Gentle ocean breezes, spectacular sunsets, warm weather: These are the many reasons why someone might purchase a vacation home. But, with all of the thought that goes into such a purchase, few buyers consider the equally important aspect of insurance and risk management.
In fact, prior to the purchase, the potential buyer should consider the following: Is the home in a wildfire or hurricane-prone area? Is the home susceptible to floods, earthquakes or mudslides?
If so, the prospective new owner must consider the downstream costs of retrofitting the home to reduce the likelihood of a loss, and even create an actual budget for the increased cost of insurance coverage (if coverage is even available). In many cases, the added price of retrofitting a home will exceed the amount a buyer is willing to pay.
And that is certainly disappointing news. But it’s crucial, because, in the end, retrofitting may ultimately be required to secure insurance coverage.
Recently, one of our clients was in a similar situation. He had found a home in the Palm Beach area listed at an extremely reasonable price. Without hesitation, he purchased it. But when it came to insurance coverage on the property, we, as his insurance representatives, uncovered the fact that there was no opening protection (shutters/hurricane glass). What’s more, because the home had been built in the 1950s, the property was below FEMA’s designated flood elevation.
These were all major issues, of course, because this was Florida. Although we were ultimately able to offer coverage, the costs were exorbitant and significantly more than the client was willing to pay. In the end, the owner chose to forego wind and flood coverage, potentially exposing himself to a $5 million loss.
A prospective owner must consider the downstream costs of retrofitting that vacation home to reduce the likelihood of a loss.
To avoid this kind of uncomfortable situation, a client should consider the year of construction, distance to the coast and proximity to flood zones. In southeastern states, in particular, the year of construction can make the difference between a $5,000 and $20,000 premium.
That’s why a client should ask his or her insurance advisors for advice as to current building codes and how the potential property models with various insurance carriers prior to making an offer on a home.
If it is determined that the coverage is available in the marketplace, the insurance advisor must then determine the quality of the insurance carriers offering coverage. Are they highly rated by (the U.S.-based rating agency) A.M. Best? Do these barriers have ample reserves to handle a catastrophic claim, and are they competent and fair in their claims settlements?
In many disaster-prone states, these are many carriers that do not fit the bill. They may be new to the marketplace; concentrated in a single state or region; have inferior coverage contracts; or simply lack expertise in underwriting vacation property.
To significantly reduce the risk of unpleasant experiences with claims, advisors and clients should stick with national carriers with proven track records for paying claims and with A.M. Best ratings above “A-.”
To put this advice into context, consider a real-life example: A client of ours who owned a summer home in Long Island asked us to review his insurance policy and provide feedback. Upon review, we noticed that the policy was written with a non-A.M. Best-rated carrier and contained limitations on wind, water and liability coverage. Alternately, we were able to secure coverage with a highly rated (A.M. Best) carrier which eliminated the gaps in coverage and left our client on par with his previous premiums.
In the end, buyers should consult with their insurance advisors to discuss potential purchases. Their advisors can then analyze how the purchase might affect the client’s insurance portfolio, and suggest different risk-management techniques that might be used to reduce the overall premium impact.
Finally, the advisor should be able to identify and communicate potential risks that might prevent the purchase of coverage or create a situation where the cost of coverage would be too great, thus helping the buyer to avoid an insurance nightmare.