As we shared in this blog post, the unpredictability of Iowa’s weather lately has created some unfavorable changes in property insurance costs. Now more than ever, knowing the details within property coverage is important for truly understanding the financial implications of various factors.
Here, we’re going to focus on commercial property coverage and deductibles, including the type and advantages of each, depending on several considerations.
What is a Business Property Insurance Deductible?
It might seem obvious, but there’s more to commercial property deductibles than meets the eye. While a single deductible that covered all types of damages was a thing in the past, Mother Nature’s increasing mood swings has changed coverage needs a bit. Now, commercial property policies often include two primary deductible types: “All Other Perils” (AOP) and Wind/Hail deductibles.
A wind/hail deductible applies to damage specifically caused by wind or hailstorms. Easy enough. On the other hand, an AOP deductible applies to claim losses that don’t involve specifically named perils (risks), like theft, vandalism or other natural disasters.
Because policies now often include both these deductibles, it is possible for policy owners to also have two out-of-pocket expenses to pay before insurance kicks in to cover the rest of the damage. This is precisely why you need to understand what deductibles you have, and how much they are, in order to be prepared in the event you need to file a claim.
Flat Rate vs. Percentage Deductibles — Advantages and Disadvantages
There are two main ways deductibles are assigned — as a flat-rate or a percentage of value amount.
Flat-rate deductibles are very straightforward. It is an amount detailed in the policy and is exactly what a policyholder must pay on a claim before insurance will cover the rest. The primary and most obvious advantage of a flat-rate deductible is its simplicity. If damage occurs requiring a claim, the deductible amount is deducted from insurance payout, and that’s the amount the policyholder pays themselves.
Percentage deductibles can be a tad more complicated because they are calculated as a percentage of the property’s limit of insurance. For example, if you own a property worth $1 million, a 2% deductible will be $20,000. While that math wasn’t too difficult, the key is to consider several other factors. Let me explain.
For some businesses, a percentage deductible can lower up-front premiums because they tend to be higher. Hooray! But not-so-fast. If that same $1 million property is damaged, but not enough to cost significantly more than $20,000 — if damage surpasses that amount at all — the easy percentage math still leaves the policy holder scratching their head. This is where considerations like the size of the company, value of the property, integrity of the building materials, and the cashflow capacity for large out-of-pocket deductibles are critical.
Deductible Types: Things to Consider
As I’ve outlined above, the type and amount of deductible that’s best for each business very much depends on the details. I highly recommend reviewing your business property insurance with a skilled insurance advisor to verify that you have the right policy for your needs. Your advisor will likely review several considerations, including:
Liquidity. Businesses with more capacity for cash reserves, or liquidity, can better handle higher out-of-pocket costs associated with percentage deductibles on claims. Likewise, smaller businesses with tighter budgets may appreciate more the predictability of flat-rate deductibles.
- Liquidity: Businesses with more capacity for cash reserves, or liquidity, can better handle higher
out-of-pocket costs associated with percentage deductibles on claims. Likewise, smaller
businesses with tighter budgets may appreciate more the predictability of flat-rate deductibles. - Roof Age and Building History: The age of a building’s roof can be a significant factor in deciding
the type and amount of deductible. For instance, I worked with a small business owner in Valley
Junction operating out of a relatively new building. When we reviewed her commercial property
coverage, I found she had a $2,500 AOP deductible and no wind/hail coverage. By adjusting her
policy to include a 2% wind/hail deductible, coverage needed in Iowa, she saved $500 annually
in premiums. Considering that her roof was only three years old, and they are generally
estimated to last at least 15 years, the adjustment to her coverage made sense for her situation.
Over the remaining 12 years of the estimated roof life, the premium savings would add up to
more than the potential cost of a new roof claim. - Property Value: The higher the property value, the higher a percentage deductible will be. For
example, a $5 million building with a 5% wind/hail deductible equals $250,000 out-of-pocket.
That is likely to far exceed the price of replacing the roof, which is the biggest risk. A flat
deductible would be more practical in this case. - Negotiate Deductibles: Carriers will often propose a deductible amount, but it can potentially be
negotiated. This is where working with an insurance advisor can be incredibly valuable. Our
team has contacts within the construction industry, so we keep up to date on material and labor
costs correlated with various types of damage. With this information, we can counter carrier-
proposed deductible amounts to help the client and carrier be more realistic about coverage
needs.
The Nuances of Commercial Insurance Deductibles Matter
Understanding your property insurance details, including the deductible types and amounts, is essential for making informed decisions on policy details that can have significant financial impacts down the road.
Unsure whether your current commercial property coverage is right for your business? We specialize in customized insurance plans that match your unique needs and budget — give us a call!
