Catastrophic or “CAT” deductibles are the deductible amounts you pay in event of a loss caused by a catastrophic event, which can include named-storm wind, tornado, hail or flood.
Your property coverage is often a combination of policies each designed to respond depending on the type of event that caused the insurable loss. The coverage, limits and deductible may differ significantly based on what caused the loss. One of the most important factors in insurance premium cost is the type and amount of the CAT deductible. Since catastrophic exposures create the greatest risk for insurers, selecting larger CAT deductibles can reduce insurance premiums but may require schools to retain substantial financial risk.
Retaining excess risk can create significant exposure to the fund balance in the event of a major claim. Understanding the total dollar exposure created by your CAT deductibles will help ensure you are making the best purchase decisions for your school.
Typically a percentage of the scheduled value of the damaged building/structure is applied on a per-building or per-location (group of buildings at same address) basis. To determine your maximum financial exposure in the event of damage to all buildings, multiply the deductible percentage by your entire property schedule value. You will need to weigh your maximum deductible exposure against any potential premium savings.
Per-Building vs. Per-Location Deductibles
There can be a huge difference in cost between per-building and per-location deductibles. If you have a group of buildings at a High School location worth $50 Million and a 3% per-location deductible, you will have a deductible cost of $1,500,000 before the first dollar of insurance coverage for any building at that location – and that’s just one location.
Typically applied to percentage deductibles, deductible minimums can make for high deductible dollar costs even if you have a low percentage deductible. If you have a building with a scheduled value of $10 Million and a 1% per-building/$500K min. deductible, 1% would be a $100,000 deductible. However, the $500,000 must be absorbed by the district before any coverage dollars are paid. Deductible minimums are typically applied on a per-occurrence basis.
Fixed Dollar or “Flat” Deductibles
Just like it sounds, the deductible is a fixed dollar amount typically applied on a per-occurrence basis, but can also be applied on a per-location or per-building basis.
While it might look attractive to save a few thousand in premium cost by selecting a large percentage deductible, the cost of just one major claim deductible can wipe out decades of upfront premium savings.
Understanding the potential cost of retained risk – your CAT deductible – is critical to making the best long-term coverage purchase decisions for your school.
Contact INSURICA to learn more about other ways to keep your schools safe.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.