What is the difference between a percentage deductible and a flat deductible?
A flat deductible is a fixed dollar amount per claim, while a percentage deductible is calculated as a percentage of the total insured value and can be dramatically higher.
Apartment insurance policies use two deductible structures, and understanding both is critical for financial planning. A flat (or dollar) deductible is a fixed amount, such as $5,000 or $25,000, that the owner pays per claim before insurance coverage begins. The amount does not change regardless of the size of the loss or the insured value of the building.
A percentage deductible is expressed as a percentage of the total insured value (TIV) and is commonly applied to catastrophic perils including wind, hail, named storms, and earthquakes. Per the ISO Commercial Property endorsements CP 03 40 (Windstorm or Hail Percentage Deductible) and CP 10 40 (Earthquake), these deductibles typically range from 1% to 15% of TIV. On a building insured for $10,000,000, a 2% wind deductible equals $200,000, while a 10% earthquake deductible equals $1,000,000.
Fannie Mae's Multifamily Selling and Servicing Guide caps wind and named-storm deductibles at 5% of TIV for DUS loans. Freddie Mac's Seller/Servicer Guide imposes the same 5% cap. CMBS loan documents may further restrict deductible levels. Apartment owners in wind- or earthquake-exposed areas should maintain cash reserves or a line of credit sufficient to cover their largest percentage deductible, as this amount is due before any insurance recovery. Some insurers offer deductible buy-down endorsements that reduce the percentage deductible to a lower level for an additional premium.