As more Californians see their homeowner's insurance policies non-renewed and are unable to find new coverage, they are being forced to turn to the California FAIR Plan, whose coverage is less comprehensive and significantly more expensive.
Staring at rates that are hundreds of percent higher than their old homeowner's policies, many homeowners are looking for alternatives. Some people who have been diligent about socking away savings and/or have significant stockholdings, are considering the once unthinkable: forgoing the insurance coverage and instead self-insuring their home.
They may figure that they have never had a homeowner's claim and if they did, they would be able to pay for it. As well, they would sock money away in savings and invest the money they would normally pay in premium every year, building it up to use in case of damage to their home or theft.
But, while this sounds intriguing, anyone considering going this route needs to think about worst-case scenarios. While you may be able to afford the repairs if a tree falls and damages your roof or a burst pipe floods part of your downstairs, if your home burns to the ground, the cost of clearing debris and rebuilding your property and ensuring it's up to new code could result in a massive hit to your finances.
Even if you have a few million dollars in the bank and stock holdings, paying to rebuild your home from scratch would put a massive dent in those funds.
In other words: The costs to rebuild would pale in comparison to the premiums you are paying for your homeowner's insurance or FAIR Plan coverage.
Also, there is a reason that many homeowner's insurers have pulled out of California: the losses from wildfires in the Golden State. For example, the insured losses from two of the largest wildfires in 2020, the LNU Lightning Complex Fire and the Glass Fire, totaled $2.34 billion and $3.07 billion, respectively.
The liability factor
Even if you think that you could cover a total loss, homeowner's insurance policies also include personal liability protection. The typical policy will have per occurrence claims limits of up $500,000 to pay for damages or injuries to third parties, such as if your dog bites someone or someone injures themselves on your property.
This part of the policy would also cover damage or bodily injury caused by family living in your home, such as your children. This coverage may cover legal fees, settlements and court judgments.
You'd be self-insuring those liabilities as well if you don't have a homeowner's policy. Keep in mind that legal costs can quickly escalate into the hundreds of thousands of dollars, not to mention any judgments you have to pay.
You may think, "I'll just buy an umbrella policy to cover potential liabilities." Such a policy can provide a higher liability claims cost limit of $1 million or more.
However, in order for an umbrella policy to be viable, it needs to provide coverage over and above an underlying policy, like a homeowner's policy's liability portion.
Also, the higher your net worth, the more potential liabilities you are likely to have, particularly if you also sit on boards of directors.
The point is that a homeowner's policy brings additional value to you and offers more coverage beyond just repairing your home after a covered claim.
And while you may be able to foot the bill for water damage that ruins your kitchen floor and cabinets, if your home is completely destroyed in a fire or if you are sued for millions of dollars after a guest is injured on your walkway, you'll be glad you have homeowner's insurance.
Give us a call if you'd like to discuss your options