State Farm and Allstate, two of the largest property insurers in California, recently made headlines by announcing their decision to stop selling new home insurance policies in California. This move has raised concerns about new homeowners’ ability to obtain property insurance and existing policies being canceled, especially in disaster-prone areas.
The California property insurance market is facing several challenges:
- Climate change. The frequency and severity of extreme weather events have increased. Over the past decade, the number of weather-related events resulting in insurance claims of $1 billion or more has risen from eight per year in 1980 to 18 per year since 2018. As a response, insurance carriers have either raised premiums or completely discontinued coverage for individuals living in disaster-prone areas.
- Rising construction costs. Another significant factor to consider is the substantial increase in construction costs. Particularly in the Bay Area, the cost of constructing homes can now surpass $500 per square foot, depending on the quality of construction and the finishes chosen. This represents a notable surge compared to the $180 per square foot recorded in 2009. This substantial rise in construction costs has significantly amplified insurers’ economic exposure in California.
For Californians who have been denied or dropped from their homeowners’ insurance coverage, there are a few options available:
- Admitted carriers. The best place to obtain insurance is from a standard admitted carrier (e.g., State Farm, Allstate, AAA, USAA, Farmers) because they are regulated by the Department of Insurance (DOI), and the DOI must approve significant rate increases.
- Non-admitted carriers. If you can’t obtain insurance from an admitted carrier, then you might be able to obtain insurance from a non-admitted carrier. These carriers are less regulated than admitted carriers and have more freedom in pricing. Here is a list of non-admitted carriers: https://www.insurance.ca.gov/01-consumers/120-company/07-lasli/
- California FAIR Plan (Fair Access to Insurance Requirements). For homeowners who can’t find a better option, the FAIR Plan offers basic fire protection without liability or theft coverage and costs more than a traditional policy. If possible, it’s a good idea to add a supplemental policy for the items excluded by the FAIR Plan.
For homeowners concerned about the possibility of their existing policy being canceled, several actions can be taken.
- Read your mail. It is crucial not to ignore any correspondence from the insurance carrier. There are specific timelines and rules governing when and how an insurance carrier can drop a customer. Ignoring correspondence could lead to missing these deadlines.
- Take preventative action. If residing in an area prone to wildfires, take preventive measures for risk mitigation and document these steps to prove to your insurer you’ve reduced risk.
- Don’t rock the boat. Consider increasing the homeowners’ deductible and avoiding making small claims that can be handled out of pocket.
In summary, the California property insurance market is facing a crisis due to the increasing frequency of extreme weather events and rising construction costs. Major insurance carriers like State Farm and Allstate have ceased issuing new policies, leaving homeowners concerned about their coverage options. However, for those who have been denied coverage or dropped by their carrier, a last resort option is available through the California FAIR Plan. Homeowners with existing coverage can take proactive steps to mitigate risks, read mail from their insurance company, and raise their deductible and self-insure for small claims. By doing so, homeowners can reduce the risk their policy will be canceled.