BusinessReport.com

It’s a homeowner’s worst nightmare. Two major hurricanes have roared over your home in as many weeks, with no time to assess the damage from one before the other hits. Now all that’s left is a heap of bricks, shingles, splintered wood and a slab, and you’re relying on a faithfully paid insurance policy to put a roof back over your head.

But somewhere in the fine print, you missed something called a hurricane deductible, or named-storm deductible, which requires you to pay out of pocket each time storm damage occurred. There’s no money to pay it, and the insurance company won’t make good on the claim until both deductibles are paid in full.

It’s a situation agency manager Paul Owen was happy to miss out on when he processed claims for John Hendry Insurance in Zachary during the aftermath of hurricanes Gustav and Ike, which affected parts of Louisiana in September 2008.

“We were very fortunate. Our agency didn’t have anybody impacted by both storms,” Owen said. “But you hear the stories of people who lost their homes that had to pay even more because of hurricane deductibles.”

A named-storm deductible is part of a homeowner’s insurance policy that is paid out of pocket before the insurance company pays for damage caused by a hurricane or tropical storm. Under the current law, an insurance company can charge a wind/hail, hurricane or named-storm deductible for each storm that has damaged an insured home before honoring a claim.

The possibilities are capable of wreaking havoc on a homeowner’s pocketbook. If a home worth $200,000 has an insurance policy with a 2% named-storm deductible, the homeowner could pay upwards of $8,000 out of pocket for damage from two named storms before the company pays on each individual claim.

The Legislature passed a bill on June 10 that will restrict insurance companies by allowing them to charge only one wind/hail, hurricane or named-storm deductible per hurricane season if damage was caused by a tropical storm or hurricane. The bill also will allow insurance companies to raise their premiums to cover the risk associated with only charging one deductible. If Gov. Bobby Jindal signs off on the legislation, the restrictions take effect Jan. 1.

Insurance Commissioner Jim Donelon says the bill was modeled after similar legislation enacted in Florida in 2005, one year after the state had sustained damage from four named storms and homeowners in Orlando were faced with up to three named-storm deductibles at once for Category 4 Charley, Category 2 Frances and Category 3 Jeanne. Any premium increase will be around 2% statewide, Donelon says, but the premiums for homes closer to the coast could increase as much as 6%. John Wortman, chief executive officer of state-run Louisiana Citizens Property Insurance Corp., says the premium increase for his company could be closer to 8% on the coast.

Some insurance companies are unsure as to what effect, if any, the new law will have on policy premiums.

“Our actuaries haven’t begun to analyze what kind of a rate increase, if any, will occur,” says Molly Kirby, a public-relations consultant with State Farm Insurance. “There is a great possibility of an increase, but there’s no way to know at this time.”

The new legislation also runs the risk of alienating the private insurance market, which has struggled to rebuild in Louisiana after devastating hurricanes Katrina and Rita in 2005. Katrina and Rita carried a combined $20 billion payout for Louisiana policyholders, causing private insurance companies to be wary of writing homeowner policies in the state. Citizens, which carried 135,000 homeowner policies before the storm, was left to pick up the slack and added an additional 40,000 policies in 2006.

To help recruit private companies back into the state and take the pressure off of Citizens, the Legislature created a $100 million incentive fund that offered $2 to $10 million in state grants to companies willing to write homeowner policies as long as they put up a match and took at least 25% of the high-risk policies out of Citizens.

The program received mixed results. After three rounds of applications, only five insurance companies took the state up on its offer, totaling $29 million in grants. Two other companies applied and were rejected, Donelon says, because they failed to meet the solvency requirements necessary to receive the grant money. The remaining $71 million in fund money, which increased with interest to $75 million, was returned to the general fund by the Legislature this session.

While those numbers seem grim, Donelon says the Louisiana private insurance industry has made a significant recovery, with 17 private companies coming into the state without participating in the incentive program. Citizens has undergone two rounds of depopulation and is currently undergoing a third, reducing its high-risk policy load to 125,000 policies this year.

Donelon does not believe the new legislation will prevent private insurance companies from doing business in Louisiana, although they will incur greater losses should two named storms occur in the same area back to back.

“Insurance is a gamble,” Donelon says. “The homeowners are betting against themselves. The company is betting on you, that it’s going to be a quiet season and that they are going to make a lot of money.”

Kirby says that the named-storm deductible restriction will not prevent State Farm from doing business in Louisiana, even if two named storms occur back to back after the law goes into effect.

“Of all of the ideas that have floated around this year, this is the best compromise,” Kirby says. “I don’t anticipate this hindering business in any way, shape or form. We’re committed to our customers, and we plan on staying in the game.”

Owen remains optimistic about Louisiana’s private insurance market. His belief is that the new legislation will cause some insurance companies to rethink named-storm deductibles, but that the market will absorb the change with no real shockwaves.

“The marketplace has always found a way to work itself out,” Owen said. “We went from 1993 until Katrina without a major storm. Over that much time, the marketplace settles itself. I don’t think this will be an exception.”