Got Insurance??? ..... Here’s The latest:
As millions of Home Owners have found out, insurance on their most valuable possession… their homes… is either too expensive or not available. Insurers’ losses due to natural disasters such as wildfires, floods, rising tides and high winds have caused them to curtail sales of these “HO” policies; State Farm even pulled out of the homeowner market in California last year but has recently changed course and is offering some policies at a 20% premium increase which was recently approved by the CA Department of Insurance in its attempt to get coverages on the market. (I’m told State Farm asked for a 29% increase.)
Now, there is the California “Fair Plan” for insurance customers for mostly fire risk. It was conceived as a means of last resort for HO’s and at low rates. (However, it has also become the insurer of first resort for thousands of owners as they are unable to find other suitable insurers.) In approving new rates for insurers the Department is aiming at getting more homes covered.
Assembly Bill 1867 was introduced to lessen the sting of high premiums by allowing a tax deduction on insurance premiums for the next five years; it applies to the primary residence… not second homes or investment properties; these may include short term rentals. The deductions would compensate owners for utilizing mitigating measures aimed at preventing fire, however the maximum amount of any deduction still needs to be determined.
The bill was dropped for a few reasons: 1) The expected tax deductions would increase the State’s huge $70B budget deficit and disrupt the General Fund; 2) The bill’s tax deduction provisions didn’t prescribe how the amounts would be determined, and might favor wealthier owners; 3) The California Department of Insurance re-opened negotiations with the insurance lobby; 4) The likelihood that a legislative remedy would best be worked out next year as more stakeholders need to be involved.
In addition, the CA Insurance Commissioner is now outlining (negotiating) a new proposal to be introduced in January or February. I will share its provisions when it is shared this month. But for now, know these things:
1. Any resolution needs to balance the needs of both owners and insurers. Insurers have the burden of paying for losses as well as their premiums for buying re-insurance. Currently, insurers nationwide have a 7% return on their policies vs. only .08% in California. This explains their reluctance to re-enter the HO market here.
2. All claims are to be expedited and resolved in less than 2 months using on line methods.
3. Rates will take into account possible future catastrophies; homes bordering forests are more susceptible to fire.
4. Commercial structures and small businesses are to be included, although at a lower number.
5. All players are to be involved in the negotiations: Realtors, insurers, builders, home owners, farmers, affordable housing developers, youth camps, ski resorts, and intervenors.
6. A “catastrophic modeling” formula is to be developed like all other 49 States already use. It will include fire, flooding and wind. Earthquake insurance is covered by the CA Earthquake Authority which ws established some years ago after major quakes; HOA owners’ contents are insurable.
7. It will include verification of individual homes’ “hardening” elements aimed at preventing fire.
8. A “public” model of rates will be made available like Florida has. This yields transparency.
9. The CA University and the CA Department of Forestry will develop the plan.
10. DATA...DATA...DATA! Any proposal needs to be data driven... loss history, future losses, climate change, insurers’ profits, neighborhood crime scores, surveillance cameras and owners’ premiums.
11. Insurers must answer consumers’ phone calls within days... not weeks or months.
12. Insurers must allow consumers to pay premiums monthly.
13. The plan must be sustainable; i.e., it must be fair enough to invite insurers while also preparing for the worst possible losses.
14. A $20M per structure coverage for HOAs and other commercial buildings should be included.
Other concerns I have are:
1. The “map” of fire prone areas needs review to more accurately draw the boundaries.
2. Why do individual condo owners pay a $160 fire prevention/response fee to the State, when landlords only pay $160 regardless of the number of units in a structure? Should HOAs be treated similarly?
3. Why are State owned buildings exempt from this fee? (Roadside rests, etc.)
An aspect of insurance most owners unfortunately encounter when being insured by the “FAIR” plan is the ‘hidden’ added cost of “wrap around” insurance. This means the house may be insured but ancillary losses may include owners’ liablity and various building components like foundations.
Finally, these stats are worth considering:
According to the CDI, between 2012 and 2021 CA insurers have done far worse than nationally:
...A direct incurred loss ratio of 59.7% nationally vs. 73.9% in CA. (I link this to our wildfires here.)
...A direct underwriting profit of 3.6% countrywide vs. -13.1% in CA.
...A direct profit of 4.2% nationally vs. -6.1% here.
HOALaws.com will keep you informed on this issue as developments occur this fall and into the next legislative session which begins in early January 2025. In the meantime... walk around your home to see what fire prevention tactics can be implemented to avoid the risk of fire.
