A growing number of homeowners are facing sharply higher costs as more insurers change how they calculate deductibles, especially for damage caused by windstorms and other natural events.The newer method of figuring deductibles is based on a percentage of the insured value of your home -- typically between 1% and 5%, and even higher in earthquake zones. With home prices having soared in many areas in recent years, this often works out to be far more costly to the homeowner than the traditional flat-dollar method of figuring deductibles, by which you pay the first $1,000 or so of home repairs. As a result, homeowners increasingly are on the hook for thousands of dollars in repairs before the insurer pays any part of a claim.Percentage deductibles were first widely implemented in earthquake insurance in the West in the early 1990s, and later spread to hurricane and windstorm coverage in the South. Now, millions more homeowners are being affected as insurance companies, including State Farm Insurance Cos., Allstate Corp., Travelers Cos. and others, continue to expand percentage deductibles for damage from high winds in the Northeast and from tornados and hail in the Midwest.
Insurance agents are concerned about a possible consumer backlash in areas where percentage deductibles are relatively new because, they say, many customers don't understand the terms. When insurers add the new deductibles, they explain them at renewal on the "declarations page" of the policy and sometimes in a separate notice, but many homeowners don't bother to read this. In many Northeastern states, the new deductibles weren't in effect the last time the region suffered a direct hurricane hit in 1991, so many homeowners don't know what to expect.Paula Aschettino, a 60-year-old real-estate broker in Cape Cod, Mass., says she was surprised to discover that her insurance policy covered none of the $7,500 cost of removing dozens of fallen trees after a freak windstorm in late 2005. When she called her agent to report the damage, she says, he reminded her that she had a 2% wind deductible on her policy. As a result, she was responsible for $12,000 of repairs before the company would pay a penny. Ms. Aschettino says some dead trees still lie on her property because she couldn't afford to remove them all."Part of the problem is, you don't know what the hell you have [in your policy]. People don't pay attention because it is so frustrating," Ms. Aschettino says.As natural disasters threaten to drive up property losses in many parts of the country, insurers increasingly are passing along more of the financial risk to policyholders. Many insurers that initially required wind and hurricane deductibles of 1% in coastal areas have recently raised them to as much as 5%, while also introducing the deductibles farther inland.So far, only a tiny fraction of policies use percentage deductibles on standard perils such as fire and theft. But insurance regulators and experts say they expect percentage deductibles will continue to spread through the industry and affect many more homeowners on their standard policies, as insurers seek to limit the cost of claims. Already, some insurers have started offering percentage deductibles as an option for homeowners who want to reduce the size of their premiums."We definitely are seeing a trend that they are moving to percentage deductibles rather than an actual [flat-dollar] amount," says Sandy Praeger, president-elect of the National Association of Insurance Commissioners. She says percentage deductibles help insurers stabilize rates.Homeowners should check with their agents about whether they've had new deductibles added to their policies. They also should ask if their coverage for damage from windstorms, earthquakes or other disasters has been dropped entirely. Allstate, for example, has dropped earthquake coverage in many states and wind coverage in shoreline communities from Florida to Texas. Homeowners can try to shop around. In some states, like New Jersey, some insurers allow homeowners to choose whether to accept a separate percentage deductible for hurricane damage, or pay a higher premium to avoid it, except in certain coastal areas where the deductible is mandatory.With wind damage, the level of storm severity that triggers percentage deductibles varies among insurers and states. In the Northeast, many insurers' deductibles are set to kick in with damage caused by the lowest grade of hurricane, known as a Category 1.But other insurers have more sweeping wind deductibles. In Massachusetts, insurers can require a separate deductible for any type of wind damage, whether from a gusty nor'easter or a full-blown hurricane. And in New York, some insurers' deductibles can be triggered if your neighborhood gets hit by winds, regardless of their speed, if they are part of the tail end of a hurricane that may have made landfall in another state hundreds of miles away.Even homeowners many miles from the coast are increasingly contending with percentage deductibles. Allstate announced recently that it would impose a mandatory 5% hurricane deductible throughout New Jersey as policies come up for renewal.In the Midwest and Great Plains, insurers increasingly are imposing separate percentage deductibles for damage from high winds and hail. Parts of Texas, Oklahoma, Kansas and Nebraska average six or more hailstorms a year, often resulting in extensive damage to windows, roofing and siding.Hank Andrae, 55, a retired Air Force veteran in Jefferson City, Mo., says he recently learned of changes to his policy that included a separate wind/hail deductible of 1% of the $657,000 insured value of his home, or $6,570, compared with a flat $500 deductible previously. Mr. Andrae has since switched to another insurer that doesn't impose a separate wind/hail deductible.Some state regulators have moved to partly shield consumers from the potentially higher costs of separate percentage deductibles. In Rhode Island, for example, a recent law bars insurers from imposing separate wind deductibles after July 1, 2008, although hurricane deductibles will still be allowed. And in Massachusetts, a new program allows homeowners in the fast-growing, state-run insurance pool to reduce their wind deductible by installing wind shutters.Some homeowners, in states including Texas, North Dakota and Kansas, are choosing to pay percentage deductibles on their base policies, for everyday risks like fire and theft, in exchange for paying less in premiums. The owner of a home insured for $250,000, for example, might save from $70 to $180 a year by choosing a 1% deductible instead of a $1,000 deductible, a State Farm spokesman says. Some other companies that offer this option in some states are Allstate, Farmers Insurance Co. and Nationwide Mutual Insurance Co.Some insurers are also offering the choice of higher flat deductibles in exchange for lower premiums. In North Carolina and Georgia, where state laws forbid percentage deductibles on base policies, State Farm offers an option of a flat $10,000 deductible.Ms. Praeger, of the National Association of Insurance Commissioners, says she chose an optional 1% wind/hail deductible, and a lower premium, on her own policy in Kansas after a sharp rise in house values boosted her insurance costs.Ms. Praeger says the higher deductibles make sense. "If the deductible is the equivalent of $1,000 or $2,000 or $3,000, then you are going to use it for what it is intended, and that is some sort of catastrophe."