‘Hurricane Deductible': Technicality Could Cost (or Save) Homeowners Thousands

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Homeowners whose properties were damaged by Hurricane Sandy probably don’t care much about exactly how fast the storm’s winds blew. All they know is that it was strong enough to knock a tree down on the roof. But due to the fine print of insurance policies, the precise speed of the wind could mean a difference of tens of thousands of dollars to many homeowners.

As the devastating effects of Hurricane Sandy became apparent early this week, thoughts naturally turned to cleaning up the mess. For affected residents, this often meant figuring out how their homeowner’s insurance would cover damage to their properties.

With most policies, there is a deductible, usually $500 or $1,000, which a homeowner must pay before insurance covers the rest. But CNN Money, MoneyWatch, and others have recently highlighted the fact that a “hurricane deductible” provision can wind up costing a homeowner much more. In states where such deductibles are allowed—including New York, New Jersey, Connecticut, and most of the East Coast—a homeowner may be required to pay 1%, 5%, perhaps even as much as 10% (in Florida) of their property’s value before the insurer coughs up a single penny.

(MORE: In the Eye of the Storm: Capturing Sandy’s Wrath)

For example, if the hurricane deductible is 5%, the homeowner would have to pay $20,000 if his property valued at $400,000 has been destroyed. Ouch.

Just as technicalities can cost consumers big bucks, however, they can also sometimes save people serious money. In most cases, the hurricane deductible only kicks in if there were sustained winds of at least 74 mph measured within the state.

Yes, Hurricane Sandy was a hurricane (duh). But by the time Sandy hit New Jersey, the National Weather Service had labeled the storm as a “post-tropical cyclone,” the designation for storms maxing out with 73-mph winds. New Jersey’s Bergen Record reported that categorizing Sandy as such will have huge impact on how much homeowners (and insurers) must pay for wind-related damage:

Kenneth Kobylowski, the state’s acting commissioner of banking and insurance, took the cue from the federal agency and ruled late Tuesday that the storm was not a hurricane for insurance purposes, because the weather service changed the designation of the storm before it hit New Jersey.

“The hurricane deductible does not apply,” Ed Rogan, a state spokesman, said late Tuesday. “We will be sending out formal bulletins to insurers [today].”

(MORE: Sandy: The Rare Natural Disaster That Isn’t Expected to Boost Gas Prices)

Likewise, a Baltimore Sun post stated that “the Maryland Insurance Administration says that for Sandy no hurricane deductibles will apply” in the state due to the fact that the “National Weather Service didn’t issue hurricane warnings for any counties here.”

There is also some precedent for states to push insurers to waive hurricane deductibles. Last year, according to the Hartford Courant, Connecticut negotiated to get most insurers in the state to waive such deductibles after Hurricane Irene (or rather, Tropical Storm Irene—a key distinction) caused destruction.

Homeowners must contact their insurers to find out if a hurricane deductible applies. In most cases, it appears as if the owners of wind-damaged homes will only be on the hook for their usual deductibles of $500 or $1,000. Note the phrase “wind-damaged.” Flood damage is different. Unless you have a policy that specifically covers for flooding, insurance probably isn’t going to pay for cleaning up the mess caused by two feet of water in your basement.

MORE: Will We Be Seeing More Superstorms?