Homeowners: Ensure You’re Insured

Does it make sense for a homeowner to insure a $1 million purchase for $2 million? Sometimes, yes. Mortgage lenders require all borrowers to get homeowners insurance before the deal closes. The mandated coverage is usually the lesser of two things: the loan amount or the insurer’s appraisal of the home value, says Mathew Carson, a mortgage broker with San Francisco-based First Capital Group. However, homes in jumbo-mortgage territory—those financed above $417,000 in most areas and $625,500 in some high-price markets—face a greater likelihood of inadequate coverage in case of a total loss, says Robert P. Hartwig, president and economist at the Insurance Information Institute, an industry-backed consumer-education organization. “What you need to do is insure for the replacement value of home, not the value of the mortgage.” Standard homeowners-insurance policies lock their replacement coverage at a set dollar amount based on industry estimates to rebuild, repair or replace the insured item. Some specialized policies, however, may allow for costs that run above the estimated expense to reconstruct the exact same house inside and out, Mr. Hartwig says. For example, the cost to rebuild a vintage or historic home may substantially exceed market price, says Jim Fiske, senior vice president at Chubb Personal Insurance, a Warren, N.J.-based insurer that specializes in high-net-worth clients. Older homes often have handcrafted features, such as custom molding, and may also require new electric or plumbing systems that meet current building codes, he adds. “In really old homes, the cost of reconstruction could be 2, 4 or even 10 times the market value of the home,” Mr. Fiske says. Newer homes also have custom features that would be expensive to replace. Chubb clients have opted to insure NanaWalls, which are folding glass walls that create indoor/outdoor living spaces, and $35,000 biometric home-theater systems with $20,000 annual subscriptions to play movies currently in commercial theaters, he says. While insurance prices vary widely from state to state, the annual premium price difference between a standard policy and a specialized policy may only be in the hundreds of dollars, says Tom Ealy, president of Encompass Insurance, a Northbrook, Ill.-based subsidiary of Allstate Insurance that insures homes valued at up to $5 million. Even if homeowners decide their high-end home can be served with a standard policy, they could consider buying a rider with extra coverage for expensive items, such as jewelry or collectibles, says Terri Dalenta, senior vice president, property product management for Allstate Insurance. The company offers online tools where homeowners can inventory their possessions and home improvements and include photos, estimated values and comments, she adds. Finally, affluent homeowners should ensure they have sufficient liability coverage in their policies for guests and contractors, Ms. Dalenta says. An injured party who sees wealth is more likely to file a hefty claim, she adds. More considerations: • Don’t wait. Because premiums, like any expense, affect the debt-to-income ratio needed to qualify for a loan, high-end home buyers especially should select an insurer as soon as possible after applying for a loan, ideally a month before closing, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage. For example, an annual premium that includes flood coverage can run as much as $25,000 for a $3 million beachfront home in Florida, he adds. • Moving out. Make sure that insurance policies provide enough coverage for rent and living expenses if the homeowner needs to vacate during home repairs or construction, especially if the contractor or materials are delayed after a disaster, Mr. Ealy says. If maintaining a luxury lifestyle and being put up in the Ritz-Carlton is important, then coverage for those costs needs to be in the policy, Mr. Fiske says. • Beef up security. Affluent homeowners are more likely to install security systems or other safety features, such as a sprinkler system or storm shutters. These may qualify the homeowner for premium discounts. Servants, maintenance staff or a chauffeur living on an estate trigger cost savings in some high-end policies, Mr. Fiske says.