Do you think that your company could do this better at a reasonable cost? How would your company handle a scenario like this internally (an entire data center becomes unrecoverable)?
If you don't have a good answer, it's simply grass-is-greener thinking.
I pay $25/month per a single hosted FogBugz user. I believe you can build in reasonable disaster recovery procedures at "reasonable cost" given these kinds of price points. I don't see any technical obstacles — in fact I think Fog Creek used to write about how they have hot backups (replication, I'd assume) in various geographical locations.
And I do not want to host FogBugz myself, in fact I'm paying exactly for the comfort of not having to plan for failures in the case of FogBugz.
Incidentally, we run a SaaS company. Our disaster recovery worst-case scenario means recreating our services from scratch in any Amazon AWS datacenter on Earth in less than 4 hours. Yes, we have an easier job, because we do not store a lot of transactional user data. But our service is also way, way cheaper than FogBugz.
Honestly, it's not FC vs. self-hosted, it's FC vs. an alternate product.
Preferably one not locate in a hurricane path, flood plain, earthquake zone, fire area, landslide track, or subject to political or economic instability.
Or highly redundant with tested failover paths.
All of which costs money, and still doesn't assure reliability. Look at last week's AWS EBS outage and root cause analysis: the service was brought down by its own monitoring (exacerbating an existing memory bug).
It's not easy. Sandy is the most extreme hurricane to hit NYC in a century (though the second in as many years). NYC is a sufficiently important commerce and financial hub to have excellent services and recovery capabilities, but it still isn't immune to perturbations.
An entire data center is becoming unrecoverable, but they had 3 days of advance notice to pull drives and bring up servers somewhere else. Don't people plan to have redundant data centers?
This wasn't a surprise storm, and it wasn't "more severe than expected" - this has been national news for a while. More it was "eh, we'll be alright, why pay for something and not use it, we'll just apologize later".
The "reasonable cost" is a good point of course. Also relative to what they are able to charge and how that would change their business model. One type of customer might be willing to pay for a more robust service, others wouldn't. Take any garden variety website hosting service where the charge is under $10 per month and try to operate it giving better uptime and charging, say, $20 per month and see your customer base vanish. People expect it to work 24x7 but aren't willing to pay for it. They would rather take their chances.
That said one thing they might be able to do at a "reasonable" cost is simply spread their customer base over multiple data centers. So the failure of one would only bring down a smaller percentage of their customers.
Ironic, given your comment, that FogBugz is $25-30/user/month, and aimed at non-individuals, typically, so teams and above, so a client could easily be paying Fog Creek hundreds or more a month.
If you don't have a good answer, it's simply grass-is-greener thinking.