Private Risk Advisor

To Hedge, or not to Hedge….

An interesting question was recently presented on Terri Cullen’s great WSJ blog for her Fiscally Fit column by someone who labeled themselves a “contrarian”. In essence, the post asked: “since the likelihood of losing a home to fire is remote, why bother insuring the home for the full cost to rebuild?”

I don’t think this question is contrarian at all, I think it is fair and logical. Savvy consumers know to beware of insurance “scare mongers”, who would have us believe that the sky is about to fall on all of our homes. Meanwhile, statistics reveal that the risk of a fire totally destroying any single home is remote.  Click here for some good insights, or check this site:  https://www.usfa.dhs.gov/statistics/national/residential.shtm

For those who wish to hedge the unlikely risk of a fire consuming their home by partially insuring the cost to rebuild, the insurance industry has erected significant pitfalls. While these can be navigated, doing so requires careful guidance.

As both a risk advisor and an insurance consumer, I would also describe myself as a “contrarian”. Meanwhile, knowing a.) fire is but one of the losses that can wreak significant damage to my home ( Click this link for a chart showing the leading losses by cause to homes), and b.) the insurance carriers who “allow” consumers to hedge against total losses do so by inserting numerous contract provisions that greatly reduce the amount they will pay after a loss, I would never elect to hedge the slight risk of a total loss by selecting a policy that offers “partial coverage”.  Others I know consider this a risk worth accepting. Neither approach can be judged “right” or “wrong” until after a lifetime of home ownership.

It is always wise to examine risks from different perspectives. In this instance, there is real risk in placing coverage with insurance carriers who so graciously permit you to partially insure your home.