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, would you know what to do and how to protect your financial interests?

Receiving notice that your insurance company went out of business or left your state is a real risk – especially in some of the most popular coastal vacation destinations.

Risks on both coasts

In Florida, insurance carriers have faced massive losses, primarily caused by hurricanes and high winds. Bloomberg reports that seven Florida property insurance companies went bankrupt in 2021 and 2022 alone.¹ Insurance companies and state lawmakers have blamed lawsuits for driving Floridian’s homeowner’s insurance premiums to the highest in the nation.² And still, several insurance carriers have been operating at a deficit, prompting them either to limit their capacity or simply close their doors.

The west coast is facing similar challenges. With California wildfires increasing in severity and home construction costs on the rise, seven of California’s largest property insurers recently decided to limit new homeowners policies in the state.³ With earthquakes, floods and landslides all threatening the region, there are bound to be further pressures on the cost and availability of home insurance in California.

If you receive the dreaded cancellation notice from your insurance company, one option is to find an independent agent or broker who represents more than one carrier and can help locate alternatives. You might also consider relief from state-run programs. In Florida, Citizens Property Insurance may be less expensive than private insurers, albeit with maximum coverage of only $1 million.⁴ In California, the FAIR Plan is a last-resort home insurance option for homeowners in high-risk areas who have been unsuccessful in the private market.⁵

Conduct your due diligence

Retiring somewhere close to the beach is a dream scenario for many people, but it’s essential to do your homework first. We recommend reaching out to an agent with expertise in your area of interest who understands both the opportunities and challenges of buying a vacation home in the local market.

When budgeting, don’t forget that property insurance may end up being more expensive than the annual mortgage payment. If somewhere like Florida or California isn’t financially viable, consider other areas with beachfronts where insurance coverage is more favorable, such as the Carolinas or the Georgia coast. Just across the border from Florida, Alabama’s Gulf Shores boasts sandy beaches and emerald waters and may offer significantly lower insurance rates.

Protect yourself with the right coverage

Review your insurance policy to ensure that 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 they work 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 affluent

While protecting primary homes and vacation properties is an obvious concern for affluent individuals, there are other insurable risks to think about too.

If you have valuable assets such as automobiles, watercraft and aviation vehicles, plus collectibles like jewelry, fine art and wine, umbrella coverage is a solution to consider. In fact, it’s the primary method some families use to safeguard wealth that has taken years or even generations to accumulate.

Affluent families may be partially or completely unprotected if a catastrophic event leads to a lawsuit, so it is also a best practice to have the umbrella limit aligned with your net worth. That way, if you’re involved in a lawsuit, the insurance is the first to pay, rather than you having to liquidate investments to satisfy judgment. If you have any unique risk factors, such as owning jet skis, young drivers in the family, or being a board member, you might want to use a multiple of your net worth to set the umbrella limit.

We believe wealth preservation is just 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 is a form of risk management that should be considered as part of your overall wealth strategy.

¹ https://www.bloomberg.com/news/features/2024-04-24/home-insurance-with-lax-oversight-hides-florida-climate-risk?embedded-checkout=true
² https://www.tampabay.com/news/florida-politics/2024/01/08/florida-insurance-crisis-lawsuits-legislature-desantis-regulators/
³ https://www.bankrate.com/insurance/homeowners-insurance/carriers-exit-california-home-insurance/#why-are-insurers-limiting-new-policies-in-california
⁴ https://www.insurancejournal.com/news/southeast/2024/01/17/755891.htm
⁵ https://www.cfpnet.com/about-fair-plan/

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