Over the past decade, multiple devastating wildfires have ravaged California, creating an unprecedented homeowner’s insurance crisis both locally and statewide.
Getting new homeowners insurance policies — and even getting existing policies renewed in some cases — is becoming increasingly difficult in parts of the Mid-Peninsula and statewide considered high-risk for wildfires. Large, medium and small insurers – including State Farm General Insurance Co., Allstate Corp., American International Group Inc. (AIG), Chubb Ltd., Farmers Insurance Group and CSE Insurance Group – have curtailed their activities, ranging from cutting off all new and existing policies to limiting the number of new policies they are willing to write.
“There’s no question, the last five to 10 years have dramatically changed the way homeowners insurance is issued in California,” said Robert Feldman, a veteran insurance broker based in the Los Angeles area who spoke on the topic to brokers in the office of Compass Real Estate’s Menlo Park in early October.
Among other concerns, insurance companies are concerned about costs associated with smoke damage to homes from wildfires and the properties’ proximity to fire-hazardous environments, Feldman said. Approximately 1.2 million homes are located in high fire risk areas across the country.
Large wildfires in recent years in Santa Rosa, Paradise, Ventura County and other communities that have destroyed thousands of homes and businesses have accelerated the insurance crisis as insurers struggle to cover rebuilding costs.
“It’s a dilemma; we’re stuck in a real problem across California,” said David Barca, an associate broker in Compass’ Menlo Park office. “As brokers, we see this on an individual basis during transactions.”
Obtaining homeowners insurance can be a contingency today, with potential buyers given several days to secure a policy before the sale is completed.
It’s wise for buyers to find insurance policies in advance these days, according to Denise Welsh, an associate broker at Christie’s International Real Estate’s Los Altos — Sereno office, especially for properties located in neighborhoods in more rural communities like Woodside or Portola Valley that are considered fire hazards by the insurance industry.
“Insurance companies are panicking about natural disasters,” she said. “And we’ve seen some incredible increases in insurance premiums for some homeowners.”
Peninsula policyholders dropped out
This problem is not new for many residents in the Portola Valley, who began experiencing insurance problems after the devastating CZU Lightning Complex fires in 2020.
At the time, the state stepped in to protect residents’ home insurance policies by issuing a one-year moratorium on non-renewal of home insurance coverage for nearly 2.4 million policyholders in California as a result of multiple widespread wildfires. The Portola Valley, which borders the Santa Cruz Mountains and includes several neighborhoods that are at serious risk of wildfires, was excluded from the state’s moratorium.
Long-time resident Ann Ashmead was among the unexpectedly canceled insurances. 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 that many insurance companies refuse to insure homeowners in the area. Ashmead was forced to pay 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 problem. Many have used neighborhood-based social media apps like Nextdoor to share stories of canceled coverage, difficulty securing new policies or skyrocketing premiums that result in annual insurance costs of $10,000 or more. Some said their policies were canceled because of things like tree limbs that weren’t cleared from their roof in time. Others were dropped when their insurance companies left the state. And one 60-year-old policyholder was given no explanation when his insurance was not renewed.
New rules for insurance pricing?
After the California state legislature failed during the recently concluded 2023 session to pass changes to state insurance guidelines aimed at keeping insurance companies in the state, Ricardo Lara, the state’s insurance commissioner, vowed to review them and to issue new guidance 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 or future projections such as climate change studies — on which to base their rates.
Lara told insurers he may consider relaxing the provisions of Prop. 103 in exchange for their full participation in the California market. That includes the potential to include the cost of reinsurance — buying insurance from insurance companies for themselves — in proposed rate increases for homeowners.
He also said homeowners can get a discount 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 the author of Prop. 103 Harvey Rosenfield, said Lara’s previous decisions to help the state’s homeowners insurance market have already failed in Florida. About 17 percent of property owners in that hurricane-hit state have lost insurance coverage, which she says is a much higher rate than in the Golden State.
Balber said insurers want to use “opaque” climate change models to help set rates.
“There needs to be a lot more transparency,” she said. “We need any rate increases passed on to consumers to be transparent, reasonable and understandable.”
From an industry perspective, insurance rates for California property owners have been “artificially low” for decades due to Prop. 103, according to Janet Ruiz, a California-based spokeswoman for the Insurance Information Institute. The New York-based industry advocacy group includes 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, according to the most recent data 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 received increases over the past three years.
Ruiz said insurers’ costs are affected by both wildfires and inflation when it comes to covering recovery costs.
While some smaller companies have fled the state because of rising costs, Ruiz said most prefer to stay because California is the world’s fourth-largest insurance market.
She is an enthusiastic supporter of state, industry and individual homeowner efforts to “harden” properties against fire, promoting such programs as the insurance industry’s Wildfire Preparedness website and the Ready for Wildfire website operated by the California Department of Forestry farm and fire protection – better known as Cal Fire.
Feldman, a broker with Conejo Pacific Insurance Services in Westlake Village, is a booster of California’s Fair Access to Insurance Claims Plan — known as FAIR — which is “insurance of last resort” for home and business owners who can’t get policies from traditional insurance companies. The state plan, which is funded entirely by insurance premiums, can be expensive and only covers certain fire and other losses.
Consumer Watchdog’s Balber said the plan currently has about 275,000 members.
Feldman said he fears state insurance officials will try to “depopulate” the FAIR plan as part of 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 strengthen both. As an example, Feldman used a hypothetical 3,500-square-foot house damaged by a wildfire that would cost about $4 million to restore.
“The FAIR plan may be responsible for the first $3 million, with insurance companies picking up excess coverage,” he said. “I think the FAIR plan is needed and should be expanded.”