Are you willing to GO NAKED???

The four seasons in California are Earthquakes, Fires, Floods, & Mudslides. What do all four of these have in common? insurance claims! That in turn leads to higher premiums or even cancellations of policies. Why? because insurance companies get really upset when they actually have to pay out on claims. After all they are in the business of making money and not paying it out.

I’m sure you’ve read about the effects of State Farm’s decision to suspend issuing new policies in California. Chubb and other high-end carriers are also reducing their exposure to claims by non-renewing. People are getting notices of HUGE rate increases. Buyers often can’t get reasonable rates for insurance coverage and are facing the dilemma of paying high premiums or the consequences of going without insurance: “going naked.” Sometimes the insurance carriers will only write a policy if certain very expensive repairs are done (like enclosing eaves or replacing a roof or updating the entire plumbing or electrical system). If the homeowner doesn’t do the required work, the carrier will cancel.

But what if the homeowner can’t afford to do the work or doesn’t agree that the required upgrades are necessary (the ole, if it ain’t broke don’t fix it…) This causes people to really consider “going naked”.

If there’s a mortgage, cancelling insurance or leaving premiums unpaid is not an option. After all the bank also owns the home. They don’t want to take any risk on their equity! Lenders are automatically informed of any unpaid premium or notice of cancellation and then they can place a policy on the property to protect their asset. These premiums are typically higher than premiums a homeowner would pay to his own insurance company.

In reality, the only people who can go naked are those who own their homes free and clear or buyers paying all cash. They can go without insurance or “self-insure” by putting aside the money that would have gone towards premiums. Then if nothing happens, they can be ahead. However when faced with natural disasters and severe weather events, robbery, or a trip and fall, they are their own “deep pockets”. Those who own their homes free and clear are usually older people with more limited income or those inheriting property from a parent. They are the least able to take the risk of self-insurance. But few realize that they are taking the total risk. Compare the situation if there is a 70-30 % mortgage: the most that a homeowner can lose is 30% or their equity in their home. If it’s a greater loss than that, the homeowner can walk away. The rest is the loss to the lender.

An important tidbit for buyers: did you know that there is an insurability contingency? It is coupled with an inspection contingency. If you decide to remove or waive the inspection contingency, make sure that the insurance contingency remains in place until you have bound a policy with a carrier. Did you know that almost all new policies have a clause that gives the carrier the right to cancel within 60 days? And getting coverage after a cancelation is truly impossible.

The moral to this story: now is not the time to change carriers! And unless you are have deep pockets, try to stay covered and don’t go naked!

Photo credit: The Creation Museum