Understanding Your Percentage Deductible

After Hurricane Andrew in 1992, percentage deductibles became more popular in policies as a way to reduce the exposure to insurance companies. In a typical claim, you will know what your deductible is but with percentage deductibles you may not know until after your loss is calculated. A common misconception is that the percentage applies to the loss sustained when in fact the percentage deductible is a factor of the total insured value (TIV). The challenge with this method is that it’s variable depending on the size of your loss and your policy language.

Here are a few things to look for in your policy:

The following notice may appear on your policy cover - Florida information: "THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU."
The percentage may be based on various parameters. It may be per location or be more defined by structure. When it’s applied by structure it can be more advantageous for policyholders since the percentage would apply only to that structures TIV.
It may pertain separately to property and time element losses of affected location(s) or it may combine business interruption and property. It is important to understand your specific policy’s wording to accurately calculate your out-of-pocket expenses before insurance kicks in. Further, contingent losses may again involve a separate percentage deductible.
Percentage deductibles are often associated with a minimum deductible and, less common a maximum deductible.

Policy Wording

Here are a few examples of policy wording related to percentage deductibles:

When a % deductible is stated above, whether separately or combined, the deductible is calculated as follows:

Property Damage – % of the value, per the Valuation clause(s) of the PROPERTY DAMAGE section, of the property insured at the location where the physical damage happened.
Time Element – % of the full Time Element values that would have been earned in the 12 month period following the occurrence by use of the facilities at the location where the physical damage happened, plus that proportion of the full Time Element values at all other locations where TIME ELEMENT loss ensues that was directly affected by use of such facilities and that would have been earned in the 12 month period following the occurrence.

As respects property located in high hazard zones for earth movement:

Property Damage: 5% per location Time Element: 5% per location
The above are subject to a minimum deductible of USD500,000 or if applicable the location deductible for Property Damage and Time Element combined, per location and a maximum deductible of USD15,000,000, combined all coverages, per occurrence.

When a % deductible is stated above, whether separately or combined, the deductible is calculated as follows:

Property Damage – % of the value, per the Valuation clause(s) of the PROPERTY DAMAGE section, of the property insured at the location where the physical damage happened.
Time Element – % of the full Time Element values that would have been earned in the 12 month period following the occurrence by use of the facilities at the location where the physical damage happened, plus that proportion of the full Time Element values at all other locations where TIME ELEMENT loss ensues that was directly affected by use of such facilities and that would have been earned in the 12 month period following the occurrence.

Calculating Your Deductible

Once you understand how your policy defines your percentage deductible, you’ll be able to calculate it accordingly.

Here is an example of how the combined % deductible is calculated:

Property, Plant & Equipment Reported Value of $250 Million
Annual Reported Business Interruption Value of $550 Million

Calculated Percentage Deductible as a Percentage of Total Insured Value (TIV)
Property, Plant & Equipment $250 Million
Annual BI Value $550 Million
Total TIV $800 Million X 3% Deductible
Equals $24 Million Deductible

Deductibles for CAT losses have become more complex over the years and interdependent operations spread the impact across the organization, so it’s increasingly challenging to have confidence in the preliminary evaluation, especially when informing key stakeholders. Those who have had losses know, with hindsight, there are gaps in understanding and initial questions that are critical to the deductible evaluation. Avail yourself of a candid, independent review from the start so that whether you have a recoverable claim or not, you’ll be prepared.