Read the episode transcript
Aaron (00:00)
Hello everybody, welcome back to the Speaking of Insurance podcast brought to you by Bollinsure Insurance Services. Today we're going to be talking about something that I think is becoming increasingly important in California, especially for homeowners with property worth two, three, four, five, ten plus millions of dollars. Of course, if this video doesn't apply to you and you're among the average people who either are renting or possibly saving up your money to invest in one of these properties.
Aaron (00:25)
This still 100% applies to you in terms of the understanding of the insurance market and the way that it can be generalized for all people and all of the experiences. So, but today we're going to be focusing on those people who are in potentially the higher wildfire areas or at least at higher risk of losing millions and millions of dollars when it comes to their house. The difference that it comes down to is having homeowner's insurance and then having the right homeowner's insurance because those are two completely different things.
Aaron (00:54)
Imagine that you own a beautiful home in Orange County. Maybe it's Newport, Laguna Nigel, Rancho Mission VAHO, or somewhere in Los Angeles. Doesn't really matter. You bought the home for $3 million. You've invested in the property. Maybe you remodeled the kitchen. Maybe you went through that entire process of redesigning it with your partner. And you've got a lot of emotional and financial investment into that property.
Aaron (01:14)
Maybe you've upgraded the bathrooms, got the custom flooring in. Of course, this might sound like the dream to a lot of people, but there are people out there who have these risks and these circumstances, and it's more common than you think for homeowners. Regardless, every year you pay for your home insurance and it just keeps renewing. You see the premium, you see a dwelling coverage limit, and you assume that everything is fine because you've been with that insurance company for years. But here is the question if your home was completely destroyed tomorrow.
Aaron (01:42)
Would your insurance company actually pay you enough to rebuild it to the same standard or superior standard as to what you have right now? And beyond that, what happens to your belongings, your temporary living expenses when you have to go rent out another house, your liability protection if something were to happen as well there, and all the other financial exposures that come with owning a high value home and being a high net worth individual? Again, whether you're aspiring to be one, whether you are one presently, it still applies to
Aaron (02:11)
The understanding of the level of risk that these homes have and susceptibility to losses. So today we're going to be breaking down seven major insurance considerations for luxury homeowners and why traditional homeowners' insurance policies, many times, if not all times, fall short of the standard that it needs to be and what you should be reviewing and doing about it before you ever have a claim. And I want to make one thing clear from the beginning this isn't about convincing everyone that they need the most expensive insurance policy available.
Aaron (02:40)
It's about understanding what you're actually buying. If you were to buy a lemon, right? A lemon car, you understand the risk that comes with that lemon car. Now, if you're buying a home, I'd think that most people have a level of emotional commitment to that place to the point where they would want it to be up to their own standards. And making sure that if something were to ever happen to that home, ever happen to their assets, ever happen to their family and all the things that they love, again, that it's it's properly covered. Crucial.
Aaron (03:09)
For those of who listen to the podcast, that's my consistent word that I like to use when I'm describing risk management for any individual. And of course, here in this situation, when you are more susceptible to these higher dollar amount losses, it becomes even more crucial. Because when you're protecting an asset worth several millions of dollars, every single detail matters. So let's start with probably the most important distinction in your homeowner's insurance.
Aaron (03:36)
Your home is market value and its replacement costs are two completely different things. We've said this in other prior podcasts, but recent statistics as well have came out that have furthered this level of need to be emphasized. If you're a first time listener, then this could also be useful. Let's say you own a home in Newport Beach that's currently worth $3 million. Be awesome. Right. I mean, I don't own a house in Newport Beach that costs a million dollars, but I help people who do.
Aaron (04:01)
A significant portion of that value may come from the land location, proximity to the ocean, school district, and overall real estate demand. Now let's go through one by one on those. The land. If it's a super nice, flat terrain closer to the beach, nice location, right? That land is going to be worth even more. If it's on a super steep terrain and it's got maybe some level of risk in terms of it's on a on a mountain or something, then that's a different type of land that it's on.
