If you own a condominium or are part of an HOA in California, you’ve likely been shocked by skyrocketing insurance premiums. In some cases, carriers have decided to drop residential insurance entirely, leaving new home buyers, condo owners, and HOAs in a financial jam.
Citing inflation, rising construction costs, wildfires, and other catastrophes, the rationale is to “protect current customers.” But with many home and condo owners without coverage, ownership represents greater risk. Potential buyers may not be able to secure insurance at all, forcing enrollments in the state-run pool.
Generally considered the insurer of last resort, The California Fair Access to Insurance Requirements Plan offers basic fire coverage when other insurance companies will not. The pool will likely be inundated with applications in light of recent increases. It’s anybody’s guess how that situation will play out.
Today, we’ll look at the evolving insurance landscape in California and talk about options for condo owners and HOAs looking to gain adequate coverage without breaking the bank.
California’s Home Insurance Crisis Explained
The prevalence of wildfires and other extreme weather events is hitting a critical mass nationwide. In California, events of recent years have underscored the instability of the insurance market.
Increasing fires, more people living and building in fire-prone areas, and rising costs of repairing and rebuilding homes damaged by fire have resulted in companies like State Farm and Allstate withdrawing from the residential insurance market altogether—at least as far as issuing new policies. Existing policy owners may not have faced cancellation, but their rates have gone through the roof so much as to make it unaffordable.
When preferred carriers like State Farm discontinued coverage and flat-out refused to carry condos, one HOA was forced to go to alternate surplus line carriers. Their premium jumped from $300K to $1.2 million – a 400% increase.
This is just one example of what’s happening in California. To call it sticker shock is a bit of an understatement.
What About Last Year’s New Regulations?
In September 2022, California’s Insurance Commissioner, Ricardo Lara, announced a regulation that forced insurers to drop their rates for homeowners that make significant efforts to reduce fire risk. Improvements recognized under the rule include the installation of fire-resistant roofing, removing brush and overgrowth, and creating at least five feet of space around a dwelling. If the community where the property is located also takes steps toward improving fire safety, premiums can be reduced even further.
The rule also directs insurance companies to provide homeowners with a quantifiable risk score that they can appeal when improvements are made.
But… a loophole in the policy also permits insurance companies to drop policies if the risk is deemed too high.
The Consumer Watchdog group expressed concern that the legislation doesn’t go far enough and would result in policies being canceled, refused, or discounts denied because they feel the property is too high-risk.
Unfortunately, the Department of Insurance can’t force companies like Allstate and State Farm to reverse their decisions. New home buyers, condo owners, and anyone left out in the cold by these changes can still purchase insurance from other providers, but it’s likely to be at a much higher rate and may leave some uninsured.
Factors Beyond Wildfires and Weather
Extreme weather and wildfires aren’t the only factors driving insurance rates through the roof.
Inflation Affecting Labor, Building Materials Costs
We’ve all experienced the effects of pandemic-related supply chain slowdowns and the subsequent cost increases for just about every type of consumer goods. When it comes to repairing, building, or rebuilding homes, inflation has driven prices up between 3.8% and 15.7%.
Labor shortages and rising wages also contribute to higher costs, resulting in significant increases across the board. While some inflation is expected, the costs of rebuilding are quite staggering when you consider how many more homes have been destroyed because of catastrophic weather and wildfire events.
Allstate reported a $1.4 billion loss last year, while State Farm was down $8.3 billion, a significant increase from their $313 million reported losing in 2021.
Is There a Solution?
While insurers can’t legally cancel policies, you may find yourself in a situation where your once-stable condo insurance costs are no longer manageable. Fortunately, a few areas are still under your control and will allow you to lower your premiums without putting yourself or your property at greater risk.
Here are a few ideas homeowners might consider doing to reduce their premiums:
- Talk to your agent about any discounts or savings you might be eligible for by improving your property. Of course, this doesn’t generally apply to condos, but HOAs can be instrumental in moving this along. It’s certainly worth a conversation to see what’s possible.
- Check your policy to ensure you receive discounts you’re already entitled to.
- Ask about loyalty programs your insurer might have. Longtime customers often get preferred rates.
- Bundle insurance together to obtain discounts. For example, if your car insurance is with another company, you might save a little by switching to the same company that does your condo insurance.
- Raise your deductible. Higher deductibles translate to lower payments. Don’t sell yourself short, though; ensure you have enough saved to cover your deductible in case disaster strikes.
Things to Know for Condo Owners
Though your coverage may be stable for now, the insurance landscape is volatile and may well change by the time your condo building’s policy comes up for renewal.
Legally, insurance companies must give 75 days’ notice if they intend to drop a policy because of wildfire risk, which buys time to look for new coverage, likely at a much higher cost.
If the property is uninsured for any amount of time, it could impact condo owners in more ways than you could imagine. For example, if you’re trying to sell your unit, the buyer might not be able to obtain a mortgage if the building is uninsured, putting both buyer and seller in an awkward position.
HOAs must act immediately and proactively to ensure all fire mitigation efforts and improvements are completed. These efforts may not avoid nonrenewal but may help when shopping for replacement insurance.
