The perils of owning a vacation home

Getting away and enjoying quality time at your vacation home with family and friends might sound appealing – and it certainly can be. However, as with any home, owning a vacation property comes with risks. For instance, if the company insuring your vacation home suddenly closed up, would you know what to do and how to protect your financial interests?

“Receiving notice that your insurance company went out of business may cause you to panic, and understandably so,” says LaTanya Simmons, Vice President and Private Risk Advisor at Aon Private Risk Management. She helps successful individuals protect their affluent lifestyles through insurance, and also educates people about risks that could significantly disrupt their way of living.

An example to consider

Simmons cites an insurance company in Florida that had gone out of business. This example is particularly relevant as Florida is a popular destination for vacation homes. In recent years, Florida’s insurance industry has become more challenging. Insurance carriers have faced massive losses, primarily caused by hurricanes and severe wind events.

Florida is also a highly litigious state, so the cost of litigation and frequent involvement of independent adjusters will increase the cost to resolve claims. As a result, some insurance carriers have been operating at a deficit, prompting them either to limit their capacity or simply decide to leave the state.

“If you’re insured by a carrier that no longer offers coverage in Florida, we recommend you explore other options immediately,” says Simmons. “An independent agent or broker represents more than one carrier and can help locate alternatives. Also consider Citizens Property Insurance, which is Florida’s state-run insurance facility. It’s usually less expensive than private insurers, but their policies are typically limited and only have maximum coverage of $1 million.”

Conduct your due diligence

Enjoying a vacation in Florida or planning to retire on one of Florida’s beaches is a dream scenario for many people, but Simmons advises you to do your homework first. Reach out to an agent with expertise in the Florida real estate market who understands both the opportunities and challenges of buying a vacation home in the Sunshine State.

“Before buying the dream house that your heart is set on, get your insurance coverage secured,” says Simmons. “Insurance may end up being more expensive than the annual mortgage payment, which can drastically impact whether you buy or not. If Florida isn’t financially viable, consider other areas with beachfronts where insurance coverage is more favorable, such as the Carolinas or the Georgia coast.”

Protect yourself with the right coverage

Review your insurance policy to ensure you hold adequate coverage, especially as the cost of real estate rises, which means the cost of repairing or rebuilding your property will rise as well. Insurance carriers periodically introduce new coverages and enhancements that may involve an increase in premiums. Do you need these add-ons and does their pricing fit your budget? It’s generally recommended to review your property and casualty risk management programs every three to five years.

Another valuable step is to check on the health of your insurance provider so you can be reasonably confident they’ll be staying in business. Do an online search for news about the company or to see their financial statements. Evaluate your insurance agent’s (or broker’s) standards of due diligence. For instance, do they only conduct business with companies that are highly rated in terms of financial strength? If your agent/broker works with insurers that offer competitive premiums because they’re not as financially secure, it might be a risk you’re unwilling to take.

Additional needs of the highly affluent

While protecting property like primary homes and vacation houses is also a concern of wealthy individuals, they face other risks with regard to insurance coverage.

According to Simmons, “very successful individuals and families should view risk using a wider lens to include automobiles, watercraft and aviation vehicles, plus collectibles like jewelry, fine art and wine. While umbrella coverage is frequently overlooked, it’s the primary method we use to safeguard wealth that could’ve taken years or generations to accumulate.”

Affluent families may be partially or completely unprotected if a catastrophic event leads to a lawsuit, so it’s best practice to match the umbrella limit to your net worth amount. That way, if you’re involved in a lawsuit, the insurance is the first to pay, rather than your having to liquidate investments to satisfy judgment. If there are additional risk factors, such as owning jet skis, having young drivers or being a Board member, it’s likely better to use a multiple of your net worth as the umbrella limit.

Wealth preservation is as important as wealth creation, and you must take the steps required to protect it all – especially as your wealth increases and potentially outgrows your coverage. Insurance and other forms of risk management need to be part of your overall wealth strategy.

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