Aaron (04:30)
Location-wise, again, different zip codes have different replacement cost estimates and different contractor reconstruction costs. That's how oftentimes replacement costs are calculated, is they take into account the zip code and the level of potential construction costs that are associated with that area. Proximity to the ocean. Now, this is one that people don't really think about. Proximity of the ocean also includes susceptibility to loss. If you're right on the beachfront, there's a bunch of different liabilities that come with that.
Aaron (04:57)
If you're on Malibu, right, or you're like, you've got that super nice property, maybe it's worth tens of millions of dollars, and people are walking by it every day, there's a liability hazard there, right? And so these insurance companies keep that in mind. You best believe it. You best believe it. They keep it in mind. The school district, too. How close are you to a school district? I mean, again, liability exposures, different levels of things that happen. I mean, if you're next to one of those high schools and God knows how high schoolers are nowadays with their TPs and all the other crazy stuff that they get into.
Aaron (05:26)
There's a level of risk there as well. And of course, overall real estate demand, if it's in a very high demanding area, then contractor prices might be even higher. And so there's a level of interconnectivity that comes with every single feature that's used for the valuation of your home's market cost. And then of course it has to be referenced against the replacement cost, which is a completely separate thing. These are things that I think everybody should consider when they're trying to understand what an insurance company would look at. But again,
Aaron (05:57)
What you're willing to pay for a house, what people are willing to pay for a house, and then what the insurance company will cover for a house are two completely different different things. Homeowners insurance generally isn't designed to ensure the market value of your land. It's designed to cover the cost of rebuilding the structure or to give you cash for the value of that structure instead of having to replace it, which is if you guys have listened to this podcast before, of course, it's nice to listen to the hubermans of this world where there's constant breaking news. This is just
Aaron (06:26)
Thing that I will continually repeat. It is that the actual cash value valuation of an entire structure is never advisable. The California Fair Plan does have a way of ensuring dwelling replacement costs, but a lot of people are on actual cash value. Now, what does this mean? This means that they will just cover the value of that structure if it was paid for with cash. Does that mean that they would cover the contracting costs to fully rebuild the thing and all of the different ordinance or laws, potential coverages and things? No, not necessarily.
Aaron (06:56)
Not at all, actually. Actual cash value is oftentimes a lot less than the replacement cost. So when people are, getting claims on their house and they file it with the insurance company and then they get told, it's actual cash value. And they're like, okay, cool, I get, I get a check, right? Check will be not enough probably to replace your house. Again, this is just advice. So the reconstruction cost is different than the market value. It's usually a lot less.
Aaron (07:21)
Let's give an example for this. Let's say that you have that $3 million house in Newport, and on the market it's worth $3 million, and it's absolutely gorgeous. And I'm jealous of you. And I bet we all are. But it's worth $3 million and it has a reconstruction estimate of $1.8 million. You notice how those two numbers are different? Now that actual cash value of that property might be a million dollars. What does that mean? Does that mean you're gonna get the $1.8 million to replace the property? Absolutely not. So
Aaron (07:49)
It might actually cost more to rebuild that property than it would be to pay cash for it. Let's say that it costs $3.5 million to rebuild. It depends on the actual property. The market value some of the time and oftentimes can be less than that replacement cost. You think about a house that has really old structure, right? The cost to rebuild that of the same quality because they don't make them like they used to.
Aaron (08:14)
It's gonna be more than the current cost to buy that property because some people might not want to buy that property because of the older structure. Does that make sense? I feel like it makes sense. Of course, it depends on the actual property, but that's where these luxury homes become super complicated. The cost that goes into rebuilding a con custom home. You might have stone countertops, you know, maybe some cabinetry that's also custom, specialty hardwood flooring, some architectural glass, specialized engineered requirements for that reconstruction product process.
