Navigating the Options
For Hurricane Damage

When it comes to insuring commercial properties against the effects of Mother Nature, expect to navigate some tricky waters.

There is no such thing as hurricane insurance for commercial-property owners per se. Instead, there are a hodgepodge of insurance-coverage options, exclusions, exceptions and provisions.

Where coverage begins and ends and what is covered in between can be confusing. Take damage caused to a property from hurricane wind and rain. Property damage caused by a hurricane generally falls under windstorm coverage in an insurance policy. If flood coverage is provided under a property policy, that coverage could apply to floods from hurricanes but only if the policy specifies that as a cause.

Windstorm and flood insurance generally have separate deductibles, with windstorm deductibles almost always higher. In fact, with the exception of California earthquakes, deductibles for windstorms caused by hurricanes are higher than other disasters -- often 2% to 5% of the location's insurable value, which includes the building, rents and contents -- according to Kevin J. Madden, managing director of the national real-estate practice at Chicago-based insurance broker Aon Corp.

And how deductibles are applied isn't always clear. Sometimes insurers apply the higher windstorm deductible even if there was more damage caused by flooding, says Gary Marchitello, managing director of the national property syndication practice at Aon Risk Services, a division of Aon. "There may be very little wind damage to the location and the owner gets flooded and they would think the flood deductible applies," he says. "But it's actually the [more-costly] windstorm deductible that applies."

One way owners can lower their windstorm deductibles is by "buying down" their deductibles. This is where a property owner purchases a separate insurance policy -- often at a high cost -- that covers the deductible on the main insurance policy. The deductible on the separate buy-down insurance policy is usually substantially lower. Some traditional insurers offer buy-down policies. There also are companies that specialize in these policies.

J. Robert Hunter, director of insurance for the Consumer Federation of America, a Washington-based advocacy, research, education and service organization, says building owners, particularly smaller owners, have to consider the cost of the buy-down versus the risk of having to use the policy.

There also are often-overlooked provisions in policies called sublimits. Property insurance would likely cover damage to the building caused by wind and possibly by flood. But it would only partially cover the cost of replacing things such as landscaping or debris removal. "A lot of owners don't realize there may be sublimits on landscaping, debris removal or other coverages," says Eric Schake, a managing director with insurance broker Marsh, a unit of New York-based Marsh & McLennan Cos. Owners can negotiate with insurance underwriters to increase those limits but they would likely pay higher premiums, he says.

Another issue owners should pay particular attention to is coverage for damage in the hours or days after a hurricane hits, such as that caused by continuing rain, says James H. Costner, senior vice president of the property practice at Willis Group Holdings Ltd., a London-based insurance broker. While the damage caused by the hurricane will likely be covered, any subsequent or further damage may not be. "Once damage has occurred," he says, "the owner is obligated to protect the property from further damage."

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