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Julie (0:05)
Welcome to the risk rundown, our episode on replacement cost of luxury properties. So today we have our renowned Willy Hammond with us who is our internal uh risk management loss uh mitigation expert and of course my co-host Tyler Banks. Thank you for joining us,

Tyler (0:26)
Julie. This is going to be a good one.

Willy (0:28)
Yeah, I'm glad to be here, Julie. Whatever I can do to help.

Julie (0:31)
All right, so Willy, we're going to do a little um rapid fire question for you. What most people think versus what reality is. So Tyler, you want to kick us off?

Tyler (0:41)
Sure. So Willy, luxury features are just cosmetic.

Willy (0:45)
False. I mean, there's a lot of different levels to that, but I I will say luxury features, whether we talk in a, you know, a very high-end theater room or whatever it is, even kitchen, custom cabinets, etc. are very expensive. Um, luxury features escalate the fastest when it comes to rebuild costs.

Julie (1:11)
All right, next one. Most people think the purchase price reflects the real real value of the property.

Willy (1:15)
Sometimes true, sometimes false. You know, let let's say that there there's 100 acres added to the property right now. You're buying the land. So now the house is probably cheaper than you bought it for. But the other way it it is more common where you pay 5 million and the replacement cost is eight because it has to account for everything inside the house. So I would I would say false.

Tyler (1:41)
All right, next one. We get this on the daily basis, Willy. Most people think insurance will cover it all.

Willy (1:47)
That one's not true at all. You know, you you have to be involved with your insurance policy, right? You need to look at the contents of your house. Everything escalates in costs from the paintings to the carpet to the furniture, antique furniture, etc. And the replacement cost of the house just keeps going up.

Tyler (2:08)
So, Willy, you know, back to ensuring to value, right? What are some things our clients can do to make sure that they're ensuring to value? Is there is there a common, you know, uh, inspection period that clients should be should be doing it every 3 years, every five years? You know, what do you recommend for our clients to make sure that they're properly insuring their their properties and their assets to value?

Willy (2:32)
Insurance, when it comes to the house, I mean, the biggest thing on some of our more high net worth clients is they're constantly remodeling the home, right? Whether they're updating the kitchen, whether they're adding a new theater room, whether the golf simulator, right now there's new technology, so we're we're making it better. We're making it nicer.

By the way, Tyler wants that. Tyler wants the golf simulator.

Making sure that your insurance agent knows, hey, I did redo my entire theater room and it cost an additional $200,000 or whatever the number is, right? if you truly don't do anything to the house, I think it's maybe a three to five year plan, you know, to have it looked at.

Um, but then the other piece is, has there been any large catastrophic events that could affect my house in the area? Do I live in an area that is booming from a construction standpoint to where now costs of construction have gone way up?

The biggest thing when it comes to contents though, and you know, I I I I preach this one a lot, it's take a have a either have a professionally done or do it yourself with your your phone is take an inventory of your home.

A lot of times people they don't they don't have it right. They they they've never done a true inventory. They try to say that they're going to remember what's there. Walk through with your phone and just video and and speak out loud. Hey, that's a, you know, a table I bought I inherited and that's an antique and this is the living room and you can and you can see and it has a you know whatever two couches, three chairs, a theater, whatever it is.

Because when the claim happens and everything's gone, you're going to have a hard time remembering what you had. And the insurance company doesn't just write a blank check. If you have a million dollars in contents coverage, you're not just getting a million dollar check. They they're going to say, "I need you to prove that you had a million dollars in there."

Well, the picture's worth a thousand words, right? A video. I mean, if they have extensive things, I recommend doing a a professional inventory. And a company will come out with videos and cameras, you know, they can document everything on a spreadsheet. They can break it down. Some things need to have appraisals, right? high highend artwork and jewelry, you don't you don't just go buy another one off the shelf, right?

It was commissioned by somebody or it's very rare. So, you know, if they have a Picasso, we'll go to the top end of the spectrum here and they paid whatever, let's say, a million dollars for it, but 20 years have gone by and now the similar Picassos um at auction are now, you know, 5 million, $10 million. Well, now you're underinsured or you're not insured to value at all. So, you need to get a new appraisal done based upon market value.

So some things are, you know, are very fluctuating on market value, but the, you know, my big piece when it comes to contents and and inventory is at the bare minimum a video taken by yourself, walking through the home, opening drawers, showing what's in there.

Part of it's for your own peace of mind. Part of it is when you have to explain something if there is a catastrophic event.

