February 14, 2012

Water: Essential to Life; Deadly to Homes

Perhaps more than any other asset, a home represents the center of a family’s financial and emotional well being. Few events are more traumatic than its destruction.  Hurricanes, earthquakes, tornadoes, and wildfires grab most of the headlines for the damage they cause to homes, but day in day out, year after year, the humble water leak ranks among the worst threats. According to data from SNL and ISO, water caused $9.5 billion in annual homeowner policy property losses from 2007 to 2010 – approximately 24% of all homeowner property losses. A solid asset protection plan should guard against this prevalent foe. 

In custom-built luxury homes, even a small water leak can cause a surprising amount of damage. We’ve seen $150,000 in damage caused in just 30 minutes. Second homes are particularly vulnerable, since the owners are less likely to be around when a leak occurs.  In one case, a leak started on the top floor of a three-story vacation home and ran for weeks, essentially destroying half the home. 

Homeowners insurance will typically cover the cost of repairs minus any deductible, but there’s no recourse for the disruption caused by lengthy repairs. Construction after major damage often lasts six months or more. The family may be forced to live elsewhere, perhaps stretching commutes to work and school. Moreover, wealthy clients are likely to have valuable collections of art, antiques, or other precious objects that could be irreparably damaged by a leak. 

Fortunately, unlike natural disasters, preventing costly damage from water leaks falls largely within the homeowner’s control. Alarm systems now exist that can automatically detect leaks, shut off the water supply, and notify a central monitoring service.These systems can prevent or minimize up to 93% of the cost of water damage, according to an ACE study of damage sustained by affluent homeowners. 

The trend towards finished basements with luxurious entertainment centers has increased vulnerability to another form of water damage: water backup from sewers and drains.  With four of the top 20 most damaging storms since 1950 occurring in 2011, many families know all too well what can happen. They find themselves knee deep in a basement flood. For the homeowners we insure, the

cost of repairs when the sump pump stops working due to a power outage averages $50,000. One of our clients recently suffered damages estimated at $350,000. 

As with plumbing leaks, sewer and drain backups can be easily prevented or minimized.  The key is to install a properly sized sump pump with backup power supplied by a dedicated battery or a stand-by generator that is connected to the breaker box and able to keep an array of critical home systems operating. 

Considering the prevalence of costly water damage, investing in prevention systems makes good sense. Each system may cost a few thousand dollars to install, an amount often equivalent to the deductible on the policy. Therefore, by preventing just one loss, the homeowner breaks even financially and avoids the disruption of repairs. Most insurance companies offer a premium discount for such systems, since preventing damage benefits them, too. 

No system is perfect, however, so homeowners should also check a few key aspects of coverage: 

  • Will the policy cover damage due to sewer and drain backup? Policies from carriers such as ACE that specialize in insuring high-net-worth clients will cover damage when water from heavy rain or melting snow overwhelms the drainage system and causes the sump pit to overflow. But most policies do not—unless a special endorsement has been added. And the endorsement may only cover losses up to $5,000.   
  • Will the policy provide unlimited loss of use in case the family must live elsewhere during extended repair work? The best policies have no limit on covering the additional cost of living elsewhere in comparable style. Most policies do not.
  • Will the policy provide replacement cost for contents?  Standard industry policies will apply depreciation to rugs, furniture and other contents of the home that have been damaged. But few people want to go out and buy a used couch after a loss. The best policies will compensate the owner for buying new replacements. 
  • Will the policy help cover the cost of installing an appropriate loss prevention device if a water loss occurs? The best policies will often provide this type of coverage to help prevent losses from recurring. Standard policies may not.
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