One of the most common of American dreams is home ownership,which has been challenged by the economy over the past severalyears.

|

Over the years, we have all heard that the three most importantfactors in choosing a home are location, location, location. Manyof our customers have been fortunate enough to be in the financialcondition to consider purchasing a secondary or vacation home.Never is the location factor more critical than when purchasing asecondary home. However, consider other important factors whenentering the secondary home market, including the insurability ofthe home. The unique risks involved with insuring these propertiesis what will be addressed today.

|

The most popular geographic areas to invest in a secondary homeare along America's coastal regions, scenic rivers and lakes, or inmountainous regions. Focusing on the secondary coastal homemarkets, the primary challenges insuring these homes include:

  • Type of ownership, or named insured
  • Use of the property
  • Liability exposure
  • Market value versus replacement cost
  • Personal property
  • Carrier appetite and capacity.

Most of the aforementioned regions will have several of the samerisk management issues and each will have some unique to theirlocations. While mountain and lake regions may face unprotectedfire districts, coastal and river areas will face flood pronerisks.

|

Related: Read the article “Weathering the Storm” byJeffrey R. Wyrsch.

|

Read Right from the outset of purchasing a second home, theissue of the named insured pops up. We see many instances offriends or relatives looking to jointly purchase a property. Oftenthey are mistakenly advised to form a Limited Liability Co. (LLC)and place the property in the name of the LLC. We find that thislimits the number of carriers who accept this form of ownership. Itis important to advise local attorneys and real estate agents ofthis dilemma and explain to our prospective insured that fewmarkets will be available to an LLC, and could potentially causehigher insurance rates.

|

Paramount to all other issues is the use of the property. Willthe owners purchase a property for their own use or will they rentthe property to others? Often they do both, renting out their homefor certain times of the year and using it themselves for thebalance of the year. Will there be a time when the property will beleft vacant or unoccupied during the year? Another situation existswhere the home is purchased for investment purposes and rented outyear-round. Any of these scenarios require different types ofpolicies to properly protect the insured.

|

Related: Read the article by Jerry Thompson“Marketing is More Important Now Than Ever.”

|

Ensure that the insured understands the importance of disclosingthe use of their property when applying for insurance. The pitfallsof owners misclassifying how they will use their homes become clearonce a claim occurs. Insurance companies are not quick to payclaims on an HO3 policy when the home is being rented without theirknowledge. When claims are questioned or denied, the insured willbe quick to point a finger at the agent with the phrase, “My agentnever told me that.” This is where your E&O policy comes intoplay, and your written documentation is very important asalways.

|

Also consider the length of time the property will beunoccupied. Most secondary homes are unoccupied for several weeksor even months at a time each year. In our coastal community, themost common unoccupied times are during the colder months, Novemberthrough March.

|

Parallel to that, the most common claims wehave during the winter are due to frozen pipes and the resultingwater damage. Keep in mind that in most of these cases, if thehome's plumbing was not professionally winterized, or if a minimumrequired temperature in the home was not maintained, there will beno coverage due to freezing of pipes.

|

To help cover against an E&O exposure, send a reminder toinsureds to have their water turned off and professionallywinterized during the time that their home is unoccupied. Recommendeasy turn on/turn off water systems and heat monitors to helpprevent claims. Anything you can do to make sure your insureds areprepared for these situations will go a long way in protecting bothyour agency and your customers.

|

The market value versus replacement cost issue is another issue.In our region, the value of the land is often two to three timeshigher than the value of the home. Our average sales price on LongBeach Island is in the range of $500,000 to $1 million, withoceanfront and bayfront properties soaring even higher. At least 60percent to 70 percent of the value is in the land alone. Mortgagecompanies may attempt to require insurance in the amount of themortgage, which is regularly higher than the actually replacementcost of the homes.

|

Related: Read the article “What's Your Flood Zone?”by Dave Wyrsch.

|

The proper advice and guidance from an agent will solve thisproblem, preventing an insured from overpaying for too muchcoverage, and help the customer understand why he doesn't need thatmuch insurance, and what his policy covers. Making sure to provideaccurate replacement cost estimates of the structure and providingthose estimates to the mortgage company is usually enough for themto accept the proper coverage. In some cases, we will even providea copy of our state statute showing that mortgage companies are notallowed by law to require a homeowner to over insure theirproperty.

|

Other significant aspects of insuring a secondary home includeliability and personal property coverages. In many cases there aredifferent options and limitations on these coverages for asecondary home. Options may reduce the cost for insureds. Forliability, it is possible to obtain property coverage on the homewithout liability, and extend the liability from the insured'sprimary home policy. This can give a significant reduction inpremium. There also are situations where liability is not availableas part of a homeowners insurance package, and a stand-aloneliability policy may be needed to properly insure the customer.

|

Double-check how much, if any, contents coverage the insuredneeds. In the case of a rental home, the insured may not needcontents coverage at all, therefore drastically reducing the costif it can be removed. In other situations, there may be a need forincreased contents coverage, or scheduled valuable items, such asfine arts or antiques. Many carriers who insure coastal secondaryhome do not have the option to schedule valuable items such asthese, therefore to properly cover your insured there will be aneed for either a standalone valuable items policy, or the abilityto schedule these items onto their primary home's policy.

|

A big challenge is the carriers' appetites or capacity issues.It has become common in the past year or two that companies arereducing the amount of coastal risks they take on. There have beensome companies who have even non-renewed all coastal properties,and others who have “reached coastal capacity” and are no longerwriting anything new. Continue to search for new markets for theseproperties. Keep clients well informed of the volatility of thecoastal secondary market, and reassure them that you will continueto have options for their insurance needs as the marketchanges.

|

The benefits and pleasure of owning a secondary or vacation homecan be very rewarding. It is the responsibility of an agent thoughto point out the unique insurance challenges a homeowner will face.Staying prepared for an ever-changing market such as this, andkeeping your clients informed and educated are a couple of the mainkeys to building a profitable book of secondary home business.

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.