Watchdog reader Paul Barth of Dallas calls it “Homeowners Policy Shock.” No, it’s not the name of a rock band. It’s the surprise homeowners feel when they learn about the newest way insurance companies are reaching into your pocket.
It was only a few years ago when the standard deductible on a homeowners’ policy was 1% of a home’s replacement value.
Now, as The Watchdog first reported 20 months ago, more insurance companies are demanding a 2% deductible.
For most families this can cause major cash flow problems. Replacing a home or roof can cost thousands. The higher the deductibles, the lower the premiums.
Showing it the easy way, let’s pretend there is still such a thing in Dallas-Fort Worth as a $100,000 home. At 1%, your out-of-pocket cash would be $1,000. With a 2% deductible that jumps to $2,000 before the company pays the rest.
Now let’s use real numbers on a typical house today. According to the MetroTex Association of Realtors, the median price of an area home is $400,000.
For that typical $400,000 home, a 1% deductible will cost $4,000 while the 2% deductible would require you to shell out $8,000.
These numbers are not hard and fast because insurance companies have so many variables.
The multiplying formula I used is 400,000 times .01 for 1%. For a 2% deductible it’s 400,000 times .02.
If you pay out of your own pocket in higher monthly premiums, the higher deductible you pay, the more likely you are to save money.
Since more and more insurance companies are requiring 2% deductibles in North Texas, a typical homeowner may have a decision to make about what kind of risk they want to take.
For that typical owner of a $400,000 home, who has $8,000 laying around to pay an insurance company for a new roof? Do you take out a home equity or home improvement loan? Dig into life savings? Or worse, cancel the repair job?
Depreciation more common
Roof replacement is part of wind and hail replacement. There’s a second deductible that previously was usually 1% for all other perils, including water damage, vandalism and fire. Now that too is climbing.
Plus, some insurance companies have in recent years added depreciation costs to roof jobs. So if you have a 20-year roof that is 15 years old, the insurance company might only pay for the remaining five years.
“You used to get full replacement for a new roof, but companies have been switching to actual ‘cash value,’” says Douglas Heller, director of insurance for the Consumer Federation of America. “They pay for your roof less the depreciation.
“These two things conspire to transfer more of the risk back to homeowners. They have been raising rates and hollowing out the coverage in a way that certainly protects their ability to generate greater profits, but they are certainly reducing the protections of Texans.”
Insurance companies say their profits have been reduced sharply, mainly due to higher construction costs for labor and materials and mostly because of damage caused by devastating storms.
Richard Johnson of the Insurance Council of Texas says, “The frequency and severity of natural disasters and other claims events have significantly increased in recent years. Higher deductibles help the industry manage rising costs, ensuring they can continue to offer sufficient coverage to all policyholders. By adjusting deductibles, they can better manage risk, keeping premiums as affordable as possible while maintaining the financial health of the company and having the funds to pay claims.”
Deductibles going up
Companies could raise the deductibles as high as 5%. That’s rare, but the requirement of 2% is getting more common.
Ben Gonzalez of the Texas Department of Insurance says insurance companies generally have “broad flexibility” to set deductibles. TDI gives approval to requests to raise insurance premiums but not on deductibles.
“Hail is one of the largest drivers of insured losses every year, and some companies are becoming more selective about which risks they choose to take on,” he said.
Under rules, if a company increases a deductible at renewal, the company must give at least 30 days’ notice to policyholders in plain language on the front page of a renewal notice.
How to solve this? Ware Wendell of Texas Watch says one possibility is a bill in Congress (H.R. 6944) that would create a national catastrophic property loss reinsurance program. Federal coordination could help stabilize the nation’s insurance market, supporters say.
Regulators have bought into the insurance industry line that says companies have to bring in more premiums and pay out fewer claims, CFA’s Heller told me.
Homeowners Policy Shock doesn’t have to be something we must blindly accept.
Watchdog tips: One deductible covers one incident. If you have two claims, you’ll have to pay twice.
Shop around. There are more than 150 insurance companies. Prices and coverage vary immensely.
Talk to your insurance agent about your deductibles.
The Texas Department of Insurance says consumers should carefully consider deductibles when buying a policy. TDI reviews rate change filings but not changes to deductibles at renewal.
