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It is impossible to overstate the deterioration of the California Homeowners’ Insurance market. While the primary factor was the tremendous damage done by the wildfires during 2018, insurance carriers have been concerned about property claims for a long time. The loss ratio in California has been much higher than for other states. Then the Camp Fire destroyed the town of Paradise in less than one day and it just may be the most expensive fire in California history. It appears as though 2018 was the straw that broke the camel’s back.
Insurance rates are going up, even for homes not located in a high risk area. Many insurance carriers are cancelling homeowners’ policies in areas they consider to be at high risk. This includes many areas where last year there were numerous admitted carriers willing to write coverage. These are not necessarily remote areas; we have seen cancellations for homes located in Placerville and even parts of El Dorado Hills. In addition, insurance carriers are tightening underwriting restrictions causing some people to be cancelled for prior loss history. At least some carriers will not write new business on a home with a water damage loss within the last three years.
In prior years, there were many non-admitted carriers who wrote homeowners’ insurance in areas considered to be at high risk. Non-admitted does not mean not licensed. Many of these carriers are very large insurance carriers with good reputations for paying claims. This meant that while insurance premiums on a home in a high risk area would be much higher than for homes located in other areas, coverage was still available and the cost was at least rational. That is no longer true today. Many of these carriers are no longer writing coverage at all and those remaining often have stunning increases. We recently saw one quote for $15,000 per year on a $700,000 home. Obviously few people could afford that. The result is that for many people the only financially feasible choice is to purchase coverage from the California FAIR Plan (“FAIR”). The FAIR plan cannot turn down coverage because of where the home is located.
It is critical to understand that the FAIR plan policy is not the same as a homeowners’ policy. A homeowners’ policy has all risk coverage on the dwelling, excluding flood and earthquake. The FAIR Plan only covers Fire or Lightning, Smoke or Internal Explosion. Optional coverage for windstorm, hail, explosion, riot, aircraft, vehicle, vandalism or malicious mischief can be purchased for an additional premium. There is no coverage for theft, falling objects, weight of ice, snow or sleet, accidental discharge or overflow of water or steam, freezing, or sudden accidental damage from an artificially generated electrical current. There is also no coverage for personal liability, medical payments or damage to property of others.
The FAIR plan does not do a replacement cost estimate, so it is extremely important to purchase adequate limits. For example the FAIR plan offers 10% of the dwelling amount, but any amount paid reduces the dwelling limit. There really is no substitute for having a qualified agent who understands the FAIR plan policy assist homeowners in selecting the best coverage options available. While the FAIR plan policy can be purchased directly, that does not reduce cost and the FAIR plan recommends using an agent. Now, the FAIR Plan requires digitally signed pictures of the building, from all four sides before we can bind coverage.
You can also purchase a Difference in Conditions (DIC) policy from another carrier that will fill in some, but not all of the gaps in coverage. These policies may have a different name, such as a Limited Property Policy. They provide valuable coverage, but there are still gaps between the coverage provided by standard HO3 homeowners’ and a FAIR Plan, DIC combination.
The FAIR plan just announced a rate increase averaging 20% in April. In some cases, people should consider purchasing new insurance prior to April 1 to avoid that increase.
We understand the major impact this has on a lot of people. If you own a home in an area considered to be a high risk for wildfire, you must be prepared for a significant increase in cost. Even if one chooses the FAIR Plan and a DIC companion policy the result is likely to be insurance premiums at least double what you are paying now. Even if your mortgage company pays for the insurance, that cost will be passed on to the homeowner.
It is easy to blame the insurance carriers; but remember that insurance carriers in California are paying claims and their claim costs are often a multiple of premium.
Terry McNeil, MBA
