To Buy or Not to Buy–That’s the Question!

In Florida, and despite Homeowners rates declining due to legislative reforms, an alarming number of homeowners are considering going without insurance coverage. Those with mortgages may not follow through on their inclination but, Florida’s Insurance Consumer Advocate said the total number choosing to not buy home coverage could be close to 20%.

This is remarkably consistent with my agent friends telling me they’re fielding this question from clients, more than ever before. One agent even said he was going without wind coverage on his own home in Coral Gables.

So… I thought an article from JS contributor David Thompson might be helpful to those fielding such questions. It can certainly be used by any agent to provide a more complete perspective to clients who are literally asking if they should forego home premiums and instead, self fund the substantial exposures of home ownership.

Feel free to share far and wide.

To Buy or Not to Buy Homeowners Insurance!

By David Thompson, CPCU, AAI, API, CRIS

In a recent report, the Insurance Information Institute (III) stated that countrywide about seven percent of homeowners take the “self-insurance” route, while in Florida that number is 15 percent. The Florida Insurance Consumer Advocate said in a recent interview that the number was as high as 20 percent.

Self-insurance can take many forms, from totally dropping the homeowners policy to removing the peril of windstorm, to removing contents coverage, and more. No matter the choice made by the customer, the end result (in my view) is they are not self-insured but instead just have no insurance. The savings might sound good when the decision is made, but after a claim life is not so rosy.

Some readers knew the legendary John Eubank who had one of the best “insurance brains” of anyone I’ve ever known. His insurance career spanned more than five decades, and John had a way with words. In most classes I watched John present, he worked in a saying that was classic: “The bitterness of no coverage is remembered long after the sweetness of low price is forgotten.”

An actual example illustrates the problem with so-called self-insurance. About six months ago a mile south of where I live, I stumbled across a house that was “fully involved” with fire. There were three fire trucks present, dumping hose after hose of water on the house. A tanker truck pulled up to resupply the other trucks. Fortunately, the residents got out safely but the lady who was the owner was crying, “My cats…my cats.” I ride my bike by that house several times a week and today it looks just like it did the day of the fire. It’s clearly a total loss, having no roof left and only the perimeter walls remaining. I’d estimate the replacement cost to be in the vicinity of $300,000. The property was listed for sale “as in” for $175,000 and just recently sold for $80,000. A few months ago, I stopped to look at the house from the street and a neighbor was walking by and she said, “I don’t think they had any insurance.” If they did drop their insurance, the reason why is unknown. Perhaps they just thought it was a good idea and a way to save money, or perhaps they actually didn’t have enough money to pay for the coverage and pay for food; they had to make a choice. As bad as this situation is, consider the nearby residents who now live next to an eyesore. What has this done to their property value?

I see several different types of folks who decide to self-insure:

• Those with significant financial assets who could easily pay the cost to rebuild their house, replace all the contents, and pay for temporary housing for up to a year. Fellow “Insurance Nerd” Rob Norberg mentioned in a TV interview, “My customer called me, saying he had enough money to totally pay for rebuilding his house and enough money to do it two more times.”
• Those who in reality can’t afford insurance. My sister helps an elderly couple with no family anywhere close to Florida. Their total combined retirement income is only a small Social Security check and the monthly amount is about $2,000. They have very little in a savings account and the reality is they have enough money to barely get by paying utilities, taxes, and living costs such as food. They dropped their homeowners policy which was over $3,500 a year and my sister “made” them get a liability policy.
• Those who might have some savings, but not enough to pay for a major property or liability loss but are upset over the increasing premiums and make a decision to drop all coverage, drop windstorm, or reduce coverages. In reality, they can afford the insurance but decide to drop it. Some of these people will gladly spend $6.00 a day at Starbucks, pay $80 or more to get their nails done, are members of country clubs, eat out multiple times per week, take vacations a few times per year, or in my case visit Einstein Brothers Bagels at least four times per week and spend $6.20 on a bagel and iced tea…something I can fix at home for about 50 cents. Think about that, $6.20 four times per week is $1,289 per year! Some of you will hate me when I tell you that my homeowners policy premium is $1,262 per year for an HO-5 policy! (New house discount, concrete block, multi-policy discount, and full wind mitigation credits.) Personally, I’ll start fixing my own bagel and iced tea before I cut my insurance back.

A recent article published by National Public Radio (NPR) addressed the soaring cost of homeowners insurance. The article mentioned a public official who consulted with his insurance agent about the premium increases and the agent was quoted, “She said honestly, my recommendation is: pay off your mortgage and self-insure yourself.” The customer did just what the agent recommended, too. Admittedly, we don’t have all the facts but that recommendation from an agent leaves a lot to be desired in my book.

From the perspective of a consumer (and we are all consumers) these are factors to consider before dropping insurance or making coverage reductions.

• Lenders often fall back on the Fannie Mae Selling Guide when a customer has a loan. Without any insurance, coverage will be force-placed at a significant cost. A policy excluding windstorm coverage is not acceptable. Building losses must be settled on a replacement cost basis, not ACV. The maximum deductible permitted is five percent of the coverage limit. These requirements limit the option for people with a mortgage to self-insure.
• Losses are unpredictable as is the severity of losses. No one wakes up saying, “I’m expecting a claim today and I don’t think it will be an expensive loss.”
• Florida has a long history of hurricanes. Names like Andrew, Frances, Jeanne, Charlie, Ivan, Michael, Ian, and Wilma are only a few of the hurricanes to make landfall in Florida. Sadly, there will be more hurricanes and some of them will be major storms causing billions and billions of dollars in damage.
• Do you really have enough money set aside to cover a total loss of your house and contents plus the additional living expenses you might incur for a year or maybe longer? In my case, my home is insured for about $350,000. Add in at least $50,000 in contents (likely more), and my cost to rent a place to live for a prolonged period of time, and I’m looking at a potential loss in excess of $400,000. Do I have enough money set aside to pay for that loss from my pocket without causing financial harm to myself? If I don’t, then self-insurance is not an option in my view. If I do have that much money set aside, do I want to “drain” my brokerage account or IRA with money I have worked to save for decades?
• It’s not just hurricanes that cause significant damage. Forbes Magazine stated that the “average” fire damage claim including cleanup and restoration is $12,900 with many homes costing a lot more. Water losses around the country are the number one cause of “non-cat” losses and those losses can cost tens of thousands of dollars to replace and restore.
• This article gives statistics about claims frequency, stating that every year one in twenty homeowners submit an insurance claim.

From the perspective of insurance agents:

• We should explain to customers what “self-insurance” really means. Remember, I call it, “No insurance.” Use some of the data in the articles referenced here for that education process.
• Ask customers if they actually have funds set aside to pay for a loss and, if they have to use those funds, how will it affect them financially going forward.
• Always quote and recommend the best coverage.
• Offer options to reduce some coverage as opposed to totally dropping coverage and explain the consequences of making such a decision.
• Never recommend dropping or decreasing coverage; offer options and as an E&O defense attorney I work with says, “Put the ball in the insured’s court.”
• Break the cost savings down into, “how many dollars per day” they are saving. Compare that to Starbucks, bagels, manicures, country club memberships, and other money consumers spend on discretionary items.
• Document, very well, any decision by the customer to drop or reduce coverages.

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