In 2023 there was a pullback of major insurance companies who were writing homeowner's policies in California when State Farm and Farmers announced they would no longer be offering new policies in the state. In September 2023, Gavin Newsom signed an executive order allowing California Insurance Commissioner Ricardo Lara to issue emergency regulation in hopes of stabilizing the market.
The goal was to maintain consumer protections, expand coverage options and keep coverage affordable. The result of this new regulation has allowed insurers to pass the cost of reinsurance onto the consumer and use "catastrophe models" to set higher premiums. The idea was that if the insurance companies were able to charge more there would be more of an incentive to continue doing business in California.
The changes went into effect on December 30th, 2024, and within a week, Southern California was devastated by wildfires resulting in $150 billion worth of losses, the costliest natural disaster in history. To put it into perspective, there was $108 billion in losses caused by hurricane Katrina. The difficulties these regulations are meant to address have now been compounded by the recent fires and will make it even more difficult for consumers to find affordable coverage.
What does this mean for me if I'm purchasing a home?
As a buyer, the first thing you should do is when you find a home you're interested in purchasing, contact your insurance agent right away. You want to start the process of finding a homeowners policy as early as possible because it's taking a lot longer to get a policy written and bound. Even getting a quote is taking longer because it's harder to find a company that is willing to write policies in California. On top of that, you will likely experience some sticker shock when you get your quote back. Yesterday's premiums are not today's premiums. For example, in 2024, the California Department of Insurance approved Allstate for an average rate hike of 34.1%.
As a seller, how does this affect me?
As a seller, you need to understand that you could have someone from the insurance company visit your home. If you list your home with noticeable deferred maintenance, debris on the roof from overgrown trees or poor defensible space, don't be surprised if something gets called out by potential insurers. This could lead to further negotiation between you and the buyer and could delay the projected closing date.
What are some potential issues?
At the very minimum, expect an insurance carrier to want pictures of the property if any previous claims have been made regarding the home. Someone may come out to inspect the property or do a drone flyover to view the condition of the roof along with foliage surrounding the home. There are simply more steps, creating a longer, more complicated process than in previous years.
There are TONS of reasons a company may decide not to insure a home. I've heard anecdotally that the roof is too old or had moss built up, that the home had a wood burning stove, that there was a broken-down car on the property, or that the electrical panel was outdated. I've even had one client get denied coverage from his long-time provider because he had filed two minor claims that he decided not to pursue.
Because obtaining homeowners insurance has become increasingly difficult and expensive, California Association of Realtors has added a contingency to the Residential Purchase Agreement specifically for insurance. Prior to this change, securing an insurance policy was included as part of your inspection contingency. Now the two are differentiated, allowing a buyer to shorten your inspection contingency if desired and maintain protection if it takes a bit longer to get a policy bound.
Moral of the story
Insurers want to write policies on well cared for, updated properties being purchased by people who have minimal claims history. With underwriting becoming more stringent, you may have to do some shopping to find a company that is willing to cover you at a cost you can afford.
