How to Overcome California’s Turbulent Property Insurance Market

In the last two years, almost everyone who owns a property in the state of California—be it a primary residence or an investment property—has experienced one of two things as it relates to insurance:

• Coverage loss
• Soaring coverage costs

(And there’s tens of thousands of property owners who’ve experienced BOTH of the aforementioned frustrations.)

In plain speak, sorting out property insurance in California is becoming a real pain in the neck, and for landlords, the soaring cost of coverage is eating into profit margins already damaged by things like rent control and zoning restrictions. 

What the heck is going on?

As you’ve no doubt seen in headlines across your favorite newspaper or social media feed, many big, national insurance providers like State Farm, Farmers, and Allstate stopped writing new policies in the Golden State starting around 2022.

Making matters worse is the fact many “mom-and-pop” insurers no longer feel like California is worth doing business in. 

Between increased liability obligations and out of control bureaucracy coming out of Sacramento, insurers large and small are simply saying “no thanks” to our state’s abundant housing market.

The collapsing supply of insurance providers is wreaking havoc on property owner’s mental well-being—not only are owners scrambling to find new insurers, but when they DO find that new insurer, they’re left with a monthly premium that makes their eyes water. 

What’s wrong with California?

Wildfires are a big part of the problem.

Generally speaking, the toxicity of fire and smoke damage means properties are unsalvageable leaving insurers to cover a total (rather than partial) loss. When parts of our state go up in flames (e.g., the Carr Fire, the Tubbs fire, the Thomas Fire, etc.) insurers are left holding the bag for billions and billions of dollars in liabilities. 

As an example, property insurers in California collected $15.5 billion in premiums from January 1, 2017 to December 31, 2018—but they paid out a whopping $29 billion in claims for the same period.  

Of course, fires aren’t the only issue. We’ve got floods, wind storms, crime (i.e. burglary), accidents (e.g. someone falls going down your stairs), and all the other things that might lead someone to file a claim with their property insurer. 

However, it’s a string of catastrophic wildfires in recent years that appear to be the straw that broke the camel’s back.

Why are the liabilities so high?

It’s not rocket science.

First and foremost, California has more urban and suburban development in red flag (i.e. high fire risk) areas than any other state in the U.S.

Secondly, California has the second highest real estate prices (i.e. property values) in the United States—only Hawaii has more expensive land. 

Thirdly—and perhaps most importantly—building is both cumbersome and expensive in our state. Between environmental regulations, permitting, labor costs, and material costs, repairing (or replacing) damaged property comes with a hefty, hefty bill.

Why not just raise prices and stay?

To be clear, many insurers are raising their prices to offset increased liability risk and choosing to stay in the state.

However, raising premiums is far from straightforward in California, due to Proposition 103. Passed by voters in 1988, Prop 103 mandates “every insurer which desires to change any rate shall file a complete rate application with the commissioner…The applicant shall have the burden of proving that the requested rate change is justified and meets the requirements of this article.”

The burden of proof referenced above requires examining the average historical cost of covering wildfires in California against the total value of premiums collected.

While well intentioned, the problem with this provision is that property values—as well as the frequency and footprint of wildfires—in California exploded in recent years. That means historical averages are no longer an accurate baseline for the present day cost of covering liabilities. 

By being tied to the historical average, insurers can’t increase their rates by enough of a margin to offset the rising expense of their customer’s claims.

So, rather than risk bankruptcy by not being able to meet their customer’s liabilities, insurers are canceling policies and leaving the state in record numbers.

Who’s feeling the pinch the most?

Every property owner in the state is being impacted by the current insurance crisis, but it’s those living in rural areas and suburban areas near what’s called a “Wildland Urban Interface” who are being pinched the most. These are areas with structures built on or adjacent to underdeveloped parklands, woodlands, grassy hillsides, and other natural open spaces with higher than average fire risk.  

(For example, someone living in Malibu, Calabasas Hills, or Whittier is going to feel the insurance squeeze more than someone living in Boyle Heights, Mid-Wilshire, or Inglewood.)

Reducing premiums

From a cost perspective, there are things property owners can do to try and reduce their premium costs including:

• Enclosing eaves
• Maintaining defensible space around their property
• Installing fire-resistant roofing
• Using different construction materials (concrete vs wood)
• Adding basic fire-suppression systems

But, for many owners, those options are more of a temporary salve than a permanent solution.

Keeping things FAIR

An insurer of last resort, the California FAIR Plan “…is available to California residents and businesses in urban and rural areas who cannot obtain insurance through a regular insurance company.”

Though the policies it provides are often limited in terms of coverage leaving owners underinsured, FAIR guarantees that some form of insurance can always be obtained through the state when the private market can’t meet consumer demand.

Underinsurance aside, the FAIR plan is not without its limitations. In the last four years, the number of policies covered by the state jumped from about 127,000 to over 350,000, an increase of 276%. As such, the California Department of Insurance is struggling to keep up with the demand of its burgeoning customer base leading to delays in policy implementation which comes with its own list of adverse consequences, from properties going uninsured to real estate deals failing to close. 

I just got dropped…now what?

The first thing you need to do is pick up the phone and call your insurance provider—find out why your coverage is ending and ask if there is anything you can do to keep your policy (e.g. installing a fire-resistant roof).

If there’s no saving your policy and you can no longer work with your current insurer, jump on the Department of Insurance’s website here to look for agents in your area. Talk to these agents about the options for insuring your home, and see if someone can offer a policy that fits your needs and budget.

Should your search bear no fruit, consider picking up the phone and calling the state Insurance Department directly at 800-927-4357. At a minimum, someone should be able to help you get connected with the California FAIR Plan which is better than nothing at the end of the day.

(You can read more about the pros and cons of FAIR here.)

In closing…

The property insurance market right now is a mess—I won’t try to pull the wool over your eyes.

However, there’s no use in crying over spilled milk—as a property owner, you need insurance to protect yourself in the face of the unexpected. (Moreover, if there’s a mortgage on your property, there’s no way the lender isn’t requiring you to obtain insurance.)  

Use the advice and resources I’ve shared above to find a policy that works for you and your budget. 

And if you find yourself really struggling in your search for insurance, don’t hesitate to contact me at 310-853-0335 or ShannonShue@KW.com. I might not have all the answers, but the chances are good that I can connect you to someone who does. 

Talk soon!

-Shannon