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February 20, 2013 at 12:30 AM
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.
