Form CP 03 20: Windstorm Or Hail Percentage Deductible Endorsement
The CP 03 20, Windstorm Or Hail Percentage Deductible Endorsement, is a commercial property insurance endorsement that modifies the standard flat dollar deductible for losses specifically caused by windstorm or hail. Instead of a fixed amount, this endorsement applies a deductible that is a percentage of the value of the covered property at the time of loss, or a percentage of the limit of insurance. This means the amount the insured is responsible for paying out-of-pocket for a wind or hail claim will fluctuate based on the property's insured value and the percentage selected.
This endorsement is typically attached to the Building and Personal Property Coverage Form (CP 00 10) and other commercial property forms like the Condominium Association Coverage Form or Builders Risk Coverage Form. The CP 03 20 is designed to allow for different deductibles by location and peril.
Classes of Business It Applies To
The CP 03 20 is particularly relevant for businesses located in areas prone to windstorms or hail, such as coastal regions susceptible to hurricanes, or areas in the Midwest and Great Plains known for severe hailstorms. While applicable in all states, its use is more prevalent in these higher-risk zones.
- Coastal Businesses: Hotels, resorts, retail stores, and restaurants located along coastlines often face significant windstorm exposure. For example, a beachfront hotel in Florida might have a 5% windstorm deductible due to the high hurricane risk.
- Commercial Buildings with Large Roof Surfaces: Warehouses, manufacturing plants, and large retail complexes often have expansive roofs that are vulnerable to hail damage. A distribution center in Texas, for instance, might opt for a percentage deductible for hail.
- Businesses with Multiple Locations: Companies with properties in various geographic areas can use this endorsement to apply specific wind/hail deductibles appropriate to the risk level of each location. For example, a national retail chain might have a higher percentage deductible for its stores in hurricane-prone zones compared to its inland locations.
- Real Estate Investment Trusts (REITs) and Property Management Companies: Entities managing diverse portfolios of commercial properties will find this endorsement useful for tailoring coverage to specific property vulnerabilities.
- Agricultural Businesses: While not the primary target, some agricultural operations with significant building exposures (e.g., large-scale poultry houses or storage facilities) in hail or wind-prone areas might utilize this.
Special Considerations
There are several important factors to consider when using the CP 03 20 endorsement:
- Basis of Deductible Calculation: It's crucial to clarify whether the percentage deductible applies to the limit of insurance for the damaged property or the value of the property at the time of loss. This can significantly impact the deductible amount, especially if the property is underinsured or its value has fluctuated.
- Interaction with Other Deductibles: The policy may have a separate, standard flat dollar deductible for other covered perils. The CP 03 20 specifically carves out windstorm and hail for the percentage deductible treatment. If a loss involves both wind/hail and another peril, the application of deductibles needs careful review.
- "Occurrence" Definition: The policy's definition of "occurrence" is important, especially for widespread events like hurricanes. Typically, all losses attributable to one cause or a series of similar causes are considered one occurrence. If a single windstorm damages multiple insured buildings or locations, the endorsement specifies how the deductible applies (often, only the largest applicable deductible for that occurrence).
- Minimum Deductibles: Some insurers may impose minimum dollar amounts for percentage deductibles, particularly for high-value properties.
- Coinsurance Implications: While the standard $500 deductible can sometimes have coinsurance requirements waived, higher deductibles or percentage deductibles might interact differently with coinsurance provisions. It's important to ensure compliance with coinsurance to avoid penalties at the time of loss.
- Flood and Earthquake Exclusion: This endorsement clarifies that the windstorm or hail percentage deductible does not apply to losses from flood or earthquake, even if those perils are added to the policy via other endorsements. Those perils will have their own separate deductible provisions.
- State-Specific Regulations: While the form itself is standard, state insurance regulations, particularly in coastal states, may have specific rules or mandates regarding windstorm deductibles, including allowable percentages and how they are applied.
- Clarity in Declarations: The declarations page and the endorsement schedule must clearly state the premises, building numbers, and the specific windstorm or hail deductible percentage (e.g., 1%, 2%, or 5%).
Real-world example: A commercial building insured for $2,000,000 has a CP 03 20 endorsement with a 2% windstorm deductible. If a hurricane causes $150,000 in wind damage, the deductible would be $40,000 (2% of $2,000,000). The insurer would pay $110,000, assuming all other policy conditions are met. If the policy had only a standard $5,000 flat deductible, the payout would have been $145,000. This illustrates the significant increase in self-insured retention with a percentage deductible.
Key Information for Agents and Underwriters
- Pricing and Premium Credits: Implementing a percentage deductible for windstorm or hail typically results in a premium credit for the insured. The higher the percentage deductible, the greater the potential credit, as the insurer's exposure is reduced. Underwriters must accurately assess the risk reduction to apply the appropriate credit.
- Risk Assessment: Underwriters need to carefully evaluate the geographic location, construction type (especially roof design and materials), age of the property, and local building codes when considering this endorsement. Properties in high-velocity wind zones or areas with frequent hailstorms will warrant higher percentage deductibles or more stringent underwriting. Historical loss data for wind and hail in the specific area is crucial.
- Coverage Gaps: Agents should clearly explain to insureds the financial implications of a percentage deductible, ensuring they understand the potentially large out-of-pocket expense in the event of a major windstorm or hailstorm. This is particularly important for businesses with tight cash flow. It's also important to discuss whether the deductible applies per building or per occurrence if multiple buildings are damaged.
- Underwriting Guidelines:
- Insurers often have specific underwriting guidelines detailing when a percentage deductible is mandatory (e.g., for properties within a certain distance of the coast or in designated catastrophe zones).
- The choice of percentage (commonly 1%, 2%, 3%, or 5%) will depend on the insurer's appetite for risk and the specific characteristics of the insured property.
- Underwriters may require property improvements or mitigation efforts (e.g., hurricane shutters, impact-resistant roofing) as a condition for offering coverage or for allowing a lower percentage deductible.
- When coverage is written on a blanket basis, the percentage deductible typically applies to the value of the property as shown on the statement of values for each building or personal property at each building.
- Relation to CP 00 10: The CP 03 20 directly modifies the deductible provisions within the CP 00 10 (Building and Personal Property Coverage Form) or other primary property coverage forms. It doesn't change other aspects of the CP 00 10, such as covered property or perils (other than how the deductible applies to wind/hail).
- Market Conditions: In hard markets, or after significant catastrophic events, insurers may be more likely to insist on percentage deductibles for windstorm and hail to manage their PML (Probable Maximum Loss).
Real-world example for underwriters: An underwriter evaluating a multi-story office building in a coastal city known for hurricanes would likely require a CP 03 20 with a minimum 2% or 3% deductible. They would assess the building's wind resistance features, the age and condition of the roof, and its proximity to the water. If the building has older, less wind-resistant windows, the underwriter might push for a higher percentage deductible or require upgrades.