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Insurance Considerations for Today’s High Value Homes

Dan Olmsted - Senior Vice President, Personal Lines

For most people, our homes represent our largest investment. And protecting that home is one of our most important responsibilities.  This becomes more challenging for homes that are in excess of $1 million in replacement value due to their size and unique characteristics.

People looking to insure such distinctive properties need to realize that not all insurance companies and insurance products are the same. To help homeowners determine if their coverage selection is adequate, two essential questions should be asked: 1) Does the homeowner have a recent property inspection and personal property appraisal report detailing the total value to be covered by the insurance policy?  2)  What is the claims philosophy of the insurance company and historical response to high value homeowners’ property losses?

The most common misunderstanding among owners of high value properties is the difference between “replacement cost value” and “market value.”  Replacement cost coverage is defined as “the actual cost to rebuild a structure or replace an item to its pre-loss condition within the current market pricing environment.”  This is driven by worldwide inflationary trends in construction materials and local availability of building contractors.  The market value of homes, on the other hand, is driven by credit availability and supply/demand for homes in a given area.

Insurance companies specializing in providing insurance coverage for high-value homes will conduct a professional home inspection of the property and secure appraisal reports of building characteristics and design features to accurately determine the cost of replacing the home in the event of a total loss.  In most cases, the insurance company’s evaluation can surpass the property market value or purchase price.  When a property is located in a catastrophe-prone area, this is an even greater risk, since building costs will often increase significantly due to “demand surge” following a catastrophic event, such as a hurricane. 

One homeowner mitigation strategy is to purchase a policy which includes either “extended” or “full replacement cost” coverage.  Under an extended replacement cost policy, if the actual cost to repair/replace damaged property exceeds the stated value of insurance coverage, the policy will pay an additional 25 percent or 50 percent above the stated amount.  Full replacement cost policies pay the actual total cost to repair/replace a dwelling damaged by an insured loss.

Insureds should also consider the option of selecting a higher deductible as a cost-saving alternative, rather than reducing the amount of coverage to reduce annual premium.  Deductibles can range from $5,000 to $10,000 and even up to $100,000 or more. 

When insuring high-value properties, it is wise to consider the outcome in the event of a severe or total loss.  High value insurance is not merely a maintenance policy against the relatively minor cost of repairing a water leak or of losing a possession.  Overall coverage should respond to a severe loss occurrence, generating claims that could impact the homeowner’s lifestyle and financial condition.