What’s Going on with Home Insurance?
Photo by Adam Ashtamkar on Unsplash
Two of the largest insurers on homes have ceased writing new policies in California, and it’s making waves in the real estate market. In May of this year, State Farm announced it would no longer sell new home insurance policies in California, and shortly thereafter, Allstate did the same after having quietly paused new policies in California last year. This doesn’t only apply to first-time policies; residents in some areas that are prone to wildfires and other disasters may have their policies not come up for renewal as well, though State Farm has claimed that they will not non-renew based on location. This has homeowners scrambling to find insurance companies that will cover them, often at significantly higher costs.
Why are insurance companies pulling out of California?
While this seems like a recent development, insurance companies have struggled for a long time to cover costs associated with home insurance in California. The scale of disaster-related damages combined with soaring construction costs have greatly driven up replacement costs. As they are also faced with regulatory controls that limit the increase in insurance premiums, insurance companies claim they have to limit new policies to avoid insolvency.
Unlike flood and earthquake insurance, which are separate policies, wildfire insurance is bundled into a standard homeowner’s policy. Consequently, homes in wildfire-prone areas are particularly at risk for uninsurability, but some carriers don’t distinguish them at all. Even areas not prone to wildfires, such as San Francisco, are facing challenges finding policies.
This problem is not unique to California. Insurers are similarly limiting policies in Florida due to hurricane-related damages.
Why is home insurance important?
Finding home insurance is critical in the home buying process if you are financing your home. Banks want to be sure that their investment is covered in the event of damages, so they’re unwilling to lend on an uninsured home. If you purchase a home with cash, you don’t need insurance, but you are left with the risk of losing your investment should anything happen to the home, such as fire, flooding, or other disasters.
Which properties are insurable, and which are not?
Technically, all homes are insurable, but it’s a matter of finding a carrier that will write a policy, and at what premiums. Alie Lopez of ProCo, an insurance broker who is working with Compass, offers the following notes:
Homes with a replacement cost of $2 million and above are the hardest to place. There are only two carriers actively writing in California (CHUBB and PURE) and they will require full packages (i.e., home, auto, and umbrella).
Homes with a replacement cost of $2 million and above that are declined by CHUBB/PURE due to location, claims history or lack of updates will have to be placed with non-admitted carriers such as Lloyd’s of London, Scottsdale, Azguard, Vault, etc. Note that these carriers’ premiums can be significantly higher than others.
Homes with a replacement cost under $2 million still have more options. ProCo has had success with Mercury, Hartford, CIG, American Modern, and others.
Occupancy is going to make a huge difference. Carriers are leaving space for primary homes. Secondary homes and investment properties will also likely have to be placed with non-admitted carriers.
Homes with lack of updates in hard locations can be placed with California Fair Plan. This is the insurer of last resort, but it is an option if all other carriers decline.
What can I do if I can’t find coverage or get a nonrenewal notice?
Brokers like Alie Lopez at Proco (License# 0K34624 / 0H65120; 415.223.7514; alie.lopez@proco.global) establish relationships with multiple carriers, and therefore have the best chance of finding a carrier that will cover your property. The California Department of Insurance has tips on how to find or retain insurance, and how to find an agent or broker who can help you find a policy. Even if you currently have coverage, it’s wise to periodically shop out policies to make sure you’re not overpaying, or at least to know your options.