My basement is a moral hazard

My sister has always said that I have bad water karma.

On the Saturday evening when Hurricane Irene’s leading edge hit Chester County, Pennsylvania, we lost power.  The next morning my son came up from the basement and announced that we had six inches of water and rising.  When power went down the night before, our sump pump had switched to battery backup.  With the ground super-saturated by rain even before Irene, the battery got fully drained in less than a day, something that had not happened before in the sixteen years we’ve owned the house.

A friend has a camper with its own generator.  He brought it over and turned on the genny.  We connected several extension cords together and fired up the sump pump.  Within a few hours the pump had most of the water out of the basement, leaving sodden carpets, underfloor, drywall and insulation, plus various shallow puddles in places where the underlying concrete was uneven.  Anything that had been on the floor was soaked through — my good cordless drill, a robot vacuum in the workroom, my late mother’s 1970s-vintage oft-repaired Electrolux canister vac, some paper records, a box of photos (including pictures of my wife Amy and I meeting with ex-President Reagan in his Beverly Hills office), and a lot of other mixed stuff, some trash and some valuable.

When the power came back and the light went on, I went down with a shop vac and started vacuuming the carpets.  A few minutes later, my daughter came down.  “Mommy says please don’t save the old carpets.”  (My wife Amy was excited about the idea that insurance would replace our dingy old carpets, much-stained by kid-related incidents.)  I kept vacuuming away, brought down portable fans, and tried to save as much as I could.

When the insurance folks called back, we learned that our policy does not cover flood damage to any personal property.  So no reimbursement for vacuums, power tools or sodden photographs.  Plus a low overall limit on reimbursements.  If the house burned down, we’d get paid for everything, probably to the tune of the better part of a million dollars.  For a flood, max of $10,000.

A few moments thought made clear why.  If not for the various limitations, once the water hit six inches I could have just gone downstairs and begun to take things off shelves and pitch them in the water.  Want to replace that big old tube TV with a new flatscreen?  Put it in the water.  Ditto the scanner, that expensive oriental rug with the weird colors, perhaps an obsolete but expensive camera or two.  Heck, if everything had been covered without dollar limit, I would not have had to wait for the hurricane.  Our house sits in a bathtub of compacted clay soil.  Spring and fall, our sump pump runs every ten minutes, 24/7.  Without the pump, our basement would be four feet deep in water most of the year.  Just unplug the pump and within a day we’d have a $50,000 claim.

The reason for the insurance company’s limitation on what gets replaced, and for how many dollars, is what economists call moral hazard.  Absent economic risk, I would have no reason to behave either morally or prudently.  I tried to save the carpet even before I knew the limits of our coverage, but if I had an unlimited checkbook and knew it, would I have bothered?

The moral hazard issue was at the heart of the 2008 financial crisis, and is a central aspect of much of the current failure of the 20th century mixed-economy model.  When you first insure the banks, bankers continue to behave prudently.  The Federal deposit insurance looks cheap, even virtually free.  But a generation or two later, the bankers are deep into the punchbowl, wearing lampshades for hats and swinging from the chandeliers.  It costs ten trillion or so to bail them out.

Ditto the quasi-public companies insuring everyone’s mortgages (Fannie Mae and Freddie Mac).  For thirty years, interest rates on insured mortgages cost 1/2% less, because of the implicit government guarantee of the two government-supported entities (GSEs).  Then Congress and those who run the GSEs went nuts.  Standards were lowered, CEOs took home tens of millions of dollars in pay, Congressmen got big campaign cash, and ultimately the taxpayer ended up with a half-trillion dollar bill.  (And no end in sight.)  The total cost of bailouts to tomorrow’s taxpayers is much greater than the present value of all the prior interest-rate savings over the years.

I like my insurer, State Farm.  They have always treated me fairly.  I have no resentment about the limitations that prudence places on my coverage.  I wish a similar logic had governed government policy over the last generation or two.

And I’m buying a generator.


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