8 July 2020

Insurance for Second Home or Vacation Home Owners: What Do High Net Worth Clients Need?

Owning a second home is more common than many Americans expect. A second home may be used as an alternate residence during part of the year or serve as a vacation getaway for the owner and their friends or family. It may also be rented or leased as an income-generating property.

All of these situations pose unique challenges for the homeowner, including that of finding appropriate insurance coverage for both their primary residence and their additional dwellings. Insurers well-versed in high net worth customers’ questions, needs and expectations can provide them with a more satisfying insurance relationship.

The Rise of Second Home Ownership

In 2018, fewer than 5 percent of American adults under age 65 owned more than one home. Among these, 30-49 year olds were most likely to own a second home, according to Alexander Kunst at Statista.

The rate of second home ownership has risen slightly in recent years, assisted in part by a corresponding increase in homeowners who own their homes outright, having paid off their mortgage.

As of 2017, 37 percent of U.S. homes were owned free and clear, writes Brenda Richardson at Forbes. Paying off a mortgage frees these homeowners to continue building wealth and to look into the purchase of a second home for vacation use, as an alternate dwelling or to place on the rental market.

Second home ownership has also begun to reduce the number of vacant residential properties nationwide, a problem that peaked during the Great Recession. In a healthy residential market, the number of vacant houses stands at 2 percent or less, writes Richard Florida, Ph.D., CityLab cofounder and senior editor at The Atlantic. Neighborhoods in which most or all of the houses have an owner see less crime and better property values — whether the owner lives in the house year-round or not.

With the rise in second home ownership comes a need for insurance policies that offer clear, comprehensive coverage of multiple dwellings. Although some homeowners insurance policies cover a second home, says Rebecca Lake at SmartAsset, others do not. And while embedded homeowners insurance is gaining popularity, it is by no means the norm.

In the case of second homes that are also large homes, homes with additional outbuildings, or homes with features such as swimming pools, even a homeowners policy on the primary dwelling that purports to cover a second or vacation home may offer inadequate protection.

Rentals, Vacation Homes and Other Abodes: What Do Customers Need?

Second homes pose a number of unique challenges for insurance customers. Whether the home is used for a vacation space, a second living space or as a rental, it needs insurance coverage — and its owners need to understand why that coverage is essential.

Protect Homes Without Occupants

Second homes of all types pose problems for insurance companies and their customers. While the issues in each instance vary, one common concern is that the second home may stand vacant or unoccupied part or all of the year.

Vacancy is hard on the physical structure of a home. Weather, animals and other factors can quickly damage a building with no one present to prevent or mitigate that damage. For this reason, vacant properties are often excluded from coverage even where a policy exists, notes David Miller at Miller Public Adjusters.

Yet unoccupancy, or a second home that is maintained but not lived in year-round, can pose similar risks. A broken pipe or a fire that would quickly be addressed if someone were living in the building may cause substantially more damage if it is not discovered for several hours or days. Theft and vandalism also pose greater risks.

“All kinds of things could go wrong if no one is minding the property,” says Lynne McChristian, communications consultant at the Insurance Information Institute.

With current shelter in place orders keeping more people in their primary dwellings, damage to unoccupied structures is likely to increase, writes attorney Michael L. DeBona. While his prediction focuses on closed businesses, vacation and second homes may suffer similar effects, particularly if more states decide to limit movement by prohibiting visits to second or vacation homes within the state.

Understand Unique Ownership Arrangements

When multiple properties are in play, ownership can become complex as well. For example, a home may be occupied by the customer and their family, but legally owned by a limited liability company (LLC), writes Patrick Wraight at insurance markets directory MyNewMarkets. The LLC may be owned by the customer, or it may be a family LLC. Some properties are owned by a trust.

Homeowners used to letting the trust, LLC or other family business handle tasks like placing insurance may be unaware of the complexities posed by unique ownership arrangements for second dwellings. Here, an approach that educates both homeowners and the staff who manage that trust or family office can help insurance companies reach all the relevant decision makers effectively.

Prepare for the Weather

Finally, second or vacation home policies should be tailored to the location of the dwelling. A study by the National Association of Realtors (NAR) found that while many vacation homes are clustered in areas known for mild weather, others aren’t.

For example, many vacation homes are currently located in states and counties known for harsh seasonal conditions, including Massachusetts, New Jersey and Michigan, says Lawrence Yun, chief economist for NAR.

Severe storms, heavy snows and other weather can take its toll on a house, particularly if the house is not occupied during the most meteorologically fraught times of the year. An insurance policy for these dwellings must account for weather conditions, which may differ dramatically from those experienced at the customer’s primary residence.

Reaching Owners of Multiple Homes

Because high net worth individuals have more complex assets, they typically have more complex insurance needs as well.

“Those insurance needs aren’t going to be met by any mobile app or cookie-cutter agent. They need someone who will act as their risk manager. They need an advisor, an advocate and an expert,” says Wraight.

Tailor Outreach to the Type of Second Home

To help owners of second homes embrace an informed approach to insurance coverage, insurers should focus on the needs of specific types of second homes or their locations.

For example, for second homes or vacation homes in earthquake or flood zones, focus on ensuring that the dwelling has appropriate coverage. For second homes that are condominiums or co-ops, focus on what the building policy doesn’t cover, as well as on the most common types of damage that can occur in these dwellings.

In his article at Brick Underground, Gotham Brokerage president Jeff Schneider says that “one of the most common claims [his] firm processes involves water damage from bathtub or sink overflows into the apartment below, which can inflict thousands or tens of thousands worth of damage.”

Condo or co-op owners who use the dwelling as a second home or vacation home may not understand the risk until it manifests. By providing information early in the process and tailored to condo and co-op owners, insurers can help these customers obtain the coverage they need before damage occurs.

Owning more than one home creates challenges, including the challenge of placing proper insurance coverage. By understanding where second home owners may become confused or lack information, insurance companies position themselves to build a stronger, longer-lasting relationship with these high net worth customers.

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