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Pay More, Get Less: Percentage-based Deductibles

If you live in a part of the country prone to hurricanes, brace yourself. If it hasn't happened already, your home insurance company may force you to take a policy with percentage-based deductibles for damage caused by hurricanes and windstorms.

In the past a typical home insurance policy had a standard dollar deductible (such as $1,000) for damage caused by fire, theft and other losses. Your insurer was responsible for paying the rest of the claim. (See these home insurance basics.)

But percentage-based deductibles are flooding the market. These policies use deductibles based on your home's insured value. So a homeowner with a house insured for $200,000 with a 5 percent deductible for hurricane losses would have to cough up $10,000 for repairs before his insurer would begin to pay. These deductibles generally kick in when a "named storm" hits your area. In other words, a bad thunderstorm can't trigger a hurricane deductible.

Percentage-based deductibles cost an insurer less but a homeowner more. Homeowners getting new or renewed policies with percentage-based deductibles aren't paying less in premiums.

Stormy weather

Home insurance companies justify using percentage-based deductibles by asserting that the weather is worsening in the areas where most people reside.

"Fifty-three percent of the population lives within 50 miles of a coastline," says Loretta Worters, a spokesperson for the Insurance Information Institute (III), which represents the insurance industry. "We're in the midst of a cycle of hurricane activity that will be more frequent and more intense. We've already been through Andrea, the first named storm of the season."

Individual insurers didn't respond to requests for comment, or declined to comment.

The start of it

The hurricane deductible originated in Florida after Hurricane Andrew in 1992, and became standard in policies throughout the Gulf States. This deductible is predictably the most common one since hurricanes and tropical storms represent 42 percent of total catastrophe losses, followed by tornadoes at 34 percent.

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