That upheaval has changed circumstances and lifestyles, sometimes profoundly. And the insurance industry — especially the excess and surplus (E&S) market — is responding by providing or tweaking coverage to meet the shifting needs of its customers. Dwelling fire policies are a case in point.
Typically used to protect residential properties that do not qualify for a standard homeowners form, dwelling fire policies have long been a go-to coverage for dwellings that are vacant, occupied by someone other than the owner, or used as residential investment property, explains Donna Dodd, director, personal insurance underwriting, Burns & Wilcox. The investment property it protected was usually a one-to-four-unit dwelling built or acquired for that purpose and occupied by at least one full-time tenant with a lease. Times have changed, however.
“Now we are seeing an increasing need for this type of coverage for seasonal dwellings with short-term rentals and for previously unrented year round dwellings with longer leases,” she says. “We’re seeing it for modest lake cottages, multimillion-dollar dwellings in upscale resort areas, and everything in between.”
In some cases, property owners who once used their vacation homes exclusively themselves have been forced to rent those properties on a short term or seasonal basis. Similarly, banks holding large inventories of foreclosed and walk-away housing are holding back some of that property and instead renting it out to bring in income, rather than accepting bargain basement prices at auction. These protection needs are usually met within the nonstandard market through dwelling fire policies or hybrid homeowners’ policies tailored to special needs.
For example, the dwelling fire policy usually covers the building, personal property (including furniture and appliances used by others), premises liability (instead of worldwide liability) and loss-of-rental-income from a covered loss (instead of the standard policy’s business-related activities exclusion), says Dodd. The owner needs this coverage even if renters have their own insurance.
The ability to customize forms and write outside the box of prescribed conditions is extremely important in retaining clients whose housing needs shift. Take, for example, a case in which an agent brought Burns & Wilcox an account that was up for renewal involving a vacant, fully furnished home in one state and a more modest, occupied condo in another. It was a puzzling situation until the underwriter learned the homes were owned by an athlete who now was working for another team in another state, prompting him to relocate to his secondary dwelling.
“We moved his primary dwelling coverage to the condo and insured the high-value home as a secondary dwelling while it was put up for sale,” Dodd recounts. “We were able to stay on the risk by eliminating loss-o-fuse coverage — unnecessary since it was no longer the primary residence — and applying a vacancy clause to retain coverage if the property stood vacant for more than 60 days. Once we made the changes, he was able to stay with the same insurer and the agent retained the account.”
The Vacant Property Proposition
“I mostly see vacant homes; more vacant homes than anything else,” says Mike Bodner, personal insurance underwriter at the Burns & Wilcox New Jersey office. Throughout the past 12-to-18 months, he’s observed more homeowners leaving their homes vacant because they want to move but can’t find a buyer.
Vacant properties and secondary rentals tend to require the flexibility of the E&S market. Like Dodd, Bodner stresses the importance of the right mix of liability protections. “Make sure the owner has the proper liability on a primary home,” he advises, “and determine whether it will descend to a secondary home. Sometimes it does. Then limit a vacant home to premises liability to avoid duplicate coverage.”
Vacant homes are often viewed as a less attractive risk than rentals because small problems can go undiscovered for long periods of time, becoming big problems. It is very difficult, for example, to place water and sewer backup coverage on a vacancy, though it is routinely available for a secondary home that is rented.
Similarly, a swimming pool at a vacant home can present a huge, difficult-to-place exposure; indeed, some markets will reject the risk entirely if they can’t exclude the pool. Pool liability is not available as a stand-alone coverage and only occasionally as an endorsement to a policy, Bodner notes. Placement may be a little easier when the pool is part of a rental property, especially if it’s well fenced. But he’s still wary of such a scenario. “Most of the time,” he says, “we suggest the broker or agent explain to the client that pool coverage is not available and have the client sign off that he understands it is not covered.”
Switching a home from vacant to short-term rental status can benefit the owner in other ways, too. For example, a dwelling fire policy was written for a $4 million Colorado ski area dwelling that sat vacant, awaiting a buyer. During the policy period, the owner decided to hire a property management firm to rent it out on a short-term basis. The vacant dwelling fire policy had to be canceled mid-term and rewritten with another carrier on a special homeowners form that included an endorsement allowing occasional rental, says Dodd. In the end, though, the rental property could qualify for better coverage than the same house as a vacancy.
Partners in Placement
Placing these risks requires the kind of flexibility that’s possible only through successful market relationships. One of those is with Atrium Risk Management Services, the San Francisco-based subsidiary of Atrium Underwriters, a Lloyd’s carrier.
Atrium’s strong relationship with Burns & Wilcox allows the broker to underwrite most risks on Atrium’s behalf. A long collaborative history “has built trust and flexibility, which is why we work so well together,” explains Gareth Jelley, underwriter at Atrium.
“We write a lot of vacant property and occupied renters through Burns & Wilcox,” he says. “Despite small pockets of economic improvement in certain parts of the country, the significant U.S. vacant property market looks to be around for longer than we anticipated.”
“Vacant property premium grew 45 percent in 2010 and another 20 percent in 2011,” he adds. “We expect the business to continue growing for the foreseeable future.”
There’s also a boom in rental property, particularly with one-to-four-family properties. “Either it’s an investor buying up property at bargain prices specifically to rent out, or it’s a property owner whose vacant home isn’t selling in this market who decides to get someone in to rent,” observes Jelley.
These days Burns & Wilcox leans heavily on Atrium’s proprietary AU Gold underwriting platform to quickly underwrite, quote, and bind a vacant property policy that meets Atrium’s usual parameters. And if the system doesn’t accept the account? “Accounts that don’t fit can still be written,” says Jelley, “if we like the risk.”