Clients Moving to the City, Pt. 2: Changing Addresses, Changing Risks

There comes a time in prosperous people’s lives when the big house with the gardens, a four-car garage and maybe a pool and tennis court, while grand, fail to provide the cultural attractions and other amenities that come with living in a city. Perhaps the responsibilities of managing a substantial home have become too time-consuming, or closer access to medical care is wanted. These deliberations may guide the decision to purchase a condo or co-op apartment.

More and more Americans are doing just that, according to the U.S. Census Bureau. Urban areas accounted for a whopping 83% of the U.S. population in 2012, while the percentage of the country’s urban population rose 12.1% between 2000 and 2010. High-rise apartment buildings now make up roughly 40% of all new construction, with the construction of single-family homes at its lowest point in decades.

These societal shifts create a new risk paradigm for homeowners, a subject I touched upon in last month's blog. People are in much closer proximity to neighbors who are literally above, below and on the other side of shared walls. They also confront the distinctive dangers of condos and co-op apartments, wherever they may be located, including heightened risks of burglary, abduction and automobile-related accidents and injuries.

Many apartment buildings, such as pre-war structures and so-called pre-pre-war (before World War I) in New York City, also are bound by strict rules governing the alteration of the environs. If a fire destroys the living room, for instance, replacing the former plaster and lathe walls with drywall will not be an option.

The myriad hazards presented by this new risk paradigm of home ownership must be identified, assessed for potential financial loss frequency and severity, managed through appropriate security and other measures and, finally, transferred to an insurance company that comprehends and fully absorbs these exposures. Not all insurance policies provide such broad coverage—for example, few would address the cost of replacing the aforementioned living room’s walls with plaster and lathe.

These nuanced considerations are often on the mind of Tim Devin. As senior VP and New York personal risk management practice leader at broker DeWitt Stern Group in Manhattan, Tim serves a predominantly affluent clientele.

“Many city dwellers like the idea of living in a pre-war building with an impressive history and prestige,” Tim commented. “Their high ceilings, thick walls, multiple fireplaces and ornamental millwork are stunning. But such buildings require approval of any changes to the interior by city historical groups, as well as the buildings’ boards. If the interior is damaged, the costs from a claims perspective can be staggering. You need to have an insurance policy that absorbs the expense of renovating and replicating the interior as it previously was.”

Unfortunately, many people are so excited by making the move to the city, Tim added, “that they fail to understand the stark differences in risk between their houses and the new apartment.”

New Lifestyle, New Jeopardies

He makes a good point. As anyone who has bought a house or apartment can attest, the stress level is stratospheric. There are simply so many complications to attend to, from the reams of paperwork in financing the purchase to schooling considerations for the children, new electric, cable TV and other utilities to set up, and packing up a life’s worth of home contents for the big move.

The latter alone is not for the fainthearted and is especially challenging to high-net-worth individuals because of their highly valuable possessions, such as fine art and collectibles. “Many older buildings don’t accommodate the movement of large items like paintings and sculptural pieces through the hallways, due to the possibility of damaging the walls,” Tim noted. “Frequently, large items have to be hoisted up to the apartment on the outside of the building, and windows removed to permit ingress. Few people contemplate such possibilities until they suddenly rear.”

Few people would ever anticipate the risks that come from not owning a car, as he pointed out. Due to the hassles of having to park in the city, many city dwellers bypass automobile ownership, preferring rental cars, taxis and services like Uber to get around. No automobile means no automobile insurance.

With no automobile insurance, the homeowner now has no liability insurance to address rental car risks, which are typically absorbed by the underlying car insurance policy. “He or she would now have to purchase a separate policy from the rental car company, although a few insurers like Chubb offer homeowners or renters insurance policies that extend a minimum of $1 million in additional liability protection for automobile-related risks,” Tim explained.

While other condo and co-op risks are more obvious, they nonetheless warrant penetrating discussions with an insurance agent. For example, since such homes are communal living spaces separated by walls, floors and ceilings, water damage from leaky pipes and air conditioners are a major hazard. It is not uncommon for someone to run a bath and forget to turn off the faucet, causing a flood that seeps through several homes below.

If the building is historic, the century-old herringbone-patterned wood floors now have to be replaced with the same design, lumber and quality. The building’s insurance policy generally, but not always, would absorb the cost of replacing the damaged flooring. The variations are remarkable, hence the prudence in having a specialized agent like Tim carefully review which potential losses would and would not be covered.

Having the right insurance in place to address any and all unanticipated losses is another way to assuage such concerns. “We recommend the purchase of a condo or co-op policy that provides coverage for `extended replacement costs’—then there are no worries about replacing the interior to like condition,” said Tim. “The insurance also absorbs losses from damaged furnishings and even provides for a temporary residence of like quality while the unit is repaired and refurbished.”

His remark reminded me of the time Chubb once put up a family in the landmark Dakota building across from Central Park in Manhattan after a flood damaged their residence. Interestingly, they fell in love with the apartment and later bought it.

Nefarious Concerns

Burglary is another hazard that many consider to be greater in an apartment dwelling. While such buildings typically have intercom systems, there is always the possibility of an intruder following a visitor into the structure. Delivery personnel and contractors also may inadvertently leave front doors or back doors open. Contractors also are at a higher risk of “breaking and entering” nearby apartments where they are not engaged in work.

Wealthy individuals also are easier to track when living in a city, particularly if they are public figures. It’s easy for criminals to figure out when they’re not home, not to mention where they live, work and shop. “They get to know their daily routines,” said Tim. “For instance, they’ll find out the person’s charities and when related social functions are scheduled. They know when residences are unoccupied, and plan elaborate burglary schemes. The homeowners also are vulnerable to physical harm, as well as abduction and extortion schemes.”

Certainly, buildings with doormen, 24-hour surveillance cameras and manned elevators reduce these threats. Some insurers will provide premium credits for these security features and others, including building entrances that are locked and secured by a central station and/or direct reporting burglar alarm; elevators that are key controlled or are monitored by security cameras; and approved and properly maintained sprinkler systems installed throughout the building.

It’s not that living in a beautiful condo or co-op apartment is riskier than a fine home in the suburbs—the risks are merely different. After living an entire lifetime in a traditional house, many people cannot presume to know what these risks are or appreciate the varied nuances in transferring these potentially devastating losses to an insurer. As always, forewarned is forearmed.

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