Homeowners insurance – Once a Formality is Now a Potential Deal Killer

Until recently, I rarely had much concern about the prospect of my clients obtaining homeowner’s insurance when purchasing a property, or for obtaining insurance for my own properties. Not that it wasn’t important – fire insurance has always been necessary to close a loan – but it was easy to get and normally available at a price that was not prohibitive and within expectations. Now, with changes to the industry and rising costs of claims due to climate risks and cost inflation, what used to be a formality in the homebuying process, is anything but.

In 2022, some of the largest insurance companies including State Farm and Allstate announced that they would no longer be writing new policies in California. This news was followed by other notable names like Kemper and Unitrin leaving the state of California entirely. These business decisions are due to increased wildfire or flood risk as well as state laws, such as Proposition 103, which is intended to protect consumers from arbitrary rate increases, but also results in preventing insurance companies from raising premiums sufficiently to keep up with their risks and costs. Additionally, a revised California wildfire map now includes properties in some areas that had not previously been in a very high fire severity zone, causing some existing policies to be dropped or prices increased substantially. In fact, parts of Playa Vista fall into a Very High Fire Hazard Severity Zone, although this has been the case for a while.

Climate change-related weather events have led to some of the greatest increase in insurance claims, totaling over $130 billion dollars globally in 2022 with the damage from Hurricane Ian and losses that came as a result of the U.S. drought making up about half of this total. Weatherproofing upgrades such as fire hardening as well as replacing roofs that maybe you could have squeezed a little more life out of are becoming essential upgrades.

There is an insurance option called The California FAIR Plan. While not a government agency or public entity, it is a pool of insurers which is required to offer partial insurance coverage to all properties with a combined limit of $3 million dollars. With coverage mainly for fire hazards, and without many of a long list of potential perils, even their website states “the FAIR plan is a temporary safety net” and was intended as the insurer of last resort, however The FAIR Plan is being turned to more and more in order to fulfill minimum coverage requirements by lenders.

Recently, my buyers are finding that it is harder to find a company to cover the home they are purchasing and one of my team members recently had a loan denied for a condo because the HOA did not have sufficient coverage to meet the lender’s requirements. Even when insurance is available, some carriers have required us to send the inspection report or upload interior and exterior photos of the property to an insurance company’s portal to assess the property’s condition before they would confirm coverage. This often occurs at the eleventh hour, right before a deal is supposed to close. What happens if they say the condition is not good enough to offer coverage? It often takes weeks to get confirmation of coverage using the FAIR plan, so this is not always an option when a deal is supposed to close imminently.

While I completely understand the business decisions that go into mitigating risk for insurance companies, which are for-profit businesses, maybe relying on for-profit insurance companies, who have their own risk management practices and stakeholders, is not the best approach to ensure predictability of costs or coverages for consumers. Beyond the FAIR plan, the statewide or nationwide creation of a government sponsored enterprise for homeowner’s insurance, the way Fannie Mae or Freddie Mac are to ensure the availability of home loans, should be considered. This will create more competition among insurance carriers who will feel that their business risks are being reduced, much as it does for banks who lend money to home buyers. In the absence of some change to the current system, the ability for purchasers of real estate to obtain a homeowner’s insurance policy at an affordable price NEEDS to be part of a buyer’s due diligence before they remove their inspection contingency and the location’s fire and flood danger should be considered prior to purchasing as well.