Size matters: the extensive equipment being installed in new luxury homes signals big opportunities for homeowners insurers.

As the size of the typical house in the United States has increased over the years, so has the amount of equipment it takes to make it comfortable. This presents an opportunity for insurers, which are expanding homeowners coverage to include protection against equipment breakdowns. It's also a challenge to add a specialty coverage that for decades only has been available to commercial clients.

The trend toward larger, more costly homes with expensive equipment can create a coverage gap for policyholders. Homeowners policies typically do not cover most mechanical, electrical or heating equipment breakdowns. However, homeowners have a lot invested in air conditioning, heating, hot water, security and other amenities. One breakdown can surprise a homeowner with a large repair bill.

Critics may mock the largest of new homes as McMansions, claiming they lack style and comparing their outsized construction to supersizing a fast-food meal. They've coined other terms such as "faux chateaus" and "Garage Mahals" for houses with extra bays for RVs and boats. But builders and some planners point out that these homes often are built on smaller lots, can help revitalize older suburbs and generate higher taxes using mostly existing infrastructure.

The real issue for insurers, in addition to the property values and exposures of these homes and their contents, is that even houses which are considered average size by today's standards have a variety of equipment and face new exposures from breakdowns. Since it takes more robust equipment to heat, cool and power larger houses, the owners have a lot more at stake when that basic equipment breaks down.

Increased Risks

How big is the exposure? Think about how much home equipment has changed over the years. The percentage of single-family homes built with central air increased from less than half in 1975 to 85% reported by the U.S. Census American Housing Survey in 2005. Home generators are now common, adding to the risk of electrical damage to wiring and equipment. Deep well pumps, the source of water for homes in many suburban and rural areas, can require costly repairs including excavation and replacement of pumps and piping.

Equipment-breakdown insurance helps fill coverage gaps, but this specialty insurance has long been offered only to clients in business and industry. While business owners have recognized the potential expense and disruption created by downed equipment, homeowners now are realizing the same thing and demanding similar insurance.

Personal lines insurers are responding by adding equipment-breakdown coverage to homeowners policies. The coverage can help a carrier add value, retain clients and compete for new business. Unlike the limited coverage of warranties and service contracts, equipment-breakdown insurance offers broad protection against the unique causes of equipment breakdown, including human error in installing, operating or maintaining equipment. It also can pay for labor and extra expenses.

Yet the trend to add equipment-breakdown insurance for homeowners can present a challenge. Equipment claims are not like other property claims. It takes experience and specialized knowledge of equipment to underwrite the business and adjust the claims. This is important for homeowners coverage, because homeowners are not as familiar as commercial clients with equipment operation, maintenance and loss prevention. A bad claim experience can seriously affect a carrier's brand reputation.

Outsourcing the Coverage

Many property/casualty insurers add equipment-breakdown coverage to their homeowners coverage through specialty reinsurers. The coverage can be offered as an option, but including equipment breakdown as a standard part of a homeowners policy helps spread the risk to make premiums more affordable. The typical cost might be pennies a day, compared with the potential for thousands of dollars in equipment repairs or hundreds for extensive home warranties or service contracts.

Families depend on equipment more than ever before. The exposure for high-end homeowners is even greater. As home equipment becomes more complex, the risk of a breakdown increases and the consequences can be more severe. Equipment-breakdown insurance for homeowners is a way for insurers to add meaningful coverage and distinguish a carrier from the competition. It fills a coverage gap and meets a real and growing need to offer protection for the way homeowners live today.

Key Points

* Large, expensive homes contain a wide range of equipment that can break down, causing costly repairs.

* Most homeowners policies don't cover mechanical, electrical or heating equipment breakdowns.

* Equipment-breakdown insurance fills coverage gaps for homeowners.

Contributor Michael R. Fusselbaugh is senior vice president for strategic business development with The Hartford Steam Boiler Inspection and Insurance Co. He may be reached at [e-mail].

U.S. Homes Getting Larger

As the average size of a new one-family house has increased over the yearn, so has the amount and value of equipment it takes to make it comfortable. Insurers are responding with equipment-breakdown coverage.

1,785 Sq. Ft. 1985

2,266 Sq. Ft. 2000

2,434 Sq. Ft. 2005

Source: U.S. Census Bureau