ELITE ADVISOR BEST PRACTICES
A Closer Look at Homeowners Insurance
Uninformed choices crack the foundation of asset protection
By David Hubbard
- Homeowners insurance policies vary significantly across the industry, and it is short-sighted to evaluate choices by price alone. An independent insurance professional can review individual needs and present custom-tailored solutions.
- Homeowners coverage limits should be based on replacement cost, not market value. Property valuations should be completed by specialists who understand the complexities of rebuilding high-value and custom residences.
- Consider factors beyond the physical structure of the home, including the breadth of personal belongings, art and other collectibles.
As your clients accumulated wealth, they likely renovated homes, moved to larger properties, purchased secondary residences—or all of the above. While careful attention is paid to real estate investments, the accompanying insurance decisions often are an afterthought. Even highly successful people tend not to revisit the insurance choices made early in their careers. If damage occurs, they may be dismayed to find that their coverage won’t be adequate.
Identifying the right homeowners insurance program requires a deep understanding of a property’s characteristics. For example, how many of your clients would know:
- How much it would cost to totally rebuild their home after a fire?
- Who established the replacement value seen on their insurance policy?
- What is the full extent and value of all personal property inside their home(s)?
For owners of high-value (more than $1 million in replacement value) properties, making sound insurance choices requires the assistance of an independent insurance agent or broker who focuses on high-net-worth clientele and who has access to multiple carriers. A qualified agent or broker will make recommendations based on each client’s lifestyle, account for all “insurable” assets (not just the home) and consider individual risk tolerance.
Value vs. Price
Many people choose homeowners insurance based on price. Unfortunately, that is a critical error. Homeowners insurance should not be a commodity purchase. Different policy forms are available depending on home value and the breadth of coverage required. An “all risk” or “comprehensive” policy is preferred for owners of fine homes, because it provides coverage for virtually anything that can happen. A handful of “elite” insurance companies (such as Chartis, Chubb and ACE) cater to affluent people and generally provide broader coverage than mainstream carriers such as State Farm and Allstate. The accompanying customer experience also will be better-suited to those with high service expectations.
Obtaining the “right” coverage may mean a higher premium than what one paid previously, but there are measures homeowners can take to control costs. For example, most insurers offer premium credits for safety features such as alarm systems and fire sprinklers. Other credits can be achieved when multiple lines of insurance—automobile, watercraft, etc.—are purchased from the same carrier. In addition, electing a high deductible and absorbing more upfront risk can lower annual premiums.
Another way to manage costs is to reduce hazards in and around the home, lessening the chance of claims. Elite insurance carriers employ residential risk managers who help identify potential exposures and recommend mitigation measures. In most cases, these services are complimentary and can result in additional savings.
Replacement Cost vs. Market Value
Most of us think of home values in terms of what it would cost to buy or sell. In insurance, however, home value is determined by its replacement cost: what it would take to rebuild in today’s market with the same quality and features.
Replacement cost is the single most critical component of a homeowners policy. If a home is damaged significantly, costs to rebuild can increase greatly due to supply and demand for materials and experienced contractors and artisans. Consider an entire neighborhood destroyed by a hurricane and how that affects supply and demand. Additionally, costs of design, architecture, property access and materials all need to be considered.
“Elite” insurers can offer either extended or guaranteed replacement cost coverage. If a home is destroyed and rebuilding it costs more than the purchased coverage, the carrier can cover the difference without sacrificing quality. An “elite” insurer also will take responsibility for establishing accurate replacement values, so coverage limits measure up if damage occurs. This is accomplished through a variety of activities, including on-site property inspections, examination of plans for new or renovated homes, and application of current construction costs for existing homes.
Conversely, a “mass market” carrier usually leaves it to the homeowner, an agent or an outside inspection company to determine the replacement cost. As a result, the home can be vastly underinsured. Some policies in this segment of the market also include extended replacement coverage, which adds a percentage of protection on top of the underlying coverage. But if the value was incorrect to begin with, the homeowner may be left with hefty out-of-pocket expenses.
Most of your clients probably underestimate the cost of replacing all their belongings. Valuation for contents should be on a replacement-cost basis, which protects against depreciation. The best policies also allow for a cash settlement without requiring the owner to replace property, but he or she must prove the loss with documentation. A number of reputable vendors can provide in-depth personal inventories, which include photographs and related documentation. Aside from helping determine accurate coverage limits, an inventory of contents can simplify the claims process.
For valuable items such as jewelry, artwork, wine, furs and other collectibles, a distinct private collections policy should be considered to minimize deductibles and to obtain coverage often limited in or excluded from the homeowners policy.
Insufficient insurance can cause unnecessary frustration for a family and ultimately put other financial assets at risk. As part of your fiduciary responsibility to your clients, take the time to recommend an independent review by a qualified insurance professional.