Picture a wealthy family with a luxury penthouse in Manhattan, a beachfront compound in Palm Beach, a golfing getaway in Augusta, a ski lodge in Aspen, a ranch near Jackson Hole and a waterfront home in Tiburon–each worth millions or tens of millions of dollars. If it seems like a dream, then you may not appreciate the nightmare insuring such properties can be for your wealthy clients.
Many wealth families and their family office managers discover that insuring each home requires navigating special conditions imposed by different state regulations and contending with different insurance company preferences. Florida can be a world unto itself for windstorm protection due to the threat of hurricanes, with a variety of special deductibles, insurance companies that charge exorbitant rates or simply refuse to accept new homes in beautiful but high-risk coastal areas, and state-run insurance pools that may not offer the desired quality of coverage and service. In California, the threat of earthquakes and wildfires can lead to similar complications.
Fortunately, wealthy families with widely dispersed properties have an important advantage that, if used correctly, can help them reduce insurance costs, improve protection and avoid the maze of state-by-state variations: geographic spread of risk. How does this work? First, let’s consider the traditional approach to insuring these homes. The family or family office manager works with an insurance agent to insure each home individually. They buy enough insurance to cover the replacement value of each home. If the family has six homes with an aggregate replacement value of $30 million, the client would purchase $30 million in coverage. That means that the family, or more likely the family office manager, would have to spend considerable time understanding all the nuances of local coverage.