Tyler (6:02)
Just this morning, Willy, I sent you a client who was a little concerned with the increase in the value of the replacement cost of his home. He bought the home in 2016 for 1.6. He feels like he could rebuild it for 3.1 and the replacement cost from the from the carrier came back at 4.1. Uh why why such a disconnect between, you know, what the client thinks he can rebuild it for versus what it's really going to cost to rebuild this home?

Willy (6:30)
So, this one has two problems, right? Number one, you have an owner builder, you know, and an owner builder always thinks they can do things cheaper because they're not charging them, you know, they can say that they're charging themselves a profit, but they're not. They're they're they're saying they're going to use the old plans. This house was whatever that is 30 years old. They're not going to use the old plans.

The other problem is is your example was it was Dallas and and Dallas and Texas in general is very um is escalating quickly and ever since co when a lot of people left more expensive areas especially lockdown areas and I'll just you know California they've moved to Texas.

Construction costs in Texas have gone astronomical in the last 5 to 10 years but when somebody hasn't moved in a long time. They still look at it as my house cost 1.6 now I could redo it for three. Well, there's a lack of skilled labor in Texas because they're building everywhere. Um it, you know, it there it's it all breaks down to a supply and demand issue.

Julie (7:36)
You know, I think that at one point when um inflation was really high and to your point, you know, a market value of buying and selling a home is completely different than replacement cost value, right? And that's a conversation that, you know, I know that all three of us have probably had on a continuous basis with many of our clients that it's a difference, right? There's a big difference between market value and replacement cost value.

Um, for one, to your point, supply and demand on a a market value, but also there's a lot of things that go into a replacement cost of a home that people don't think about, right? Oil prices, right, is a big thing, not only with the transportation of materials, but PVC piping and a whole bunch of other stuff. And then also other things that are happening across the world, right? So can you kind of talk about a little bit about that about the supply and demand of the supplies?

Willy (8:26)
If we have a hurricane in Florida or an approaching hurricane, especially a wild hurricane season where if we have multiple storms kind of coming back to back, the cost of plywood goes up 25, 30, 40%. People are buying plywood. As their windows blow out, what do they do to cover the hole in the house? They nail up a piece of plywood.

So now the the the cost of plywood goes up and it's hard to find and they you can't hardly source plywood in the in the southeast. Petroleum products are in everything from plastic, you know, from your window to your sink to everything.

So, when there's a war or something that causes petroleum, the prices of petroleum to go way up, once again, you see home prices go up based on the availability of how petroleum is in a lot of different products.

Tyler (9:21)
So a, an article came out recently that said that about 3/4 75% of the people that lost their homes in the Eaton and Palisades fires were underinsured meaning that they is there's a huge gap in in re in rebuilding these homes after a catastrophic loss like this. So the issue of of underinsurance and you know what clients should be aware of when it comes to underinsuring their home and why you know doing an inspection on these homes is so important.

Willy (9:51)
Well, and you know, a lot of those houses, I mean, I I will say a lot of those houses that were underinsured are more middle market carriers that don't do inspections for one. Maybe nobody's done an a replacement evaluation of the house and all of a sudden it's way underinsured, right? And now they don't know what to do because they can't rebuild it.

Um the higher value the the insurance company carriers that are more for the high net worth homeowners they do try to get out there and do these because they're trying to cut that off right they're trying to understand because they want to gather the premium based on the true value of the house.

If the house is insured for five and it goes back to Julie's example that the true replacement cost is eight so I mean under insurance is a real problem and unfortunately people don't understand it until until they have a claim until there's a catastrophic event that how causes it.

So, people should really evaluate their insurance yearly. I mean, part of this comes back to making sure you have a nice licensed agent broker that understands the market and understands how things work and to read the policy and to understand, hey, do I have any buffer? Is there a 150% is there 125% do I only have exactly this amount and can I rebuild my house for that?

Tyler (11:20)
There's a delicate balance between overpaying and underinsuring, right? I mean, that that's what these clients number one concern is like I don't want to overpay for insurance, but also you don't want to underinsure it because in the event of a loss, that's where underinsurance really kind of, you know, hits these clients in their pocketbook.

Willy (11:38)
100%. And and people, you know, there's also myths out there, right? I'll never have to replace my foundation. That That's one of them. And I still hear push back on that. If you look at those palisades houses after that fire, every one of those foundations is it they're it's ruined, right?

And there's not an, you know, an engineer alive that would say, you know what, that foundation's probably fine. The heat of the house was astronomical. And the foundation might be too old that now the building code doesn't stand up, so it has to be replaced anyways.