Aaron (08:44)
A specific complicated roof design, a hillside foundation, which is what we talked about with the location. Again, market value has some things that do intertwine with the replacement cost, with the cost of your insurance, the level of liability associated with zip codes, the reconstruction cost associated with a specific zip code as well. Here's another example, because we're example FC over here. We love examples. Let's say a homeowner has a dwelling coverage limit of 1.5 million.
Aaron (09:11)
After a total loss, the actual covered construction cost comes out to 2.2 million. What the heck do you do? Well, honestly, there's not much that you can do. What you can do is you can, before that loss happens, look into something called extended replacement cost coverage. We've talked about it so many times. If you're a new listener, extended replacement cost coverage adds a percentage to that dwelling A coverage for covered losses. It's extraordinary. Just covers the additional expenses that potentially you or the insurance company didn't estimate or account for in the beginning.
Aaron (09:41)
So that $700,000 difference with the 50% extended replacement cost would be covered. Because you got the 1.5 million, right? 50% of 1.5 million, 750,000. That's 2.25 million that's covered. Bang, UCLA degree coming into play. Now, whether the insurance actually covers the loss is a completely different thing. Like in the first place. And that's where a lot of these custom homes and the custom insurance companies, the chubs of this world, get so cited by AI, get so recommended by AI.
Aaron (10:09)
But so many people aren't willing to pay that custom premium. If you have a property that's worth $8 million and you get quoted for a few hundred thousand dollars, are you gonna make that decision to buy that insurance? Especially if you're in a high brush or high potential loss area, are you gonna buy the earthquake insurance if your eight million dollar property is on a fault line? Does it matter if your property is eight million dollars? Will you buy it? Again, this is where talking to an insurance broker that is unbiased, as unbiased as one can be in a money making industry.
Aaron (10:39)
And somebody who really understands the level of risk and also has paid for the California insurance comes into play. That's where our family comes into play. If you do want an unbiased zero cost estimate or unbiased replacement cost gauge, which is just like a we go into our carrier portals, see if we can find you a better price and also gauge their estimated replacement cost against your current, could be the difference between your house being covered in the event of a wildfire or not.
Aaron (11:07)
Potentially adding the other types of insurance that you need versus not realizing that you have a water damage supplement or not. All of these things come into play. So let's talk about the wording that some of the time can seem very complicated. Guaranteed replacement cost versus extended. Let's say that your home is insured for $2 million under coverage A, which is your dwelling coverage, which is just the coverage for your house. Let's say that your property includes 25% extended replacement cost.
Aaron (11:34)
Assuming that the loss satisfies the policy conditions or that it's covered, you can get that extra $500,000. And it's usually way cheaper to add that than it is to add $500,000 to that dwelling coverage A. So your potential dwelling reconstruction coverage is actually $2.5 million.
Aaron (11:50)
Again, this just highlights how it depends on the property, depends on the structure, depends on the risk. And that's why it's so important as these rebuilding costs increase and inflate to have consistent market understanding with an insurance broker who's there for you, for your property risk, actively making sure that your limits are enough. If you again have a property that's worth four million dollars and you're upset about a $30,000 premium, that's of course understandable. $30,000 is a lot of money.
Aaron (12:19)
That's a 40, that's a $4 million property. Some specialty homeowners offer coverage designed to pay for the eligible cost to rebuild the home, even if the cost exceeds the state of dwelling on that. Whoa, a lot of words, guaranteed replacement cost. Makes sense. It'd be nice if every single home insurance company was just like, hey, we'll just cover whatever it costs to replace your house. But the reason that they have these limits is in case that these numbers get inflated, in case construction costs change. That's why we're seeing a lot less guaranteed replacement cost coverage in the California market.
Aaron (12:50)
Because these numbers become so inflated and they're so, spontaneous depending on the day, depending on the weather, depending on the circumstances, depending on the year, depending on the month. All of these things and these numbers change, and that's why they just like to lock it in for a year with a specific number instead of guaranteeing that you're covered the entire time. If you're able to get guaranteed replacement cost coverage and it costs double the price, definitely consider it.
