Expert Commentary

Protecting Historic Homes

From an insurance perspective, establishing a clear standard that determines whether a home can be underwritten as "historic" or as a residential unit that is just plain "old" can be a challenge. There are many older homes that have not been updated, are often in disrepair, and are simply regarded as just being old. Sadly, the insurance solutions for older homes that have not been well maintained are few and often only eligible for either a dwelling fire form or an H0-8.


Personal Risk Management
May 2016

The focus of this article is to examine the special challenges and solutions that are available to manage the risks for well-maintained older homes with updated mechanical systems that have been purchased by consumers because they are "vintage" or "historic."

How Old Is Historic?

Many insurance underwriters are eager to know whether the residence was built pre- or post-war. This author recalls being an underwriting trainee who was daring to ask, "which war?" and received the terse reply, "World War II, what else!" from a senior manager. Perhaps coincidentally, the last time frame tracked by US census data for the residential year built is 1939 or earlier. It is worth noting that nationwide, 13 percent of all housing units in the United States were built more than 75 years ago (see Table 1).

Naturally, this percentage varies widely based on geography. For example, in the Northeast, over 23 percent of housing units are older, built more than 75 years ago (see Table 2), and in more established municipalities, that figure is well over 50 percent. Readers who wish to sort the data more locally will find the US Census site to be quite user-friendly.1 Governing.com is another website full of insightful data, including the August 2014 article "The Implications of Older Housing Stock for Cities" by Mike Maciag,2 which features a tool by Tableua that enables the user to examine US Census data for very specific locations.

Table 1: United States Housing Units by Year Built

Year Structure Built
Total Housing Units 23, 740, 329
Built 2010 or later 138, 333
Built 2000 to 2009 1, 901, 165
Built 1990 to 1999 1, 898, 769
Built 1980 to 1989 2, 408, 325
Built 1970 to 1979 2, 821, 188
Built 1960 to 1969 2, 769, 621
Built 1950 to 1959 3, 296, 750
Built 1940 to 1949 1, 827, 479
Built 1939 or earlier 6, 678, 699

Table 2: Housing Unit in the Northeast United States by Year Built

Year Structure Built
Total Housing Units 132, 741, 033
Built 2010 or later 1, 315, 426
Built 2000 to 2009 19, 803, 260
Built 1990 to 1999 18, 512, 067
Built 1980 to 1989 18, 346, 272
Built 1970 to 1979 20, 978, 482
Built 1960 to 1969 14, 626, 326
Built 1950 to 1959 14, 374, 462
Built 1940 to 1949 7, 119, 373
Built 1939 or earlier 17, 665, 365

This data is convenient, as homes constructed during or before 1939 were built using vastly different materials and workmanship, presenting a number of challenges to both home owners and insurers when a covered loss occurs. Of course, whether the mechanical, plumbing, and electrical systems and the roofs in those homes have been updated helps greatly to determine underwriting acceptability.

What Is Your Process?

Asking an applicant for homeowners insurance for the approximate year the home was constructed is among the first questions asked by risk advisers. Having this question answered is not only critical for underwriters, but should be viewed as equally important to risk advisers. Especially when assisting consumers purchasing their first "vintage" home, it is essential for risk advisers to carefully explain that there is no correlation between the market value or the purchase price and the cost to rebuild a historic home. It is a rare home owner who understands the importance of correctly establishing the cost to rebuild his or her residence, and owners of historic homes must become well educated on the importance of establishing the cost that would be required to rebuild their homes.

As Stephen Covey explained in his bestselling book The 7 Habits of Highly Effective People, the second habit in achieving important objectives is to "begin with the end in mind," and the purchase of insurance protection offers a perfect opportunity to illustrate the importance of this concept. Ask an owner of a historic home this question: "If your home were severely damaged by a covered loss, would you want your insurer to provide coverage for the full costs to repair/rebuild using materials and workmanship that are the equivalent of those in your home?" For the few who do not immediately reply yes, ask him or her to describe the features of the home. Ask if he or she would instead be comfortable purchasing insurance coverage that enables the insurer to replace the vintage doors, flooring, molding, and other items that make his or her home distinctive with contractor-grade doors, flooring, and molding commonly available at building supply stores.

