People often think they can get something for nothing, and while this can be true on rare and isolated occasions, it is not true in the long run, and it is not true reliably.
This is nowhere better illustrated, perhaps, then in how people often relate to insurance, warranties, and property management companies.
Insurance
As a rule of thumb, I don’t trust insurance companies. And it’s not because insurance companies are evil – in fact, I’ve known several people who work in them and would claim otherwise – it’s because there’s an inherent imbalance of power between them and you.
One of the best examples of this power imbalance comes from the pandemic. Believe it or not, but “pandemic insurance” is a real thing, and many people (mostly businesses) had pandemic insurance policies prior to 2020. So what happened when a pandemic actually started? Those insurance companies denied all of the pandemic insurance claims, of course! And you think to yourself, “Well, those businesses can just sue the insurance companies, right?” I wish it were that easy, but suing your insurance can be a long, arduous, and expensive process, and for many companies, they didn’t have the funds to even stay in business long enough to do that; meanwhile, the insurance companies had an army of lawyers to try to defend themselves, or at least delay the process longer than their claimants could endure. The entire profit model of insurance is aiming to earn more money than you have to pay out in the long run, so it’s only natural to try to pay out as little as you are legally obliged, and preferably nothing.
I once developed this terrible pain in one of my toes, but I had no idea why. It lasted several weeks, so I went to the doctor and went through several tests, including x-rays. No cause was truly figured out. Sure enough, a month or two later, I got a message from my insurance saying that they thought this must be somebody else’s fault, and they didn’t want to pay anything. This was pretty frustrating, so I described the situation in as formal of detail as I could, emphasizing the fact that I had no knowledge of how I could have developed the pain and was therefore seeking a medical explanation. Fortunately, they backed off and paid, but I talked to another friend, who said the same thing had happened to his girlfriend. Apparently, this sort of “prove it” attitude had become quite popular! [The pain in my toe eventually went away on its own. I still only have suspicions about what caused it, but it has never returned]
And to be fair, insurance fraud is huge, so I totally understand that procedures have to be in place to prevent fraud and protect insurance companies from being ground into a pulp by grifters. I do get it. But damn, the whole industry has a pretty terrible reputation.
In another anecdote, this house I live in was damaged pretty badly in a hail storm over the summer, so my roommate has been working with the insurance company to cover the cost of a new roof. The insurance company basically doesn’t want to pay for it, opting for patching things up instead, even though the roof is old and is better off being replaced. Apparently, it’s the only home insurance in town that has a reputation for only covering a fraction of these sorts of things, which sucks (and my roommate will probably switch insurances because of this), but it’s a tough anecdote that sometimes, insurance doesn’t want to pay out, and there’s usually nothing you can do to fix this that doesn’t cost more than the problem itself.
Warranties
I’ve mentioned him a long time ago in this blog, but I remember working with a manager (not directly over me) whom I secretly named something like “Captain Middle Class”. He was always on the phone in his office arguing with the contractors working on his house and his car dealership. It has ever since been emblazoned in my mind that homeownership and new cars sometimes bring more headaches than society wants you to believe. What’s funny is that his car warranty didn’t cover the rear frame from rusting out after only a few years. What?! A warranty that somebody doesn’t want to honor?! No way! They promised!! So of course course they gave him the go-around for a month or two, and I never did hear anything about whether they agreed to fix it or not. Car dealerships are notorious for promising you the world to get you to spend tens of thousand of dollars on a new car “because of the warranty”, but once you’re on the hook, it’s only advantageous for them to wriggle out of doing anything. But hey, free oil changes! [/s] And what are you going to do? Spend a year or more trying to take them to small claims court to maybe, potentially get $4,000 or less? Caveat emptor!
And of course, that doesn’t mean “never buy a new car”. It’s just important to realize that there is an inherent power imbalance between you and dealerships. You should know from the outset that they will probably try to avoid honoring the warranty, especially if it costs them a lot of money: you don’t run a profitable dealership paying out for every claim. Moreover, dealerships are usually just franchises, who work with the manufacturer, and so are at the mercy of the quality of the manufacturing. There’s a lot of tension between dealerships and manufactures as a result. If they can’t win against the manufacturer, they will certainly opt to win against you.
