Insurance coverage options expand

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High value, $1 million or more homes are the norm here on the East End, even in today’s so-called depressed real estate market. But just because somebody has the money for that type of real estate doesn’t mean that he or she is not going to be concerned about insurance coverage should a Katrina-like storm swamp the South Fork.

When one starts listing what can be impacted as a result of a natural disaster, it’s easy to see that there are lots of things that can keep homeowners up at night, not the least of which is an insurer’s inability to pay claims. Or 
the sinking, dread premonition 
that the company may deny such a claim.

Standard homeowners policies are often criticized for the coverage provided in the event of a major catastrophe, and can often fall short when coverage is needed for fire, lightning, explosion and theft. Things are a little different in the high-value home market which has largely been served by three major insurers—the Chubb Group of Insurance Companies, Fireman’s Fund Insurance Company and the AIG Private Client Group, a division of the beleaguered American International Group.

While each of these carriers has a very good reputation when it comes to paying claims, these insurers have a potential liability of their own as each is publicly owned. Since the businesses are publicly owned, the company stock trades on the market and management must eventually answer to shareholder demands, which oftentimes can be in direct conflict with the needs of policy owners.

Seeing opportunity in the high-value home market, but uncomfortable with the differences between shareholders and policy owners, Ross Buchmueller—a former president of AIG Private Client Group who was also once a Chubb executive—left to form PURE Risk Management LLC in Florida in 2006. Mr. Buchmueller’s goal was to create a specialty insurer offering customized personal coverage without mandatory hurricane deductibles for high-value homes in high-risk coastal areas such as Florida, North Carolina and New York.

A major flaw with the competitors’ model, according to Mr. Buchmueller, is that the pressure to produce profit conflicts with policyholder needs. Instead, in creating PURE, he drew from the traditional mutual insurance company model, in which policyholders also possess certain ownership rights such as the ability to elect the management of the organization and to participate in a distribution of any net assets or surplus.

The company’s specialized coverage is predominately offered in the $1 million to $10 million home marketplace. Under the traditional mutual model Mr. Buchmueller has used for PURE—which has most often been largely applied to life insurance carriers—policy holders are considered “members” whose goals are more closely allied with that of the company, thus removing the profit pressure found at shareholder-owned companies.

Demand for coverage such as that provided by PURE is growing as the major insurance carriers announce intentions to drop homeowner coverage for those in natural-disaster prone areas. This type of coverage-drop is especially prevalent in coastal areas, such as eastern Long Island, which tend to have a lot of high value homes.

In January 2006, Allstate, the largest provider of homeowners insurance in New York State, announced it would no longer offer new policies in the eight county downstate areas, including Long Island, New York City and Westchester County. Afterward, other companies followed suit stating the need to reduce exposure from mega-claims that might result from high-level storms hitting coastal areas.

Some of these major carriers do offer specialized coverage that can be added to a standard homeowner policy, often with no deductible, but this type of coverage is created on a case-by-case basis and can be withdrawn if the insurer decides to leave a geographic market.

Though not a perfect system—coverage with a company like PURE or one of its high-end competitors is quite pricey—at least there are insurance options available for higher risk homeowners. But some policy holders have reported that by switching to the so-called luxury insurers, they’ve actually saved money on their coverage, as the common carriers continue to raise rates for those in what they determine to be disaster-prone areas.