Especially for owners of vintage homes, there is usually a very strong desire to obtain coverage that will repair and rebuild their home with materials that are the equivalent of those that are damaged. Establishing those expectations early will facilitate a much more instructive dialogue and enable risk advisers to recommend a coverage solution that will meet those expectations.

Securing Proper Coverage Requires Accurate Valuation

To receive the best possible outcome after a claim, owners of historic homes will want to examine a coverage offer from one or more of the small group of underwriters comfortable with providing the important coverage terms and conditions needed to repair or rebuild a historic home. Such solutions are only available to applicants who agree to an on-site, detailed inspection to accurately establish the cost to rebuild the residence. Risk advisers should patently reject the use of any online or virtual system that estimates the cost to rebuild a residence, as those systems are simply not designed to calculate the cost to rebuild a historic home.

Additionally, it is this author’s experience that home appraisals outsourced by an underwriter to third-party appraisal firms often lack the specialized expertise and greater attention to detail that are so important in establishing an accurate cost to rebuild a historic home. The preferred approach to proper valuation is to work with underwriters that employ highly trained appraisers with experience inspecting and calculating the cost to rebuild historic homes.

As with any specialized service, the level of expertise by staff appraisers can vary widely. Risk advisers should ask to understand the appraiser’s qualifications to properly value historic homes. Inquire about the appraiser’s training in historic valuation and his or her ability to discern between the different species of old growth woods, true dimensional lumber, hand-grained finishes, the wide range of handmade items, and the architecturally significant details that are significant cost drivers when appraising a historic home.

Becca Hunt, AIG Private Client Group’s assistant vice president and a highly recognized expert with strong credentials in historic homes, was approached to explain some of the challenges that occur when appraising the cost to rebuild historic homes. With a master’s degree in historic preservation, Ms. Hunt worked for architecture firms as a historic preservation specialist for 7 years prior to entering the insurance industry in 1999. In her current role, Ms. Hunt contributes her professional and educational experience in historic preservation, building conditions assessments, and fine and decorative arts to the Risk Management Services team at AIG.

In explaining the importance of having specialized expertise in understanding the nuances of historic homes, Ms. Hunt offered the following helpful observations worth considering.

It is very important for the person appraising the home to understand the dates—year built, additions, renovations—so the variety of existing materials and features can be accurately priced. People with expertise about historic homes know how to "read" the physical characteristics and place them in various periods based on construction technology and architectural styles. Most homes are a combination of old and new materials, and replacement cost calculations need to be detailed enough to account for that variety.

It is generally the case that appraisals will be received that correctly identify the year the original home was built, but often are silent concerning the additions and renovations that have occurred over different time frames, which should be properly accounted for in the appraisal process. This oversight illustrates the importance of partnering with underwriters who can provide truly specialized professional expertise when appraising and valuing the unique and historic homes they agree to insure. Once armed with a detailed and accurate analysis of the home’s special materials, features, workmanship, and design, a much more realistic cost to repair or rebuild a historic home can be established.

Secure Important Coverage Enhancements

Once the proper cost to rebuild a historic home has been established, there are only a handful of select underwriters willing to provide an extremely important loss settlement feature that has become increasingly hard to secure—a true guarantee to rebuild no matter the cost required to do so. While many insurers have contract provisions with terms suggesting they will pay the full cost to rebuild, most risk advisers know to be aware of percentage caps that restrict the amount of coverage for a total loss. Even for the select group of underwriters that do not cap this coverage limit, in most states a percentage cap is introduced for states with an increased exposure to catastrophic loss. Selecting coverage from an insurer that authorizes the higher costs to make repairs using like-kind and quality materials and workmanship is just as important. Avoid recommending coverage from insurers with loss settlement provisions that merely provide the cost to make repairs using materials that are "similar" or "functionally equivalent."