The big questions to ask are how much are you paying, and what are you expecting from your warranty? If you really think that you can experience $5,000 worth of headache and the warranty will just magically whisk that problem away, you might want to reconsider. The greater the expectation, the greater the requisite caution.
Property Management
On a note very similar to insurance, I’ve known far too many people who want to own investment property, sometimes because some hustle bro on YouTube told them it was the winner’s way to riches. But trusting your multi-six-figure property in the hands of a company you maybe pay $500/month to (at the high end, I believe) is a huge risk in its own right, and is roughly analogous to insurance. You might think the contract protects you, but you’d better be damn sure when you are playing with big money. I still remember a conversation with a friend who wanted to buy a first-time house specifically to use as an investment property. I warned him that it’s quite a dedication and his response was, “Oh, but I’m planning to hire a property management company, so I won’t need to worry about the details”. Are you absolutely sure about that? Have fun. It sounds great in theory, but the house is still ultimately your responsibility; buying “insurance” in the form of property management doesn’t negate that. Property management companies don’t make money putting even just $10,000 into your house when you only pay $6,000 per year (again, at the high end). Sure, they often have a pool of resources from which they can pay out for handling the really bad cases (at least initially), but the name of their game is to put as little money and effort as possible into the process of renting your house out, and they’re NOT going to upgrade your countertops. They often have good, efficient processes for managing the rental side of things, and the legal and technical infrastructure to make it happen, and so this can potentially be a net positive for you, but you don’t get something for nothing. And if you want better service? It comes at a higher price, which eats into the “gains” these hustle bros say are so easy. Again, I will never say it can’t work, but I think people frequently operate on the assumption that you can pay a small token fee to a company and consequently never have any problems at all, and this line of reasoning is deeply flawed, in my opinion.
On a side note I’ve probably written before: the owner of an old townhouse my parents used to rent ended up selling the place because of a bad experience he had with a different property, which incurred something like $10k+ of damage. I don’t remember all the details, but it was apparently really bad, and that guy decided he was done with investment properties at least partially because of that incident. Again, that doesn’t mean investment properties can’t be profitable, but if you asked me on a scale of 1 to 10 how interested I would be in owning an investment property, I would laugh and walk away. But it does depend on your temperament, and some people do well. I just prefer my software money and not having to give a shit about something that could easily turn into a six-figure nightmare. In fact, structuring my life in such a way as to give fewer shits is a critical element of my life strategy [or at least, to give fewer shits about the things that get in the way of living a good life. It’s a work in progress].
Concluding Remarks
This actually goes back to my designation of certain types of possessions as “protective”. The goal is to not need them. They are there in case you need them anyway. So, treating insurance, warranties, and services like property management as something that you “use” that just magically protects you from everything is missing the point. Now, I’m not saying you shouldn’t claim on those things you are perfectly within your rights to claim, but I think the general perspective on these things is wrong. In fact, it’s bizarre to me that replacing a windshield is something people have come to expect from car “insurance”, even though the cost of this is simply baked into the monthly. Technically, replacing the windshield should be your responsibility – it’s not like, oh my gosh, my tie rods are going bad, I should call my insurance! – no, you take your car to a mechanic and pay them to replace the tie rods. Insurance is for when serious damage happens, or you hit somebody, not a couple hundred dollars. But somehow, they started throwing out token items like windshields, which really muddies the expectations and the understanding of how insurance really works. And health insurance is its own insanity that I haven’t really talked about, and it’s bizarre to me that people don’t just expect to pay for a doctor’s visit, which is only outrageously expensive because the cost is hidden within the overall price of insurance and people have come to expect this, eliminating the market force of competing on price. Ugh. [Seriously, though, health insurance is a different beast, of which there is far more to say than I could say here, and I only comprehend a fraction of it anyway]
Insurance, warranties, and management services can be great risk-limiting tools, but they absolutely do not eliminate risk, and they shouldn’t be an excuse for inviting additional risk into your life. The companies offering these will always have more leverage than you do. There’s a time and a place for calling in the cavalry, but they don’t rush in for free.