Dan's Papers - July 18, 2008 - Insuring Waterfront Property: The Ins and Outs

For many people, the ultimate achievement is having that waterfront mansion. However, as so many out here on the North and South Forks of Long Island know getting home insurance with packages for wind, hurricane and flood insurance has become an expensive and complicated challenge.

Christopher McDonald, a principle owner of Amaden Gay Agencies, a firm offering insurance solutions since 1890, says you should first read your home insurance policy and know it well. Secondly, make sure your home is insured for its current replacement value, (that is, should it burn down or be destroyed, the money it's insured for will be suffice to replace the home as is.) And lastly, know your hurricane clause, which most policies now have post hurricane Katrina. You need to understand that deductable amounts change once a storm becomes a named hurricane, usually at level two.

Home insurance is affected by distance from the water, with most companies only covering homes 2,500 feet from tidal water, such as oceans, bays and the Great Lakes. However, as of just as recently as last week, new rates and conventional policies are available for homes as few as 250 feet from tidal water.

A valuable and needed insurance in Suffolk County is flood insurance, which is guaranteed up to $250,000 and written by the Federal Emergency Management Agency (FEMA). However, FEMA has three categories in which it places homes. The least expensive, and most desirable rating, is for Flood Zone X, with a premium around $388 for the $250,000 of flood insurance. The next rating is for Zone A. This category is defined by hazardardous elevation and proximity to designated flood areas. The least desirable category is Zone V, which is for actual negative elevation (like New Orleans), where that same $250,000 of coverage can cost thousands of dollars. There are umbrella policies available, with $250,000 deductibles, meaning you need a FEMA policy for the first $250,000.

McDonald explained that some very high end companies, such as Chub, Fireman's and AIG Private Client, will insure homes close to tidal waters as part of a package deal with other high end properties in order to spread the risk. An example of this might be a package that includes the home in Aspen, the home in Greenwich, and the home on Further Lane, plus the ten cars, the boat and maybe even the jet. But not everyone fits into that category. However, there is still another option - the secondary or excess market - which costs more money because a company like Lloyds of London comes in to evaluate the risk and gives a quote. This is, perhaps, the costliest option.

The rumor has been that since companies like Allstate quit Suffolk County post Katrina, it would become impossible to get homeowners insurance to satisfy mortgage commitments to lenders. Not true. While rates have gone up, companies are now coming back into this lucrative market with new products structured to satisfy mortgage commitments while being somewhat affordable. Competition is good, since it steadies rates and may even bring them down. McDonald stressed that many factors go into calculating an insurance rate, such as a home's distance from fire hydrants, materials it's made of, elevation and, of course, location to tidal waters. The big fear is not water damage, because most policies don't cover floods, though the additional FEMA policies do, but wind damage potential. Proximity to tidal water effects potential wind damage levels. That's why, stresses McDonald, it's important to know your hurricane coverage clause because your deductable can go from $2,000 to a percentage of the value of your home, perhaps as high as $16,000, just because the storm is a level 2 hurricane, (Katrina, in New Orleans was a level 4; In Biloxi, Mississippi, it was a level 5.)

Many local residents can't understand why their homes that are nowhere near tidal water are labeled to be located in flood zones. In essence, due to the low elevation of most of Long Island and its proximity to either an ocean or a bay, complicated mapping systems used by each insurance company dictates the label to help manage risk in the whole area.

Good insurance is good risk management. McDonald says it's smart to bring in your policies to firms to go over them with an expert. It costs nothing to know what coverage you have, what you need or what you can get. It's better to know now before it might be too late.