Over the past decade, multiple destructive wildfires have ravaged California, creating an unprecedented homeowners insurance crisis both locally and statewide.
Obtaining new homeowners insurance policies — and even securing renewals on existing policies in some cases — has become increasingly difficult in parts of the Midpeninsula and throughout the state considered high-risk for wildfires. Insurers big, medium and small — including State Farm General Insurance Co., Allstate Corp., American International Group Inc. (AIG), Chubb Ltd., Farmers Insurance Group and CSE Insurance Group — have restricted activities, ranging from cutting off all new and existing policies to capping the number of new policies they’re willing to write.
“There is no question, the past five to 10 years have drastically changed how homeowners insurance is issued in California,” said Robert Feldman, a veteran insurance broker based in the Los Angeles area who spoke on the subject to Realtors in the Menlo Park office of Compass Real Estate in early October.
Among other concerns, insurance companies express worry over costs associated with smoke damage to homes resulting from wildfires and the proximity of properties to fire-prone surroundings, Feldman said. An estimated 1.2 million residences are situated in high-risk fire zones statewide.
High-profile wildfires in recent years in Santa Rosa, Paradise, Ventura County and other communities that destroyed thousands of residences and businesses have precipitated the insurance crisis as insurers struggle to cover rebuilding costs.
“It is a dilemma; we are mired in a real problem throughout California,” said David Barca, broker associate in the Menlo Park office of Compass. “As Realtors, we see this on an individual basis at the time of transactions.”
Obtaining homeowners insurance can be a contingency today, with potential buyers given a few days to secure a policy prior to the sale being completed.
It’s wise for buyers to find insurance policies up front these days, according to Denise Welsh, broker associate in the Los Altos office of Christie’s International Real Estate — Sereno, especially for properties located in neighborhoods in more rural areas of communities like Woodside or Portola Valley that are considered fire prone by the insurance industry.
“Insurance companies are panicking over the issue of natural disasters,” she said. “And we’ve seen some incredible increases in insurance premiums for some homeowners.”
Peninsula policyholders dropped
This issue isn't new for many residents in Portola Valley, who began experiencing insurance woes following the destructive CZU Lightning Complex fires in 2020.
At the time, the state stepped in to protect residents' home insurance policies, issuing a one-year moratorium against nonrenewal of residential insurance coverage for nearly 2.4 million policyholders in California in the wake of multiple widespread wildfires. Portola Valley, which abuts the Santa Cruz Mountains and includes several neighborhoods that are at severe risk of wildfire, was excluded from the state's moratorium.
Longtime resident Anne Ashmead was among those who had her insurance unexpectedly canceled. Ashmead told Embarcadero Media in 2021 that Nationwide sent her a letter stating that it would not renew her homeowners insurance because the company was no longer willing to cover properties worth more than $1.5 million.
"I was just like, 'What? Why?'"
Her insurance agent told her many insurance companies were declining to insure homeowners in the area. Ashmead was forced to look at paying about 30% more for insurance, she said.
Down the Peninsula, homeowners in Los Altos, Los Altos Hills and Palo Alto are now experiencing the same issue. Many have taken to neighborhood-based social media apps like Nextdoor to share stories of canceled coverage, difficulties in securing new policies or steep increases in premiums leading to annual insurance costs of $10,000 or higher. Some said their policies were canceled because of things like tree branches that weren't cleared away from their roof in a timely manner. Others were dropped when their insurance companies exited the state. And one 60-year policyholder received no explanation when his insurance wasn't renewed.
New rules for insurance pricing?
After the California state legislature failed during the recently concluded 2023 session to adopt modifications to state insurance guidelines geared to keeping insurance companies in the state, Ricardo Lara, state Insurance Commissioner, promised to review them and issue new guidelines by late 2024 or early 2025.
Since the passage of Proposition 103 by California voters in 1988, insurance companies have had to seek approval from the state Department of Insurance for rate increases and can only use historical data — not current circumstances nor future predictions such as climate-change studies —on which to base their rates.
Lara has told insurers he may consider relaxing Prop. 103 provisions in exchange for their full participation in the California market. That includes the potential of including the cost of reinsurance — insurance companies’ purchase of insurance for themselves — in proposed homeowner rate increases.
He has also said homeowners could get discounted rates by taking measures to improve their home’s fire safety.
Carmen Balber, executive director of Consumer Watchdog, a Los Angeles-based consumer advocacy nonprofit founded by Prop. 103 author Harvey Rosenfield, said Lara’s tentative solutions to propping up the homeowners insurance market in the state have already failed in Florida. About 17% of property owners in that hurricane-battered state have lost insurance coverage, which she said is a much higher percentage than in the Golden State.
Balber said insurers want to use “opaque” climate-change models to help determine rates.
“There needs to be much more transparency,” she said. “We need any rate increases passed on to consumers to be transparent, reasonable and understandable.”
From the industry’s perspective, insurance rates for California property owners have been “artificially low” for decades because of Prop. 103, according to Janet Ruiz, California-based spokeswoman for the Insurance Information Institute. The New York-based industry advocacy group has membership of more than 50 insurers.
“The average cost of homeowners insurance in California is in the bottom half of all states nationally,” Ruiz said. As of 2020, the most recent figures available, the average annual cost was $1,400 in California, $1,700 nationally — and $6,000 in Florida.
But, she noted, many Golden State homeowners have gotten increases during the past three years.
Ruiz said insurers’ expenses are being affected by both wildfires and inflation, when it comes to covering rebuilding costs.
While some smaller companies have fled the state in the face of rising costs, Ruiz said most prefer to stay, since California is the world’s fourth-largest insurance market.
She’s an enthusiastic supporter of efforts by the state, industry and individual homeowners to “harden” properties against fire, touting such programs as the insurance industry’s wildfire prepared website, and the Ready for Wildfire website operated by the California Department of Forestry and Fire Protection — better known as Cal Fire.
Feldman, a broker with Conejo Pacific Insurance Services in Westlake Village, is a booster of the California Fair Access to Insurance Requirements plan — known as FAIR — which is the “insurance of last resort” for homeowners and business owners who can’t get policies from traditional insurance companies. The state-mandated plan, which is funded entirely by insurance premiums, can be expensive and only covers certain losses by fire and more.
Balber of Consumer Watchdog said the plan currently has about 275,000 members.
Feldman said he fears state insurance officials will attempt to “depopulate” the FAIR plan as part of its insurance reform.
“I think that would be a big mistake,” Feldman said.
He proposes a partnership between the FAIR plan and insurance companies as a way to bolster both. As an example, Feldman used a hypothetical 3,500-square-foot house damaged by wildfire that would cost about $4 million to rebuild.
“The FAIR plan could be responsible for the first $3 million, with insurance companies picking up the excess coverage,” he said. “I think the FAIR plan is necessary and should be expanded.”