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.
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Related Questions
What types of insurance does an apartment building owner need?
Apartment owners typically need commercial property, general liability, loss of rents, umbrella, and workers compensation coverage at minimum.
How much does apartment building insurance cost?
Apartment building insurance typically costs $500 to $3,000 per unit annually, depending on the property's size, location, age, and coverage needs.
Do I need flood insurance for my apartment building?
If your property is in a FEMA-designated flood zone, your lender almost certainly requires it. Even outside flood zones, flood coverage is worth considering.
What is loss of rents coverage and how does it work?
Loss of rents coverage replaces rental income lost when units become uninhabitable due to a covered property damage event, such as a fire or major storm.
What is the difference between replacement cost and actual cash value?
Replacement cost pays to rebuild at current prices without deducting for depreciation, while actual cash value deducts depreciation from the payout.