Aaron (13:11)
The insurer may require you to maintain an accurate reconstruction estimate, report the renovations that happen, and insure the home to its required value. But the guaranteed wording on that policy is huge if you're able to get it. So here's the biggest takeaway, I would say, of this section. Extended replacement costs gives you a defined additional percentage of coverage. Guaranteed replacement costs may provide broader rebuilding protection, but only under the applicable policy terms. There are some cases where.
Aaron (13:40)
Potentially prices exceed by a specific amount, or possibly natural disasters have some separate configuration for the insurance company to not have to pay out that guaranteed replacement cost coverage. So don't ask, am I covered? Ask the more in-depth question: what happens if the actual rebuilding cost exceeds my dwelling limit? That dwelling coverage A, the property coverage for my home. That's a more useful question. Number three, let's talk about specifically California.
Aaron (14:09)
Because if you have a beautiful, well-maintained home, finding the right insurance can be challenging. Over the last several years, of course, if you are in this sort of situation, the insurance market has experienced significant pressure, higher prices from wildfire losses, the reconstruction increases, the reinsurance expenses, which is just the insurance company's insurance company, the people who give the insurance company the money to insure people, the fact that they're losing so much money, they've had to increase the prices of their insurance companies that they insure.
Aaron (14:39)
And that changes these insurance companies' appetite. If that makes any sense, if you followed along with that, A plus. For high value properties, the challenges can become even more pronounced. Why? Because an insurance company isn't simply evaluating the probability of a loss, it's also evaluating how large that loss can be. So if a home is insured for $500,000 and it experiences a total loss, its exposure can be different, of course, from insuring that $5 million reconstruction cost. Now multiply that exposure across an entire neighborhood.
Aaron (15:08)
This is where we see things like capacity come into play. If an insurance broker ever quotes you with the market and they say, all of our markets are at capacity, what does that mean? That just means that the insurance companies have pretty much exhausted their ability to write in a specific zip code. They've got a lot of centralized risk there. Maybe you have 250 houses on the specific neighborhood that you're in. Maybe the insurance company insures five to 10% of them and they're happy with that limit. If they insure any more and wildfire comes through, then they're
Aaron (15:38)
Completely screwed. And so, of course, in the same city, different areas of that city, this can vary. And a home being expensive does not automatically make it difficult to insure. If you've got a newly constructed home in a low wildfire area, voila. That that could be a great risk to insure. But if you're looking at these older, more vintage homes, the higher insured values with the specialized construction features, that level of catastrophic exposure can narrow the
Aaron (16:06)
insurance companies availability to insure those properties. So that's why working with an independent insurance broker can be the difference maker when it comes to making sure that insurance companies are properly being reached out to and used as references and gauged across your renewals. So let's move inside the house. What if you have a huge personal property exposure? Because rebuilding the structure is one part of high value homes. Usually if you have a high value home, you got some nice furniture inside of it, clothing,
Aaron (16:33)
Electronics, artwork, jewelry, watches, collectibles, you name it. Let's say that you've got a super nice comic book collection. The insurance company doesn't know about it, and you're on a standard insurance company configuration, and you again let's call it $100,000 of comic books. That has to be scheduled on. The insurance company has to be aware of that. Companies like Chubb add that. Companies like AIG private client add that. Companies that are specialized to the higher net worth individuals can add that for you at a low cost.
Aaron (17:02)
With flexible coverages. And that's what it's all about. And these are the smaller things that do accumulate and add up over time. That jewelry limit. A lot of people, you go to an insurance company, they don't notice that it's a $10,000 jewelry limit. That's more than what you bought your wife's ring for, or, your husband's ring for, or your jacket for in this high net ware sort of situation. So if your policy has $600,000 in personal property, sounds like a substantial amount, but
Aaron (17:31)
If you've got custom furniture, that number can go and exceed a million dollars very easily. You can have a huge hundreds of thousands of dollars of coverage gaps without considering the deductibles, exclusions, and sublimits that do happen on that policy. So here's where it becomes more interesting: that certain valuable items carry those specific limits. So a standard one would say, hey, we have a watch limit of $10,000, but then all of a sudden your Automama get gets stolen.
