Insurance Challenges and Changes
Obtaining homeowners insurance has become an increasingly difficult proposition in California and other high risk states, as many insurers have stopped writing new policies and are sending non-renewal notices to existing homeowners. The escrow process during a purchase allows 17 days as a standard timeframe for buyer due diligence, which is often focused on property inspections, loan processing and an appraisal. However, obtaining quotes for insurance is an important yet sometimes overlooked aspect of that due diligence. With insurance companies becoming more risk averse given natural disasters, wildfire and localized flooding over the last few years, it is all the more important to confirm availability of insurance quickly. Every property presents a different scenario, whether the property is a condo, stick built home, rural property on acreage and also whether the property will be owner occupied, a 2nd home or used as investment.
As a recent example, I just helped clients close escrow on a 1bed, 1bath condo in Morro Bay, CA. They had sold a small apartment building and were using 1031 exchange funds to purchase this 1983 built condo as an investment. Even though it was a cash purchase, the close of escrow was delayed until the buyer could obtain insurance coverage which was not nearly as easy as anticipated. After being denied by no less than 5 different insurance companies, these clients ended up getting coverage with CA Fair Plan, which is intended as California’s insurer of last resort. Their annual premium was just under $1,200 (not as bad as I was expecting), however the buyer had to get additional insurance to cover liability protection. That is because a FAIR Plan policy protects your home for the risk of fire, and will satisfy a mortgage company’s requirement that your home be insured, but it doesn’t cover theft, flood, earthquake, hail, vandalism or personal liability. That being said, I have also had clients on acreage who have paid up to $10,000 a year for Fair Plan coverage.
There may be improvements coming, albeit slowly. The insurance commissioner for CA recently announced a package of executive actions aimed at improving insurance choices and protecting Californians from increasing climate threats while addressing the long-term sustainability of the nation’s largest insurance market. According to the Department of Insurance’s website, “The actions announced today are aimed at addressing problems fueled by climate change and being experienced by states across the nation including global inflation and increased costs for rebuilding that have led to several insurance companies pausing coverage for writing new homeowners and commercial insurance policies, non-renewing existing consumers, and increasing rates to maintain their financial stability. Unlike public utilities, which are required by law to cover all consumers, insurance companies will not write insurance, especially in high-risk areas, unless they are able to ensure they have the capital and reserves to fully meet all insurance claims submitted by consumers, cover their expenses, and earn a fair return. Insurance company actions following multiple years of major wildfires and winter storms have pushed more people to the FAIR Plan, which is intended as California’s insurer of last resort but has become the only option in some areas of the state.
“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change. I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market,” said Commissioner Lara. “The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”
If you are in a situation where your policy has been non-renewed, or you are searching for insurance coverage, please don’t hesitate to reach out for a list of local insurance brokers who have been successful with placing coverage.