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Insuring your home the smart way

Special considerations apply to high-end properties, and not paying attention to your policy until it’s time to file a claim is a recipe for disaster.

Here's a case that illustrates one reason why you shouldn’t buy mass-market homeowner insurance for a high-end home: a few years ago, a New York father let his daughter throw her friends a New Year’s Eve party in his apartment. Someone left a window open, and nobody noticed until freezing temperatures caused a pipe to burst some days later, flooding other apartments downstairs. The result: $12 million worth of damage, over which the father is still fighting with his insurance company. 

“The owner had a very low-end policy,” says Dylan Pichulik, CEO of XL Real Property Management, which manages New York City residences for out-of-towners. 

Homeowner insurance is a requirement to close on a house purchase or take out a mortgage, but often buyers don’t focus on the terms of the policy until it’s time to file a claim. Then they frequently discover they’ve paid for insurance that doesn’t cover the problem at hand, Pichulik says. 

Before choosing a homeowner policy, start by reading the documents that come with your property, including the offering memorandum or offering plan if you’re purchasing a condo, the proprietary lease if you’re buying a co-op, or any documents pertaining to a homeowners’ association. Some apartment buildings have insurance to cover any damage to a residence provided it still has the original floors, fixtures, or other finishes; others don’t cover anything inside the apartment. 

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When fairly and properly drafted, they can provide protections for both members of a couple.

“Regardless of what it [the association’s or building’s insurance policy] says, our recommendation for high-end owners is always to fully insure your property so you’re not at the mercy of anyone else,” Pichulik says. 

One major benefit of homeowner insurance is that your carrier pays for any third-party liability or damage you do to someone else’s property. “If you had a few glasses of wine and decided to take a bubble bath and created a water park downstairs, the liability coverage would pick that up,” Pichulik says. 

But as the case of the New Year’s Eve party shows, that works only as long as the insurance company agrees to pay out on your claim—and as long as you have enough umbrella liability coverage to take care of collateral damage to neighbors’ property. 

This is why it’s crucial to read the documents before signing the insurance binder, Pichulik says. Owners often scramble to put coverage in place before a closing and rely on the insurance agent’s assurances instead of scrutinizing the contract. Some also don’t give agents the level of detail they need to quote an appropriate policy. These owners run the risk of missing exclusions built into the policy that could cost them money later on. 

To vet the policy, you may want to have your lawyer look at it before you sign it, but be sure to work with a reputable insurance broker and a strong insurance carrier that specializes in high-end properties. Word of mouth can be helpful. 

“Talk to friends who have had to file claims about what experience they had with their carrier,” Pichulik says.

It’s important to contact several insurers to compare prices and terms. Chubb, AIG, and Pure are among the top carriers for high-end homes; others include Cincinnati, NatGen Premier, and Ironshore. The nonprofit Consumer Reports recommends using an independent broker to help you determine how policies differ. 

In the worst-case scenario, if your home is uninhabitable, you need a level of coverage that will allow you to reconstruct it. That’s where insurance buyers often go wrong. They may not realize how much it would cost to rebuild their home from the ground up, or they may not understand what a policy’s fine print dictates.

“Most people are well under the recommended coverage for a rebuild,” Pichulik says. 

A good insurance broker will quote you a rebuilding price per square foot based on your home’s location and the current costs of construction and labor. Then the carrier will send an inspector to walk through the home. This is one of the benefits of dealing with a high-end home insurer: not all companies will send an appraiser to look over your home’s structure and contents to make sure you’re fully covered.

Another benefit of opting for an insurance carrier focused on high-end homes is the availability of coverages that other insurers simply don’t offer. For example, while many companies will provide only the limited flood insurance that’s obtainable via the federal government, high-end insurers can give you greater protection. Additionally, if you need to hire a contractor to make repairs for a covered claim, the insurer can provide you with names of ones who have been vetted and whose bills will get paid. They also typically offer guaranteed-replacement-cost endorsements. These say the insurer will pay whatever it takes to make your home the same as it was before the damage you’re claiming.

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“Once it’s agreed on by the insurance carrier that you’re insuring the home to value, regardless of the construction climate that we could be going through, we’re going to pay whatever it takes to reconstruct your home with like kind and quality,” says Adam Herfield, president of Fields Group Insurance Services in New York. 

That’s been important over the last few years as hurricanes and wildfires have vacuumed up contractors’ time and increased the prices of building supplies, he says, adding that top carriers will typically offer to waive a deductible for a large loss. That means that if a loss exceeds $50,000 or so, no deductible will apply. 

One trouble with homeowner policies designed for the mass market is that they may come with exclusions or sublimits that will trip you up if you have to file a claim for a large home. For instance, a multimillion-dollar policy might have a $50,000 sublimit for water backup, so that if your bathtub overflows, your carrier will pay out no more than that amount, no matter how much it costs to repair the damage, Herfield says. 

Many homeowners choose to use the same carrier for all their insurance, including automobiles and homes. That way, if you back your car into your garage wall, you don’t have to deal with two insurers and there’s no question about which company is responsible. Also, most insurers provide discounts to customers who sign on for multiple policies.

Be sure to ask your broker how a policy you’re considering will handle jewelry, fine art, and other collectibles. If your policy has blanket coverage rather than a schedule of specific pieces, find out what the maximum is for each piece, and see whether it matches the value of the items you’re insuring. A $1 million blanket art policy may have a per-item limit of $50,000, which could be considerably less than your paintings or necklaces are worth, Herfield says. 

“We always recommend scheduling jewelry and art as much as possible, and it’s also typically less expensive,” he notes. 

What about an Umbrella?

Knowing how much umbrella liability insurance to put on top of your homeowner policy is difficult. The number is the answer to the question, “If I were sued and found negligent, how much could they get me for?” and relates to your net worth and future earnings, says Adam Herfield, president of Fields Group Insurance Services. But many homeowners carry too little additional umbrella-liability insurance or none at all.

“That to me is the silliest mistake you can make,” Herfield says. One reason: umbrella coverage is inexpensive compared with homeowners’ insurance, in part because you’re not likely to need it. If you do need to make a claim, however, you’ll want as much umbrella coverage as possible.