Aaron (18:01)
And you're done. you don't have coverage. You don't know what to do. You're like, you're like looking all around. Now, if you'd gone to AIG private client and told your insurance broker, hey man, I've got this super nice watch, maybe super nice collection, you know, I've got my Roley and maybe three of them. You know, we've had cases where people have watch collections that are ridiculous. And trust me, those get stolen, oftentimes you'll be crying.
Aaron (18:27)
And the insurance company will cover you if they know about it and if it's on that policy explicitly and it's a covered loss. So that's where valuable articles come in. It's just additional coverage that can be added. Insurance brokers who work with these sorts sorts of situations can 100% go through and add those things. Usually they require appraisals, purchase receipts, photographs, and serial numbers just to add those on. And if it's in
Aaron (18:50)
move like property and transit. Sometimes you might need an in the marine policy. Let's say that you've got art that you transport location to location, not on business use, but on some like, I just want to flex. and it's like a personal exposure, you might want to get some in the marine coverage on that. We have a people who do have millions of dollars of those art collections. And it's very important to make sure that those are all explicitly stated crucially to the insurance company. Number five, here's another thing I think gets overlooked.
Aaron (19:15)
Additional living expenses. You have a $3 million house, major fire, home becomes uninhabitable. Maybe it's a smoke damage. Now that's a trigger word for a lot of people because the Palisades thing that happened with insurance companies not properly paying out for smoke damage claims. Let's say you're with a good private client company and the rebuilding takes 18 months. That could be an underestimate, but let's just say it takes 18 months. Where are you gonna live? You've got family, you got children, maybe you got pets.
Aaron (19:40)
Maybe have some accessibility requirements. Maybe you're in a wheelchair, which is okay. obviously insurance companies should be able to help you with all sorts of sim situations. In certain parts of SoCal, renting a suitable home that matches the quality of your existing homework seeds, it can be very, very, very expensive. Let's say that an appropriate rental costs $20,000 a month for your level of living that you're accustomed to. Over 18 months, that's $240,000. Do you have that loss of use coverage?
Aaron (20:10)
Maybe not. And so these coverages have their specific limits and restrictions. And this is just an example of how all those coverages matter, every single one of them. You got to think about what type of house do I want to live in if something were to happen my house? What are the pros and cons? For high value homeowners, this distinction matters. Not just how much additional living expense coverage you have, but how long it can continue for. Because man, on those standard policies, they have like a
Aaron (20:37)
six month limit or something or 12 month limit. But if it takes that 18 months, what happens to those additional six months? You gotta pay out of pocket. So how is additional living expense coverage calculated? Is there a dollar limit? Is there a time limit? And what happens if rebuilding is delayed? Are you gonna have an insurance company that'll support you during that process? Important questions. Section six, let's talk about liability insurance because a homeowner's financial exposure isn't just the structure or the property. Imagine somebody is seriously injured on your property.
Aaron (21:06)
Fall near a pool, maybe you've got some really nice rock slide. Now, if you listen to my prior podcast, there was a guy who's looking to invest in a property to rent out as an Airbnb. If you're looking to rent out an Airbnb with a rock slide, good luck. It'll be fun. Fun for me to take a look at and to try and find an insurance company that will want to ensure the rock slide. But joking aside, that's a serious sort of exposure. Maybe a visitor suffers a significant injury from that.
Aaron (21:33)
Or a household employee alleges an injury against you, and that's just like somebody who's doing main doing maintenance. What level of workers' compensation coverage do you have on that property? Perhaps a family member causes a serious automobile accident. Different insurance policies respond to all of these different things insurance companies respond to this in different ways. Depending on the circumstances, the coverage and the level of insurance company that you're with.
Aaron (21:58)
The potential financial exposure of this can be in the hundreds of thousands of dollars. We've seen a number that was the average liability claim in some situation was exceeding six hundred thousand dollars. Now, of course, that's not like a super specific statistic with citations and everything, but you gotta think, if you're a high net worth individual, you wanna be.
