Did you know that California is in the midst of a home insurance crisis? If you own a home, this article is for you!
Like dominos falling, the largest insurance carriers in the U.S. are exiting stage right from California. State Farm and Allstate announced they will no longer write new homeowner insurance policies in California, and others are following their lead by leaving the state or pulling back coverage in wildfire risk areas. This is a big deal folks!
Farmers Insurance seems to be the last holdout in California, as they are still insuring detached homes at the time of writing this article. However, they are no longer insuring townhomes or condos in the City. Detached home policies are becoming expensive, depending on their fire risk rating. If you live in 92127, that risk is considered to be very high.
A growing number of our San Diego home buyers are experiencing difficulties finding coverage and experiencing soaring rates. So what’s going on and what can you do about it if you are denied insurance?
Is it me or is it getting hot out there?
Wildfires have burned nearly 10 million acres of forest and destroyed 39,000 homes in California over the last 5 years. Subsequently, insurers paid a record $15.4 billion in losses in 2017, and $13.6 billion in 2018 in the aftermath of the two most destructive wildfires the state has seen.
At a time when it’s more important than ever for homeowners to have adequate insurance coverage, many carriers have exited the market. As a result, many California residents are left with little to no options for homeowners insurance — particularly those with homes in areas most at risk of wildfire damage.
Back the bus up: Why is this happening now?
After two straight years of insurers paying out $1.85 in losses for every $1.00 of premium earned, the California Department of Insurance approved 71 rate increase requests from 50 different companies in 2019.
In California, this process is made more difficult by Proposition 103. This 1988 law requires insurance companies to justify rate increase requests for future wildfire losses based on their average annual wildfire losses over the last 20 years. Given the fact that wildfire losses have increased exponentially in recent years, Prop. 103 is asking insurers to take on more risk than they’re able to compensate for in premiums. As a result, insurance premiums have soared and a record number of residents were denied policy renewals since early this spring.
Government program to the rescue?
The California FAIR Plan is a state-mandated program designed as a last-resort option for homeowners struggling to find coverage on the private market. It is available to all homeowners, to ensure that anyone can get coverage. Premiums under this plan have increased by 219%. This plan is a short term solution, as it’s funded by levies on private insurance companies that do business in the state. With the largest insurers exiting the state, that means there will be less money to fund this plan. As the risk of catastrophic wildfires increases, that risk falls disproportionately on the FAIR Plan. If a severe fire season renders the plan bankrupt, the tab will fall on those insurers still doing business in the state, which is another reason suppliers are backing away from the California market.
Additionally, rebuilding costs have soared, up roughly 34% since the start of the pandemic due to ongoing supply chain issues and labor shortages. This further complicates matters.
Help! So what can you do?
Contact your insurer if your policy is canceled or nonrenewed and ask if there are any property upgrades or steps you can take to reduce your home’s risk and keep your policy. If you are planning on selling, make sure you check to see if your property is in an area that will require a Defensible space inspection with the Fire Department to make sure it’s in compliance with the defensible space requirements of 2021. This could entail clearing out trees, brush within 100 feet of your home.
Take steps to fireproof your home. Taking steps to reduce your home’s wildfire risk not only makes your property more attractive to insurers, but it also can earn you discounts. The Wildfire Prepared Home initiative is a great resource. You also may be eligible for discounts if your home is in a Firewise community.
Contact a local agent. It’s important to contact a local agent who’s familiar with San Diego's unique insurance situation.You can find local agents here or ask us. We have experience in helping our North County clients find plans.
Contact the California FAIR Plan. The California FAIR Plan is the state’s last resort insurance program for San Diego homeowners who are denied coverage on the private market. It’s important to note that FAIR Plans are often costly and usually don’t cover liability for water damage or theft, so you will need to supplement the gap with other insurance agencies.
Consider an E&S carrier. An excess and surplus (E&S) carrier is an insurance provider that's specialized in insuring high-risk properties that are considered too risky for traditional insurers. There is a catch, as these policies are not backed by the California Insurance Guarantee Association, which means that if your house is destroyed and the insurer doesn’t have the funds to pay out your claim, you could be left footing the bill yourself.
Consider one of these suppliers recommended by our preferred lender:
Costco, AAA, or USAA: (with USAA, you must be current or former military or have a family member in the military who is a USAA member that invites you to join.)
Additional suppliers include Pacific Specialty & Bamboo Insurance. Of course, an insurance broker is the most qualified person to direct you to the best insurance options in your area.
Don’t let your escrow fall apart!
As a San Diego real estate team, we work hard to anticipate issues and prepare our homebuyers and sellers for a smooth escrow process. Lenders require that home buyers obtain homeowners insurance as part of the closing requirements of the loan. By understanding the difficulty in obtaining homeowner’s insurance in today's market, we can steer you to the right people who can help, and avoid potential pitfalls like falling out of escrow.
Have questions? Please reach out. We would love to help.