California is in the midst of an insurance battle. Home insurance rates in California are currently the lowest in the country (behind the state of Hawaii). According to the Insurance Information Institute, the average annual homeowners insurance premium in California in 2017 was $1,008 — half the national average. You may find this a bit surprising when you consider the catastrophic wildfires statewide in the last few years.
Insurance companies are all too aware of the economic impact the fires are causing. The state experienced the two costliest fires in history — the Camp Fire in 2019 and the Tubbs Fire in 2018. Insurance companies have pushed for regulatory changes to homeowners insurance in an effort to increase insurance premiums to cover the losses. Assembly Bill 2167, supported by the insurance industry, is intended to challenge previous consumer protections and establish the Insurance Market Action Plan (IMAP) program. Watchdog groups are concerned the bill would raise home insurance rates in California by 40%.
California Insurance Commissioner Ricardo Lara agrees with the watchdog groups. He’s a proponent of keeping insurance rates low and has publicly opposed AB 2167 considering it an “insurance industry ‘wish list,’ with nothing to help consumers,” he says. The bill is going to lead to higher rates and weaker consumer protections at a time California can least afford it.”
Homeowners applaud the rate cuts, as well as Lara’s public opposition to the controversial bill, but is fighting for the lowest insurance rates in the country a good idea with current climate changes and the rise in devastating fires?
Do the Rate Cuts Benefit All California Residents?
Although the state is pushing for rate cuts and limiting premium increases from one year to another, there are plenty of homeowners who have seen a dramatic rise in premiums. Jade Plummer, an insurance broker at Unity One Insurance in San Clemente, California who specializes in writing property insurance, can attest to that.
According to Plummer, “Rates that were $2,000 per year are now being renewed for $4,000 to $10,000 per year.”
The higher rates and insurers’ reluctance to provide coverage in high-risk areas is also affecting neighboring communities. “Any home that is in close proximity to brush or a high-risk fire area is also a challenge for an insurer,” Plummer claims.
If there are rate cuts that keep homeowners insurance rates low on average, many homeowners in or near high-risk fire zones are not experiencing the same savings.
How Rate Cuts Could Backfire
If the state of California continues to push for a freeze or price cut in the face of losses from wildfires, insurance companies may be cornered into taking drastic measures. Canceling homeowners insurance for those living in high-risk burn areas is one measure.
It’s already happened. Homeowners in wildfire zones are being dropped from homeowners insurance and forced to scramble for new coverage. In response, the State of California passed The Wildfire Safety and Recovery Act (CA SB-824) in late 2019. It’s a moratorium preventing insurance companies from canceling homeowners policies or refusing to renew them for one year.
CA SB-824 may provide temporary relief for those insured, but it doesn’t prevent insurance companies from stopping new coverage to homeowners in certain areas. If fewer insurance companies accept new policyholders, it limits the number of available insurance plans for California residents during an already difficult time.
The moratorium is set to expire soon. What could happen to the insurance coverage of the 800,000 homeowners living in high-risk zones when the time is up?
Spreading the Risk
Two scenarios are likely. The moratorium expires and hundreds of thousands of homeowners get dropped by their insurers. Even more homeowners in neighboring areas may also face cancellation or nonrenewal as insurance companies cut their losses before further mandates from the state. Plummer is concerned that “all of the fire losses again this year may cause homeowners to have a very difficult time obtaining coverage they can afford.”
The second possibility may have wider-spread consequences. If insurance companies have their hands tied and can’t raise insurance rates or cancel the highest-risk policyholders, they may need to spread the cost of insuring homeowners in wildfire zones by raising insurance prices in other areas.
Options for Homeowners
With all the uncertainty at this time and the wildfires still burning, it’s difficult to know what the outcome will be — and whether home insurance rate cuts are sustainable. Homeowners who live in or near high-risk burn areas should look for options in case their insurance rates climb dramatically or end up non-renewed.
Working with an experienced insurance broker may be helpful. A good broker will know which insurance companies are providing the right coverage for your needs and budget. They may also be able to negotiate better prices on your behalf.
If you can’t find affordable coverage, the state-regulated Fair Plan provides uninsurable homeowners with fire insurance. Due to the number of devastating fires, Commissioner Lara doubled the coverage limit the Fair Plan offers to $3 million earlier in 2020. You’ll need to obtain basic homeowners insurance through a private insurer for general coverage and combine it with the Fair Plan for fire insurance.
The Bottom Line
The insurance industry is watching California closely. The state has suffered record losses from wildfires in the last couple of years and is currently experiencing new ones. In the meantime, legislators sensitive to the current state of the economy are pressuring insurance companies to maintain low insurance rates, as well as temporarily preventing insurers from canceling coverage.
It’s difficult to predict if the current situation in California is sustainable. Even homeowners in low-risk zones may see a jump in their home insurance rates if legislators and insurance companies don’t come to an agreement. Hopefully, both sides can come together to find a fair and reasonable solution for homeowners.
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