Aaron (22:15)
Almost all of that work that you put in to get to that can be taken from you or at least a big chunk of change versus just paying the extra 50 to 100% on your insurance policy and having that added for you. We've discussed umbrella insurance on this podcast before, so I don't want repeat that entire conversation, but I do want to emphasize something specific for high net worth individuals. Your liability program should coordinate across all the different exposures you have: your rental properties, your rec vehicles, your watercraft that you have, your cars, your custom cars.
Aaron (22:45)
your home, other activities that require that additional liability protection. Now, in specific instances, we see events where people need twenty million dollars of umbrella insurance and they want to go get that just with a farmer's policy. Not gonna happen. unless farmers is willing to do that. on a standalone basis, no insurance company wants to be on the hook for twenty million dollars unless you have everything with them, ninety nine point nine percent of the time.
Aaron (23:09)
So the AIGs of this world, the Chubb Customs of this world are gonna be looking at your risk and want a holistic approach to that property, to that risk. And then they'll maybe consider insuring you for $20 million. That is a lot of money. And if you need that level of coverage, it is super important. And so the goal is to make sure that your liability protection is coordinated rather than just relying on several unrelated policies and hoping that they work all together, coordinating it actually. Last section: what about second homes and vacation properties?
Aaron (23:37)
Here's something that's worth discussing in depth. Of course, we should probably have a different broadcast on secondary homes and vacation risks. A lot of affluent households don't just own one property. Maybe your primary residence is in LA, but you have a place in Palm Springs, maybe Lake Tahoe. Each property has a different insurance consideration. Now, if you're with an insurance company that'll add all of them up together and insure you with the umbrella on the auto, perfect. But some carriers do require that some alterations to these policies be made.
Aaron (24:06)
An example being water leak detection devices, monitored alarms, temperature monitoring, and other property inspection-based requirements for those vacation properties because they do sit unoccupied for extended periods of time. And that has a different level of underwriting requirement. Especially also, again, if you have that Airbnb exposure, completely different level of liability risk. Not every homeowner's policy is designed to cover short-term rental operations. In fact, if you
Aaron (24:35)
Do you have short-term rental operations and you're just on a standard landlord policy? Very scary. Very scary. Odds are you are not covered on that. We've seen events where that's that's happened and you have to quickly coordinate with an insurance broker to get that resolved. That is where our team has come in and helped people actively Bollinsure. You know, got a plug. It's also important to evaluate whether properties are owned personally, trustwise, or through other legal entities. So distinguishing the first name of insured on policies before.
Aaron (25:04)
You actually buying a policy is a way to make it so it's super easy. So I hope you guys have liked listening to this podcast. Of course, we talked a lot about high net worth individuals. If you are among those upper echelon of exposures for properties, paying the extra amount for the insurance company that will partner with you for all of your insurance, leave you one renewal date, one sort of consistent bill, and one sort of contact for covering you and all your assets, that is the perfect situation. If you do have to split it up because
Aaron (25:34)
Maybe some insurance companies don't like the home in Tahoe. Just making sure that all of your assets are properly lined, liability-wise, structure-wise, and coverage-wise is huge. You people don't think about, how much dwelling A coverage they have. They just think about that yearly premium. And we've seen events where people are just solely focused on that premium so much that they don't care about the accuracy of their dwelling A coverage on millions of dollars of properties. So
Aaron (26:01)
With that, this has been the Speaking of Insurance podcast. Again, if you're a California homeowner and you'd like someone to review your current insurance program, you can reach out to us at Bollinsure Insurance Services. We work with homeowners and business owners to evaluate coverage, identify these potential gaps, and explore available insurance options. You can visit bollinsure.com, B-O-L-L-I-N-S-U-R-E.com to learn more or request a review with our risk management team. Thank you for listening. See you all in the next episode. You have a great rest of your week.