But, you know, so there's a lot of little things that might, you know, nothing's going to happen to this and nothing's going to happen to that. Well, you know, these bigger and bigger wildfires or the hurricanes where we're getting, you know, huge storm surge that's just knocking houses completely down goes to show that everything has to be replaced.

So, you need to take a comprehensive look at what what my house is and what would it truly cost to rebuild it.

Julie (12:39)
That's why it's so important that these replacement cost evaluations should be part of our risk management strategy, right? And it that that is part of what us as an agent should be doing. Is there any other major things that um clients should be thinking of in order to be able to mitigate the risk of something large happening uh a catastrophic event happening to their home.

Willy (13:03)
I'll touch a little more on the you know the largest insurance claim and the most the claim that happens the most and the most expensive a lot of times blindsidiz people but it it's water damage. It's domestic water too and it's not flood damage. It's it's the water line to your toilet breaks that your sink line breaks your ice maker breaks.

That's seems to be a very common one. And it never happens when you're standing next to it, right? It happens when you're away on vacation and then the water flows for 2 days, 24 hours, whatever it is. And it's astronomical to see, you know, because now it's destroyed the cabinets cuz everything got wet, the floor, it went through the floor and ruined your theater room in the basement, etc.

So, the the water shut off valve is is a must-have for almost every carrier these days. And what it does is it senses water flowing and it turns the water off. So that way from a huge claim it becomes a relatively small claim. I can go down a rabbit hole on that one, Julie.

Julie (14:04)
Well, we could go down that rabbit hole all day, Willy, but I'm unfortunately we're running out of time. Thank you so much for joining us. As always, we always uh have a wealth of knowledge leaving our conversations and you are such a big huge resource for not only our clients but for us at here at Alliance.

So, thank you so much for joining us. Um, Tyler, it's always a a joy to to be your co-host. And so, I just want to thank you both for joining our risk rundown. And as always, stay safe and stay protected. See you next time.

00:05 — Welcome & episode overview: replacement cost of luxury properties
Julie introduces the Risk Rundown episode, outlines the focus on replacement cost for luxury homes, and welcomes Willy Hammond and co-host Tyler Banks.

00:41 — Myth vs. reality: Are luxury home features just cosmetic?
Willy explains why high-end features like custom kitchens and theater rooms significantly increase rebuild costs and escalate faster than standard construction.

01:11 — Does purchase price equal replacement cost?
The team discusses why market value and replacement cost are often very different, especially for high-value properties with extensive contents and custom features.

01:41 — Will insurance “cover it all”?
Willy addresses the misconception that insurance automatically covers everything and explains how rising costs for contents and materials affect coverage adequacy.

02:08 — Ensuring to value: How often should homes be reviewed or inspected?
Willy shares guidance on inspection timing, remodeling disclosures, and why frequent updates are critical for high-net-worth homeowners.

03:38 — Why home inventories matter for insurance claims
The conversation highlights the importance of documenting contents through video or professional inventories to support claims after catastrophic losses.

04:53 — Appraisals for fine art, jewelry, and collectibles
Willy explains why high-value items need updated appraisals and how market fluctuations can lead to significant underinsurance.

06:02 — Why replacement cost estimates are often higher than expected
Tyler presents a real client example, and Willy explains the disconnect between perceived rebuild costs and carrier replacement cost calculations.

07:36 — Market value vs. replacement cost: supply, demand, and inflation
Julie and Willy discuss how inflation, labor shortages, oil prices, and global events impact construction and rebuilding costs.

08:26 — How natural disasters drive construction material costs
Willy explains how hurricanes, wildfires, and global events cause spikes in materials like plywood and petroleum-based products.

09:21 — Underinsurance after catastrophic losses
The team discusses data showing many homeowners are underinsured after wildfires and why inspections and evaluations are critical.

11:20 — Balancing premium costs and adequate coverage
Tyler and Willy discuss the challenge clients face between overpaying for insurance and the financial risk of underinsuring their homes.

11:38 — Common myths: foundations, total losses, and rebuilding realities
Willy explains why foundations often must be replaced after fires and why homeowners underestimate total rebuild requirements.

12:39 — Replacement cost evaluations as part of risk management
Julie reinforces why replacement cost reviews should be a core part of an overall risk management strategy.

13:03 — The most common and costly homeowner claim: water damage
Willy explains why domestic water losses are so frequent and how smart water shutoff valves can dramatically reduce claim severity.

14:04 — Final thoughts: staying protected
Julie thanks Willy and Tyler, closes the episode, and reminds viewers to stay safe and stay protected.