For the last several years, rates for homeowner’s insurance for single family homes have skyrocketed. A few years back, a friend of mine paid about $1,400 per year for insurance. Today, he pays about $28,000 per year—that’s a 20-fold increase. It’s enough to make you ask, “Do I really need this insurance?”
The cost of insurance depends on several factors. Since the primary reason for higher costs has been fire risk, the factors of note are threefold: the type of property, its geographic location (and proximity to fire hydrants and the fire department), and the surrounding terrain.
If you own a new home with sprinklers and fireproof siding made of concrete boards, your risk is far lower than if you own a mid-century home with the original redwood siding and Hollywood shake roof shingles. If your home is at the top of a grassy knoll surrounded by acres of oak woodlands and heavy brush, your risk is much higher than if you live in town across the street from the fire station.
If you have a loan on your home, the lender will likely require you to have casualty (fire) insurance. If you own your home free and clear, you can choose whether to carry homeowner’s insurance.
Homeowner’s insurance policies typically include two types of insurance: casualty and liability. Although you can go without either, you’re taking on a substantial risk. The casualty insurance covers the structure; the liability insurance covers mishaps like the mailman slipping on your driveway or the cost of medical care after your kid knocks out a classmate’s teeth at school (no joke, this insurance covers a broad array of incidents).
As a side note, people who rent a home, be it an apartment or a house, should have a renter’s homeowner’s policy. They may not own the structure, but they do have a home, and a renter’s policy will cover the loss of significant belongings as well as provide liability coverage.
If you have a home loan and your lender requires casualty insurance, if you don’t get it, they will get it for you–and you won’t like the price. Most lenders have a forced order insurance company on speed dial who will insure any structure sight unseen. These policies have outrageous premiums and you’ll be legally required to pay them. This is when the significant rate hikes on your existing insurance policy start to seem reasonable.
If somebody drops the ball and a homeowner with a mortgage doesn’t have insurance, things can get ugly if the house burns down. If the 2,000-square-foot home with three bedrooms and two baths is no longer standing, all that’s left is a vacant lot. The homeowner still owes the full amount of the loan, say $400,000. The lender recognizes that the value of the property is now closer to $100,000. So, the lender can do a judicial foreclosure: selling the property and subtracting the proceeds from the loan total and sending a bill for the remainder. This is one of the many reasons homeowner’s insurance is important.
In 2017, several elderly residents in Redwood Valley owned their homes free and clear and had opted to forego homeowner’s insurance. Then the fires came. They ended up without a home or the means to rebuild one.
In my book, the only people who should consider going without homeowner’s insurance are those who could lose their home without it having much of an impact on their overall financial health or standard of living.
If you cannot afford premiums, then you definitely cannot afford to lose the property. It’s one of those unfair conundrums in life. So, before you abandon homeowner’s insurance, talk with your financial advisor and accountant. If you think homeowner’s insurance is expensive, try going without it.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years. He is the president-elect of NORBAR, but the opinions expressed here are his and do not necessarily represent NORBAR.
