When one home-insurance policy isn't enough - MarketWatch

For the owners of some residences, one home-insurance policy just doesn't cut it.

To get full coverage on their home and the belongings in it, many homeowners with $1 million–plus properties have to sign up for at least four policies. Beyond basic home insurance, they often need policies that pay out for damage their homes may sustain from natural catastrophes, like floods or earthquakes. They also want policies to protect valuables, like an art or wine collection, at home. And most of these homeowners also sign up for home-related policies that protect their assets in case of a lawsuit.

What's more, premiums have been going up partly due to an increase in homeowner claims. For example, high-end insurer AIG Private Client Group says it increased premiums by 2% to 5% over the past two years. ACE Private Risk Services, the high-net-worth underwriting division of ACE Group (US:ACE), says it raised premiums by an average of 4% over the past year.

The more expensive or rare a home, the more complicated the process of insuring it. To confirm a home has the appropriate amount of coverage, luxury insurers will send an appraiser to walk through the property to assess the cost of rebuilding, replacing rare materials or employing skilled workers to restore its unique features, like hand-painted murals. That can lead to an estimate that's 50% to 100% more than the market value of the home — leaving homeowners with higher premiums than they expected.

Insurance premiums for luxury homes vary widely. For example, on a $1 million home in areas where catastrophes are infrequent, a basic home-insurance premium can range from $4,000 to $5,000 per year, including a $2,500 deductible, with the high-net-worth unit of AIG (US:AIG). In high-risk hurricane zones, however, insurance brokers say wind coverage (which may not come with basic insurance but instead is sold as a separate policy) on high-end homes can come with premiums of $50,000 or more per year.

And in many cases, individuals planning to take out a mortgage on a home have no choice but to sign up for extra policies. Lenders will require borrowers purchasing a coastal home at high risk of flooding to first sign up for a flood insurance policy before the mortgage can be approved. Similarly, many lenders will require wind coverage for homes located in hurricane-prone areas before approving a mortgage. In some states, like Florida and South Carolina, buyers often need both flood and wind coverage to get a loan.

Complicating matters, a home's location could make it ineligible for certain types of coverage. Experts say some insurers won't provide wind coverage in risky markets, such as Palm Beach, Fla., and Hilton Head Island, S.C. Others first have to confirm the property is built to withstand a hurricane. Otherwise they'll require homeowners to install hurricane-resistant features.