I live in a state with stupidly expensive state-sponsored earthquake insurance. To get a 5% deductible, I basically have to buy 1/10 of a house over my lifetime... but the chance of losing my home to an earthquake over that timeframe is only 1/500. But then I noticed that for half the cost, I could buy a policy with a 20% deductible on the full value, and then a second policy with a 20% deductible on 20% of the value. To effectively get a 4% deductible.... at almost half the cost. Because of the lower deductible, the premium on the first policy drops by half. The second policy is 1/5 of that.
The payout with these two new policies is as good as one policy with a 4% deductible. For example, if the home is destroyed, then I collect 80% of the home value from policy 1, and another 16% of the home value from policy 2. So, in total, I get 96% of the value, just as in a 4% deductible plan. Neither policy is paying out any more or less than it would have if I had just one of the two new policies. So I am not causing any harm to either insurer by having the other one. Right?
Generally speaking, double-insuring things is legal. For example, I can insure stocks or mortgages that I don't own, and I can have 15 life insurance policies. Nonetheless, I have to ask: is there any potential legal issue with doubling up on earthquake insurance? Is it somehow illegal to attempt to avoid getting ripped off by the state?