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Learn moreThe late Charlie Munger spent most of his life as vice chairman of Berkshire Hathaway (BRK.A) (BRK.B) a company built on insurance. In February 2023, at the annual meeting of Daily Journal Corporation (DJCO), where he was chairman, he was asked about self-insurance and answered in a way that worked against his own company's interests. "With one exception, I've never carried collision insurance on a car, and once I got rich, I stopped carrying fire insurance on houses," he said. "I just self-insure. That is the right way to do it."
Becky Quick, moderating, put the obvious point to him: he was the number two at a group stuffed with insurers; why not just tell people to insure everything? "I'd rather tell it the way it is than tell it in a way that helps Berkshire. I'm not going to tell it differently than I think it really is just because it's better for Berkshire. Even though it's bad for Berkshire, I will tell you that if you can afford to self-insure, then self-insure," Munger said.
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He continued, "You should insure against things that you can't afford to pay for yourself." He continued, "But if you can afford to take the bumps, some unusual expense coming along doesn't really hurt you that much, why would you want to fool around with some insurance company if your house burned down?" He was describing people who could write a check for a replacement house. For anyone who could not, his own rule points the other way.
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This ideology has limitations, however: almost every mortgage lender requires homeowners coverage, and virtually every auto lender requires collision on a financed car, so the choice Munger described is unavailable to most people who have not already paid off the asset. Liability coverage is separate again because the exposure is open-ended rather than capped at the value of the thing insured, and it is not a candidate for self-insurance in a normal household. Further, many states around the U.S. require liability insurance to drive a vehicle on the road.
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