By Diane Brinson, President and CEO of Momentous Insurance Brokerage
Simply put, the type of policy needed is a homeowners policy, with some coverage enhancements to address the custom features that increase the replacement cost of the home.
Most policies include an extended replacement cost provision that can extend the amount of coverage from 25 percent to 100 percent of the dwelling limit on the policy. This additional coverage can be used to account for custom, one-of-a-kind features. Some insurance companies offer guaranteed replacement cost, which pays the full amount needed to repair or replace the home, appurtenant structures (gazebos, guesthouses, etc.) and contents, with comparable construction materials, regardless of the declared policy limits. The additional premium for including guaranteed replacement cost will vary depending on the size of the house, but is generally affordable and certainly worthwhile. Not all companies will provide this valuable coverage and those that do will require a current replacement cost appraisal.
When selecting the appropriate homeowners policy, it is important to work with companies that specialize in highvalue homes—brokers who understand the exposures and have access to insurance companies that provide broader coverage forms that the homeowner deserves and expects.
High-end insurance companies almost always require an appraisal immediately after binding coverage, which alerts the company of any special features in the home and ensures that policy limits are agreed upon and appropriate. This should be repeated when remodeling or doing major construction. To account for inflation and rising construction costs, most policies include an annual inflation adjustment, from 2 to 10 percent.
With today’s declining property values, clients are asking to reduce coverage on their dwellings, not realizing the factors that affect property values are not the same factors that affect replacement cost (see below). An important distinction is that the value of the land the house sits on is the portion of the value that varies the most. Furthermore, the fair market value of land is not insurable. The confusion between real estate values and home replacement values is a longstanding problem. With catastrophic events happening in many parts of the country, insuring the home to value will continue to be a critical issue to address before a major loss occurs.
Another important policy coverage to review is rebuilding to code/building ordinance. Throughout America, municipal building departments have implemented tougher building ordinances and standards to create fewer hazards for the community. A selective group of insurance companies will address this issue and pay up to 100 percent of the dwelling coverage limit.
It is critical that homeowners work with a broker who specializes in the high net worth arena and has the expertise to design policies that adequately cover their homes.
Understanding Home Replacement Cost Values
The confusion between real estate values and home replacement values is a longstanding problem. The following illustrates the key factors that affect each.
Real estate values have been affected by:
- Subprime loan crisis
- Foreclosure rates
- New housing starts
- Location factors
- Land value
Home replacement value factors include:
- Fuel and labor costs
- Construction code requirements
- Changing construction standards and practices
- New technology
- Demand for and availability of labor and materials (which rise dramatically in the event of a catastrophe)
About Diane Brinson
Diane Brinson has been in the insurance industry since 1981, serving as an insurance company marketing representative, a direct writer and an independent insurance broker. Before forming Momentous, she was amanaging director of a national insurance brokerage, where she was responsible for more than 100 professionals. Her expertise in insurance is rooted in insuring high net worth individuals through accountants, attorneys, family offices and company CFOs, as well as working directly with high-profile clients. She was recognized by the Los Angeles Business Journal as a woman making a difference in 2009 and as a Leading Wealth/Insurance Advisor by Worth magazine. She is well versed in all agency operations, and sits on numerous insurance company advisory boards, including ACE, Chartis, Fireman’s Fund, Chubb and Travelers. She has a bachelor of science degree from Florida State University.
Disclaimer: The above content is a general overview which is provided for discussion purposes only and is not in any way meant as providing recommendations or legal counsel. It is not intended to apply to each circumstance. Because the facts and circumstances of every matter differ and the terms, conditions, exclusions and limitations contained in insurance policies vary, you should review your policy carefully and seek any legal counsel that may be necessary or appropriate. Momentous is not responsible for any losses or damage resulting from reliance on the information contained herein. If you would like to further discuss the issues raised here, you may contact Diane Brinson by phone 818-933-2700 or email: firstname.lastname@example.org .