Earthquake insurance, usually written on a policy called Difference in Conditions, and may also include the peril of Flood, is considered catastrophic coverage. Earthquakes and floods impact a number of people and businesses in a concentrated area, so the insurance company knows that if there is a catastrophe, there will be a high volume of claims. To distribute the risk, the deductible levels are much higher on these policies than on standard property policies. They are a percentage, usually 10%, 15% or 20% and/or include a minimum flat dollar amount, usually $25,000 or $50,000 per occurrence. 

There are four major types of policy deductibles that will be covered in this article, along with loss adjustment examples for each one. 

1. Per Unit of Insurance

• The deductible is calculated separately for and applies separately to each unit of insurance

Example:

Let’s imagine there was an earthquake that caused $100,000 damage to the building structure, $600,000 to business contents, and that the company lost $150,000 in income as a result of not being able to operate.

The insured purchased a limit of $800,000 for building, a $700,000 limit for contents and $200,000 for business income. They have a 10% per unit deductible on the policy. 

The loss would be adjusted as follows:

To determine the deductible amount, take the stated value on policy, per unit, and multiply times the deductible percentage.

1: Building: $800,000 x 10% deductible = $80,000
2: Contents: $700,000 x 10% deductible = $70,000
3: Business Income: $200,000 x 10% deductible = $20,000
4. $80,000 + $70,000 + $20,000 = $170,000 Deductible 

To determine the amount the insurance company will pay, take the actual loss per unit of insurance, minus deductible amount calculated above.

1: Building: $100,000 – $80,000 = $20,000
2: Contents: $600,000 – $70,000 = $530,000
3: Business Income: $150,000 – $20,000 = $130,000
4. $20,000 + $530,000 + $130,000 = $680,000 Insurance company payment

Recap:
The total loss is $850,000
The carrier pays $680,000
The portion not covered due to the deductible is $170,000

2. Per Location

• Deductible is calculated separately for and applies separately for each location
• Total stated values of all covered property at each location
• Applies regardless of whether the covered property incurred loss or damage

Example:

In this example, the insured has 2 locations – one with 2 buildings, and one with 1 building, and a 10% per location deductible.

The loss would be adjusted as follows:

To determine the deductible amount, take the stated value on policy and multiply times the deductible percentage.

1: Deductible applied to Location #1 = ($1,920,000 + $140,000) x 10% = $206,000
2: Deductible applied to Location #2 = $900,000 x 10% = $90,000
3: $206,000 + $90,000 = $296,000 Deductible 

To determine the amount the insurance company will pay, take the actual loss per location minus deductible amount calculated above, then add that together.

1: Total Loss at Location #1 = $1,000,000 + $30,000 = $1,030,000
2: Total Loss at Location #2 = $200,000
3: Location #1 = $1,030,000 – $206,000 = $824,000
4: Location #2 = $200,000 – $90,000 = $110,000
5: $824,000 + 110,000 = $934,000 Insurance company payment

Recap:
The total loss is $1,230,000
The carrier pays $934,000
The portion not covered due to the deductible is $296,000 

3. Per Building

• Total values at risk per building is the total stated value of all covered property and time element coverage located at each separate building
• Applies regardless of whether the covered property incurred loss or damage

Example:

In this example, the insured has one location with 2 buildings and a 10% per building deductible. 

The loss would be adjusted as follows: 

To determine the deductible amount, take the stated value on policy and multiply times the deductible percentage.

1: Deductible applied to Building #1 = $1,200,000 x 10% = $120,000
2: Deductible applied to Building #2 = $600,000 x 10% = $60,000
3: $120,000 + $60,000 = $180,000 Deductible 

To determine the amount the insurance company will pay, take the actual loss minus deductible amount calculated above, per building, then add that together.

1: $800,000 – $120,000 = $680,000
2: $200,000 – $60,000 = $140,000
3: $680,000 + $140,000 = $820,000 Insurance company payment

Recap:
The total loss is $1,000,000
The carrier pays $820,000
The portion not covered due to the deductible is $180,000 

4. Per Policy

• The deductible is a percentage of the total stated value of all covered property and time element covered at all locations
• Applies regardless of whether such covered property incurred loss or damage

Example:

The insured has two locations and a 10% per building deductible.

The loss would be adjusted as follows:

To determine the deductible amount, take the total stated value on policy and multiply times the deductible percentage. $2,400,000 x 10% = $240,000 

To determine the amount the insurance company will pay, take the actual loss minus deductible.
$1,600,000 – $240,000 = $1,360,000

The total loss is $1,600,000
The carrier pays $1,360,000 (85% covered)
The portion not covered due to the deductible is $240,000

Not sure which is the right deductible type for your properties?

Typically a “per unit” deductible is recommended, but it may depend on how many buildings are insured and other factors. Please discuss these options with your insurance broker to determine which deductible type works best for your property portfolio.

Disclaimer: The above content is a general overview which is provided for discussion purposes only and is not in any way meant as providing recommendations or legal counsel. It is not intended to apply to each circumstance. Because the facts and circumstances of every matter differ and the terms, conditions, exclusions and limitations contained in insurance policies vary, you should review your policy carefully and seek any legal counsel that may be necessary or appropriate.  Momentous is not responsible for any losses or damage resulting from reliance on the information contained herein.