HOUSTON, TX – AUGUST 30: Flooded homes are shown near Lake Houston following Hurricane Harvey August 30, 2017 in Houston, Texas. (Photo by Win McNamee/Getty Images)

Named Windstorm deductibles are fairly common in areas prone to hurricanes. Instead of a policyholder being responsible for deductibles which can regularly rise to several thousand dollars, in the event of a named storm, which tropical storms and hurricanes become, a higher Named Windstorm Deductible applies and usually results in a very high deductible. Many Named Windstorm deductibles are on a percentage basis.

For commercial properties where the values can rise to the hundreds of millions of dollars, a percentage deductible can make the dollar amount a seven or eight figure sum. Many of these large commercial policies also cover flood insurance with a very high dollar deductible usually starting at $500,000, which is the limit of the National Flood Insurance Program to insure a building. Thus, in many cases, the National Flood Insurance policy is the first layer and the commercial policy—with a high deductible—acts as an excess flood insurance policy.

Hurricanes generally cause massive wind losses and can cause massive flood and storm surge losses. My experience has been that carriers apply the Named Windstorm deductible to the wind damage and the Flood Deductible to the flood and storm surge portion of the policy. This may change after a recent case in Texas ruled otherwise. Commercial insurance brokers, agents and risk managers may want to take note of this case and contact the underwriters about their interpretation and treatment of these clauses.

The case involved a large commercial location with a flood loss and no wind damage from Hurricane Harvey. The parties agreed that the policyholder suffered $6.7 million in flood damage and no wind damage. This was a very common scenario in the Houston area after Harvey because of the huge flood caused by the historic rains from Hurricane Harvey.

Regarding the deductibles, the court opinion noted:

The Deductibles section provides that if ‘two or more deductibles provided in this Policy apply to a single occurrence, the total to be deducted will not exceed the largest deductible applicable, unless otherwise provided’…The general deductible under the Policy is $100,000.00.’

One exception to the general deductible amount is for ‘any adjusted loss due to Flood.’ ….The Flood Deductible provides a $1,000,000.00 per location deductible. . . .

Another exception to the general deductible amount is for ‘any adjusted loss due to Windstorm and Hail’…The deductible under the general Windstorm Deductible is $100,000.00 per occurrence….An exception to the general Windstorm Deductible provides a deductible of:

5% of the total insurable values at the time of loss at each location involved in the loss or damage arising out of a Named Storm (a storm that has been declared by the National Weather Service to be a Hurricane, Typhoon, Tropical Cyclone, Tropical Storm or Tropical Depression)….

The 5% deductible was greater than the $6.7 million. The insurer argued that this deductible applied to the flood or wind damage and not just to the wind damage so that nothing was owed. The policyholder said the $1 million flood deductible applied and $5.7 million was owed.

The court agreed with the insurer stating:

The Named Storm Deductible in the Windstorm Deductible does not apply only to wind damage. Instead, the Named Storm Deductible provides unequivocally that it applies “regardless of the number of coverages, locations or perils involved (including but not limited to all Flood, wind, wind gusts, storm surges, tornados, cyclones, hail or rain).”…Therefore, by its clear and unambiguous language, the Named Storm Deductible in the Policy applies to any loss caused by a Named Storm, including a loss caused by flooding that resulted from the heavy rains associated with a Named Storm.

I have seen hundreds of these situations and this is the first I have read about an insurer treating similar clauses in this manner. I would strongly urge brokers to revisit these provisions because I am certain many have advised their policyholders that they have a higher wind damage deductible if a hurricane strikes but will have coverage for the hurricane flooding that will dovetail with the National Flood Program or some other flood deductible rather than the Named Windstorm Deductible.

Quote Of The Day

Insurance contracts are long, dense documents that are hard for insurance professionals, including agents and claims adjusters, to understand, much less the typical consumer.
—Rob Galbraith, “The End of Insurance As We Know It: How Millennials, Insurtech, and Venture Capital Will Disrupt the Ecosystem”