Self-insurance for homeowners

Mary sent me an email asking about an alternative to high insurance premiums.

"We have a home in Shingle Springs. Our existing insurance company informed us they would not renew our policy. The only insurance that is available to us is the California FAIR Plan which we find to have minimum coverage and high premiums. We don't have a mortgage and are considering going without fire insurance. What is your opinion?"

Opinions are like noses, we all have one and they are all different. Individual insurance requirements will also be different. Life is risky. Insurance may not reduce the risk of an unwelcome event but helps compensate when stuff happens. Self-insurance is when a homeowner assumes some or all of the risk that a conventional insurance policy would cover.

An increasing number of homeowners are frustrated about the increasing cost of their homeowner's insurance, if it's available. Many major carriers have stopped doing business in California or have applied the brakes. Going without is a serious step and should only be considered after all other options are reviewed with your trusted insurance agent.

According to the Insurance Institute, the percentage of homeowners without insurance has been increasing with California having the largest percentage of uninsured homes. Although it's an attractive thought of saving a few thousand bucks every year, owning a home is the largest investment most folks will make in their lifetime and carries responsibilities.

It's understandable why homeowners are considering parting with their insurance provider. Insurance companies have been dumping thousands of longtime policy holders simply due to where the home is located. A homeowner's home hardening and defensible space efforts account for zilch if a home is within a designated high wildfire area. For many rural property owners, the Cal FAIR Plan is the only insurance option.

Insurance advertising assures homeowners they can't live without full insurance coverage, but most can. The odds are greater of winning the Fantasy 5 Jackpot than of a homeowner losing their home to a fire. There are 15 million homes in California. According to Cal Fire, over the last five years there were 25,000 buildings destroyed by fire. That's tragic but statistically the odds of losing a home are slim and on the decline. California's fire prevention strategies keep improving as do firefighting equipment and response times.

Losing a home to a fire is horrific and, like airplane crashes, should be avoided. These tragedies are, however, rare. The overwhelming majority of the 1.5 million daily airline travelers arrive safely at their destinations and 99.89% of homes are never lost to a fire.

Unlike car insurance, there is no legal requirement for homeowners insurance. Homeowners with a mortgage, regardless of the amount, will be required by their lender to have fire insurance. The amount and type of coverage is detailed in the lender's security documents. Typically, lenders require full replacement costs. These are the most expensive and comprehensive policies.

In El Dorado County 40% of homes do not have a mortgage. These homeowners have alternatives when deciding the type of insurance policy, the amount of the deductible and whether they should have insurance. Going entirely without insurance may be more of a risk than most homeowners would be willing to take. However, moving from a full replacement cost policy to an actual cost value policy will save thousands of dollars. Over the years the savings add up.

I met Sally at a fire safe council meeting. She shared with the attendees she hasn't had fire insurance in 25 years. The information produced a collective gasp of disbelief from the audience. She then shared that she had calculated her savings at $85,000 in premiums, prompting an enthusiastic applause.

Cal Fire has studied why some homes will survive a neighborhood fire and others are destroyed. Homeowners considering the risk of self-insurance should first conduct a comprehensive fire risk analysis of their home and property. Cal Fire or a local fire safe council may help with a fire safety inspection and suggestions for surviving a wildfire.

Firefighting resources are limited and emergency situations call for prioritizing resources. A few years ago I met a firefighter whose responsibility during a wildfire was to determine which homes were more likely to survive a neighborhood wildfire and worth defending. Properties are also evaluated for safe access and possible retreat. Homes that have natural and man-made obstacles posing a safety risk to firefighters and equipment are passed over for homes that have defensible space, clear views and easier access.

Self-insurance should only be considered when a home's value is less than 35% of the family's net worth. Typically, Americans have 70% of their net worth in their home. Other options may include partial self-insurance by reducing the amount of coverage, eliminating contents and other non-essentials, and increasing deductibles.

If the land value is more than twice the value of the home, homeowners should consider self-insurance. I once had a client with a small lake-front cabin paying $10,000 a year in premiums on a $1million valuation.

Statistically, homeowner's insurance is a poor investment. A lifetime of premiums invested wisely will produce better returns. However, when smoke is in the air … it's reassuring to know that you're in good hands.

Ken Calhoon is a real estate broker in El Dorado County., He can be reached for questions and comments at [email protected].