do business,” he says. “It is a market that most insurers have got to be in. They just have to be in it. Louisiana is 1% of the total national market. You don’t have to be here. If we don’t incentivize people to be here, it’s just not going to happen.”

With private insurers pulling out, Florida’s Citizens Property Insurance Corporation has taken on an additional 500,000 policies. Cunningham calls it a “financial disaster waiting to happen” if Florida sustains another major hit and Floridians are stuck with a massive bailout of Citizens, a government-created, not-for-profit insurer of last resort created by the state in 2002. Louisiana has its own version, the third-largest residential and commercial property insurer in the state.

Despite his warning against following Florida’s model too closely, Cunningham says there is some room for negotiation between the industry and Louisiana lawmakers as legislation takes shape; a single seasonable deductible, for instance. He predicts Kleckley will be successful in getting a bill passed that creates one. If that happens, Cunningham says, a “very minimal” premium increase would likely follow—maybe 1% or 2%.

Were Louisiana to go down the same road as Florida, insurers would stay away, and only competition—more insurers doing business here—will improve the market, Cunningham says. Homeowners already have choices, he adds, noting that deductible percentage vary among insurers.

“If you don’t like the products being offered to you,” Cunningham says, “there are other options.”

Post-storm trauma

Brenda Chapman blames no one but herself for not knowing about the 5% hurricane deductible on her homeowner’s insurance policy—a deductible that works out to between $11,000 and $12,000.

She, like thousands of other policyholders who felt ambushed by high deductibles after Gustav, didn’t read her insurance policy.

“We’re adults,” Chapman says. “We know how to read. Shame on us. We accept that as part of our responsibility. You just don’t look at the papers like you should.”

Now that she’s aware of the deductible, however, she says it’s unacceptable. Neither is she happy about the treatment she’s gotten from the insurance company in trying to make repairs to her mother’s home in Jefferson Park subdivision.

The adjuster won’t agree to replace her mother’s roof, insisting that repairing damaged sections is sufficient. Meanwhile, the two roofing contractors Chapman has managed to have look at the property so far declined to give estimates on repairing the roof because they weren’t able to guarantee the roof wouldn’t leak afterwards. Her mother’s deductible is about $9,000, while her house sustained about $28,000 worth of damage.

Chapman says she is so disillusioned from dealing with the insurance company on her mother’s house she’s not even bothering to file a claim on her own house on Hoo Shoo Too Road, which had several trees toppled, fences down and cars crushed.

“The insurance company has no idea the level of anger in this town,” she says.

Chapman says she has no intention of settling for inadequate repairs to her mother’s home and plans to fight the battle to the finish to get the insurance company to pay for a new roof—buffeted repeatedly by gusts that were strong enough to blow the chimney off. She’s waiting for the final papers from the insurer to begin legal action.

“We all came out of it safe,” Chapman says. “You can’t ask for any bigger blessing. That doesn’t mean I’m not going to fight [the insurance company]. Fair is fair. That’s how I was raised and that’s how the world should be.”