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Making waves: How to insure an island home

Have you ever dreamed of owning a house on an island, accessible only by boat? Not only is the ocean view a huge benefit, but listing prices often are comparable to those of mainland homes. However, there's one downside that could sink your dream: It's often difficult and expensive to insure an island property compared with a mainland home of similar value.

The insurance risks of island homes

Island homes are subject to a number of factors that can make them more difficult to insure than most mainland homes.

island-home-insurance“Island properties have a lot of exposure to risk,” says Michael Barry, a spokesman for the nonprofit Insurance Information Institute. “Wind damage is one major factor, since island properties have no land buffer if a storm comes through.”

Fire safety is another hazard. “Access to a fire department, hydrants and proper water pressure all go into an insurer’s calculation as to what a premium should be,” Barry says.

Insurance companies rely on the Office of Insurance Services’ Fire Suppression Rating Schedule, which grades communities according to their firefighting capabilities. This rating is a large factor in determining how much a homeowner's insurance premium should be.

In some island communities, flooding also is likely, but flood damage typically isn’t covered by a homeowner’s insurance policy. If a property is designated by the Federal Emergency Management Agency as a “special hazardous flood zone” because of low elevation or proximity to water, the homeowner’s lender will require flood insurance as well, says Bob O’Brien, an insurance broker who has obtained coverage for island properties on the coast of Maine. Without flood insurance, the homeowner wouldn't be able to file a claim for related water damage.

Are island homes insurable?

“Many people, including underwriters, think that any structure on an island is vulnerable to flooding or being toppled by wind at any time,” says Robert Ellis Smith, a publisher and part-time resident of Block Island, off the coast of Rhode Island.“They have never visited the places and see only a speck on a map.”

Some major insurers, including State Farm and Allstate, stopped writing policies or cancelled coverage for many customers with coastal homes, whether island or mainland, after Hurricane Katrina in 2005. In 2009, Allstate cited concerns about hurricanes in dropping coverage for 12,000 customers in coastal areas of North Carolina, South Carolina and Alabama. In 2012, State Farm declined to renew coverage for 10,000 Texas homeowners in coastal counties, even though some of those homes were as far as nine miles inland.

However, some major insurers will make exceptions in cases when someone has several policies with the same company, O’Brien says. “Try to keep your business all with one company if you can,” he says.

Depending on an island’s fire safety capacities, hurricane risk and other factors, some homeowners may be out of luck buying insurance from private carriers. Barry says island dwellers often need to rely on “surplus line insurers,” which are permitted to do business in certain states but aren't licensed by those states. Such insurers, including Lloyd’s of London and Chubb, can take on higher-risk properties, but they don't offer the same level of consumer protection because they don’t fall under a state insurance department’s authority, Barry says.

In some cases, even surplus line insurers won’t cover an island property. In such a situation, homeowners must rely upon Fair Access to Insurance Requirements (FAIR) Plan insurance – a state-run insurer for people who aren’t eligible for private insurance. In Massachusetts, for instance, more than one-third of FAIR policyholders are residents of coastal and island communities in places like Cape Cod, Martha’s Vineyard and Nantucket.

The cost of insurance for an island home

Are island dwellers likely to pay more for insurance than people on the mainland? Not always. In areas with high ratings for fire suppression and a low likelihood of natural disasters, homeowners may not see much disparity.

But where the risks are greater, the rates will be higher. “Depending on how close it is to the water, you may pay about twice as much in premiums as you would for a mainland home of similar value,” O’Brien says.

In addition to the risk level, “the insurer is looking at what it costs to rebuild the home in the event of a total loss,” Barry says. If there's no road access to the island via bridge, the insurer likely will have to pay more for labor and construction because of the added costs to transport workers and materials by boat and barge.

Make sure you talk to your agent in detail about what your homeowner’s policy does and does not cover, and discuss some of the specific risks that you might face as an island dweller. To fully protect your investment, you may want to purchase supplemental flood and wind insurance policies if these risks aren’t fully covered by your homeowner’s policy. To avoid breaking the bank on premiums, consider raising your deductibles to the maximum level you can afford.

Aside from what coverage you need, be sure to talk to your insurance agent about what it will cost, O’Brien says. If coverage for your fantasy retreat is more than you can afford, think twice before picking up the keys.

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