The fascinating January 2001 Architectural Digest article "A Phoenix Rises in Montauk—Rebuilding the Historic House of Dick Cavett and Carrie Nye," by Michael Frank,3 chronicles the remarkable efforts provided to a policyholder with unlimited "Guaranteed Replacement Cost" coverage and a loss settlement provision that authorized the use of like-kind and quality materials and workmanship. While a remarkable story, is this not the outcome most owners of historic homes would want to receive from their insurer? A documentary was authorized by the home owner to film the rebuilding process, and the insurer that insured the home was Chubb.

Few owners of historic homes understand that after a covered loss, all repairs must conform with current building codes and zoning ordinances. Identifying with any certainty what those changes may entail would require knowing the scope and timing of a future loss, making it impossible to ever know how much law and ordinance coverage may be needed. The modest 10 percent limit for this protection provided by standard homeowners insurance policies may be adequate for homes that were built not long ago, but this limit will likely be very deficient for homes built more than 7 decades earlier. As a result, risk advisers should counsel consumers of the importance of securing coverage from an insurer that places no limits on the extra costs required to rebuild in compliance with changes in local codes and ordinances.

Many historic homes have detached garages and other historic outbuildings on the property that can be substantial. Quite often, the cost to replace the outbuilding(s) of a historic home greatly exceeds the 10 percent of the dwelling limit allotted by traditional homeowners insurance policies. While the insurers who specialize in insuring historic homes typically provide a higher limit for unattached structures, a home appraisal will also detail the cost to rebuild the outbuilding(s), and those values should be adjusted accordingly.

Of course, owners of historic homes often furnish their homes with similarly historic personal possessions. As a result, risk advisers should make a concerted effort to introduce a professional resource to assist in valuing the personal possessions in the home and outbuildings. Once proper valuations are obtained, it is often necessary to adjust coverage limits for personal contents. Isolating those personal possessions that are antiques, shifting protection for them from household contents to a valuable articles policy, and scheduling either itemized or blanketing coverage is a cost efficient strategy that can also broaden protection.

Preventing Losses

All risk advisers understand that recommending solutions that can prevent or reduce the impact of a loss is even more important than securing proper insurance coverage. This author has noticed owners of historic homes are especially interested in preventing losses. The 2012 IRMI article Personal Risk Management Services: More Than Just Insurance 4 offers a more complete review of the wide range of services and solutions available to help reduce the risk of many residential losses.

Risk advisers are likely aware that historic homes have characteristics that often require taking a different approach to preventing losses. Ms. Hunt offered several good insights on solutions that are helpful in preventing losses in historic homes. For owners who are not open to traditional wired alarm system, Ms. Hunt shared that there have been great advances in wireless burglar and fire alarms that many find unobtrusive. With greater vulnerability to interior water damage from a home plumbing system, Ms. Hunt also recommends installing monitored water sensors and water shutoff devices. And particular attention should be paid to mechanicals and other water or fire hazards located in attics and top floors, as fires or leaks that begin in this area often lead to catastrophic damage throughout the home.

Summary

Owners of historic homes require specialized expertise and protection, providing risk advisers an ideal opportunity to showcase a differentiated value proposition. Having a process that demonstrates the importance of defining the desired outcome after a covered loss helps to explain the critical importance of proper valuation. Armed with a correct valuation from an expert resource, risk advisers should work with the select group of underwriters providing the coverage enhancements most historic homeowners will want after a covered loss. After taking these essential steps to better protect owners of historic homes, the customer experience will be vastly superior if and when a covered loss does occur.


1http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk

2http://www.governing.com/topics/urban/gov-cities-old-housing-stock.html

3http://www.architecturaldigest.com/story/wank-article-022001

4Tim O’Brien, Personal Risk Management Services: More Than Just Insurance, (November 2012). https://www.irmi.com/articles/expert-commentary/personal-risk-management-services-more-than-just-insurance


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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