A San Francisco couple arrived at their second home in Vancouver, B.C., earlier this year to discover that their luxury condo was more than just waterfront property. It was actually underwater - four feet of it. A valve in a new washing machine had failed during their absence, and the damage was done.
Fortunately, unlike a surprising number of high-net-worth home-owners, the couple possessed what Michael Cullen, their San Francisco-based financial advisor, calls "Cadillac insurance" - in this case, from Chartis Insurance. "In 30 minutes, the Chartis people were on site, getting everything out of the house and into storage," Cullen says.
The insurance company quickly found the couple a waterfront house nearby where they stayed for two months. Restoration of their home included replacing custom bamboo flooring throughout the condo, not just in the damaged area.
Chartis is one of a handful of insurance companies focused on the special needs of the very wealthy - the top 1% to 2% of the nation's population. However, most consumers who fall into this category "are blissfully unaware of how exposed they are" to risk, says Jerry Hourihan, national sales manager of Chartis' Private Client Group. "We estimate that three-quarters of our target customers are still buying their coverage from mass-market providers," he adds.
The selling point is that the very wealthy need extra service. For the price of a higher deductible, these firms promise to restore or replace the most luxurious details or valuable collectibles for premiums that average out to little or no more than the cost of mass-market policies.
The insurance policies also can be customized. "A traditional insurer would replace damages with like- or equal-kind. We'll go as far as Italy to replace marble from a particular village," says Darryl Page, president of the personal insurance division at Fireman's Fund Insurance Co.
It might seem that a house once regarded as having a multimillion-dollar valuation would be overinsured. Think again: Studies by Ace Private Risk Services show that while the market value of luxury homes may have declined from the 2007 peak, the cost of replacing a damaged property has risen with inflation. "We're preparing a lot of information about rising costs, but it's a tough sell because most people relate [replacement] value to market value," says Ace Division President Bob Courtemanche.
The study uses the Ace Platinum Portfolio policy to illustrate that the annual savings in premium for insuring a million-dollar home with a $2,500 deductible vs. a $500 deductible could be about $900. Over 11 years - the typical gap between claims for an Ace policyholder - the higher deductible saves $9,900 - far outweighing the additional $2,000 paid at the time of a loss.
American College Assistant Professor of Insurance Kevin M. Lynch puts it this way: "If your client's home is worth $3 million to $5 million, and their automobiles are Maybachs and Bentleys, are these coverages too expensive? Not as expensive as self-insuring," he points out. "All self-insurance means is you're carrying the risk yourself."
Passionate as they may be about their collections, many wealthy patrons fail to have their valuables inventoried and reappraised on a regular basis. Even policies where particular items are individually scheduled may have limits.
Affluent customers, the Ace study found, are often unaware of how much the value of such items may fluctuate over the years. For instance, imagine the effect on the value of gold jewelry when the price of gold rose to nearly $1,800 an ounce last month from a low of a bit more than $600 in January 2007.
Specialty insurers protect against this market volatility by offering policies that pay up to 50% more than the scheduled replacement amount. Irreplaceable items are, of course, irreplaceable. But the ability to purchase something of equal quality and value mitigates some of the sting of loss.
In addition to covering replacement costs, high-end insurers are providing new services to prevent damage. This includes property managers for unoccupied second and third homes, or units that monitor and respond to leaks or fires.
Chubb's Property Manager provides peace of mind after the fact with post-catastrophe inspection. Available to hurricane-prone Florida residents since 2007, Chubb extended the program to Georgia and South Carolina in 2009. Any storm big enough to warrant a name results in residential appraisers visiting covered properties whose owners can't get to them quickly themselves. If there's damage, it's assessed and policyholders can authorize the appraisers to submit claims on their behalf and arrange for restoration specialists to board up, tarp and extract water from the homes.
High-end insurers have also turned their attention to containing and minimizing catastrophic damage from fires. Chartis' Wildfire Protection Unit covers much of California and parts of Colorado. Chartis can identify endangered homes by their location, monitor them even when they are vacant, treat houses in the fire path with repellent and contact nearby fire departments.
Warren, N.J.-based Chubb introduced its Wildfire Defense Program in 13 Western states three years ago. Texas was added last year. Chubb relies on a network of certified firefighters who specialize in putting out wildfires as well as a fire-retardant gel.
But the worst losses today come from water damage, says Courtemanche of Ace, which introduced its Leak Defense System about five years ago to detect leaks and shut off an in-home water supply. The system, which earned Ace an industry innovation award, offers a discount on the price of the equipment, a policy credit to homeowners who purchase it and lower water bills.
Establishing ties to financial planners has become increasingly important for these insurers. Two years ago, in response to a growing numbers of inquiries about insurance risk management from attorneys, financial planners and wealth managers, Chartis expanded its Private Client Group University - a continuing education and training program designed for insurance agents and brokers - to provide continuing education (and CFP credits) to financial services professionals who advise high-net-worth individuals and families. Chubb, Fireman's Fund and Ace all encourage the independent agents and brokers who sell their policies to forge relationships with financial planners in their communities.
The constantly fluctuating values of everything from homes to vintage cars and gold means insurers have an enormous stake in providing planners with the right questions to ask.
"I don't understand why more advisors don't partner with insurance companies for their high-end clients," says Cullen, the CFP whose clients became waterlogged. "I've found it to be a tremendous value."
Nancy R. Mandell, a freelance writer in Clifton, N.J., is a former managing editor of On Wall Street and Wealth Manager magazines.