February 20, 2013

Lessons From Sandy: Are Your HNW Clients Prepared for a Home Loss?

New Jersey home damaged by Hurricane Sandy. (Photo: AP) New Jersey home damaged by Hurricane Sandy. (Photo: AP)

With many victims of Hurricane Sandy still unable to return to their homes or find suitable housing outside of expensive hotel accommodations, many are learning about the intricacies and shortfalls of coverage in their insurance policies. 

Homeowners policies typically include coverage for additional living expenses when families must live elsewhere while their home is being repaired due to a covered loss or while civil authorities have ordered an evacuation. The coverage is supposed to allow the family to maintain their standard of living, but too often reality falls short of intent. 

Most HNW clients insure their homes with policies from mass-market carriers. These policies can limit coverage for the additional cost of living anywhere from 10% to 20% of the replacement cost of the home. So a home insured for $3 million by a standard carrier would likely have $300,000 to $600,000 in coverage for additional living expenses. By contrast, policies from carriers that specialize in serving high-net-worth families place no absolute limit on additional living expenses in all but a few states.  

The $300,000 to $600,000 in coverage provided by mass-market carriers sounds quite adequate, but many HNW families would be surprised to learn how quickly the additional expenses add up and how long they may be unable to live in their homes. A 2011 study by United Policyholders, a non-profit insurance consumer advocacy organization, found that more than a third of Colorado residents whose homes were destroyed or damaged by the 2010 Fourmile Canyon wildfire would exhaust their additional living expense coverage before they could move back into their home. 

Imagine a family of five in a $3 million home with six bedrooms. The home burns down. Now they must face the prospect of living elsewhere for a long period of time. It typically takes 18 months or more to rebuild a high-value home. At first, the family is in shock and understandably unable to make a major decision about where to live for so long. Usually, they stay in a local hotel for several months while they search for a better solution. The daily cost of multiple rooms and meals out can easily reach into the thousands. We have seen costs of $5,000 or more per night for hotel bills alone in high-price areas such as Manhattan. In such a case, expenses would top $150,000 after one month, with another 17 months to go until the home is likely rebuilt. 

Transportation costs add up, too. The kids may be spread out in age and attending different schools and engaging in different extra-curricular activities. In new, farther-away accommodations, the primary caregiver and driver may be unable to ferry everyone everywhere within the necessary timeframes. A car service may become necessary.

How HNW-Market Carriers Add Value After a Home Loss

With proximity to their damaged home, workplace, and schools a priority, the family will understandably limit the area in which they are willing to find a rental home. By limiting the area, they limit the odds of finding a good deal—another addition to expenses. Mass-market carriers may not have the relationships in place to find luxury properties quickly, if at all, potentially extending the time the family must stay in an expensive hotel. HNW-market carriers typically have a network of such relationships already established, allowing for a faster transition to a satisfactory temporary home. 

Furthermore, the best temporary home they find within an acceptable distance may still not match the quality of their damaged home. Perhaps they had a bathroom with a large whirlpool tub, and the temporary home only has a standard tub. Perhaps they had an extensive wine collection stored in a sophisticated temperature controlled environment. The temporary home does not. A standard carrier may not appreciate these qualitative differences—one bathtub is the same as another. A HNW-market carrier, however, will recognize these differences and may, in certain circumstances, pay to have the home altered to match the quality of the damaged home. 

While whirlpool tubs and wine cellars may sound extravagant, HNW-market carriers understand that few events cause more anguish than the loss of a home. The family will be out of their home for a long and unsettling time. Allowing them to enjoy every sense of normalcy only helps them overcome the pain of loss.

Finally, when a natural disaster destroys many homes, the laws of supply and demand put further upward pressure on temporary living expenses, as in the case of Superstorm Sandy. Although laws do guard against price gouging, prices still escalate to some degree. Furthermore, it may take longer to find an available contractor to start the rebuilding process, extending the time that higher temporary living expenses are necessary. Public infrastructure repairs or environmental hazards may also need to be addressed before homes can be rebuilt. We’ve seen it take 12 months just to get the building permit. Policies from mass-market carriers can place time limits, such as 24 months, on coverage for additional living expenses.

The differences in how mass-market carriers and HNW-market carriers treat additional living expenses provide one more reason why wealth advisors should ask their HNW clients about their personal insurance program. Along with having inadequate levels of coverage for liability, the home structure, and collections of jewelry, art, wine and other precious items, additional living expenses represents a key financial risk for HNW families. By partnering with an insurance agent or broker experienced in dealing with HNW clients, advisors can help make sure these risks are properly addressed as part of their overall fiduciary responsibility to their HNW clients.

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