Over the past two years, Rancho residents have been receiving the dreaded email with the subject line: Insurance Non-renewal. Our first such notice came two years ago when our insurance agent told us our underwriter Oregon Mutual was leaving the state. We replaced it with Berkshire Hathaway’s AmGuard only to be informed one year later that they too were pulling out of California. The homeowners insurance landscape in California, particularly in Rancho Santa Fe, is in turmoil as major insurers pull back on policies, raise their rates, or just leave the state citing rising costs and wildfire risks.
From the start of this summer, State Farm began dropping 30,000 homeowners insurance policies across California, impacting 50 San Diego zip codes, including Rancho Santa Fe. This shift has led to drastic premium increases for residents, with some seeing costs quadruple overnight. One neighbor reported their insurance premium jumped to $46,000 annually for their home which is valued between $10 and $12 million.
How Did We Get Here?
When we got the call from our broker that we needed to once again shop for a new insurance policy, I figured they would just find another underwriter. After all, they had been fantastic finding coverage for us despite our horse property being in what is considered a moderate wildfire zone. And they did, except now the new premium came with a 300% price tag increase. My initial response was less than gracious as I was trying to understand what in the world was going on.
So what happened? Brian Ruiz of Teague Insurance, who has been actively involved with the insurance industry in California, helped shed some light on the domino effect of legislation and regulations that came down from Insurance Commissioner Ricardo Lara that drove insurers from the state. First of all, Lara created a regulation preventing insurance companies from raising their premiums despite the rising costs of everything from construction to healthcare. Ruiz said California insurance companies were spending $1.25 for every dollar they were bringing in, putting their balance sheet in the red. Bottom line, they couldn’t afford to do business in California if the premiums could not adjust with the rising costs.
Apparently, insurance industry representatives told Lara his new regulations would create an economic barrier and force insurers to leave California – much like other businesses have exited the golden state looking for friendlier climates. While Lara may have thought they were empty threats, many of these insurance companies did indeed leave, and those who stayed jacked up their premiums following the simple principles of supply and demand. I suppose that is what happens when an elected Insurance Commissioner with a degree in journalism rather than an MBA is put in charge of the world’s fifth largest economy’s insurance industry.
Now Lara is trying to quell his angry constituents caught in the middle of his ill-fated gamble and skyrocketing insurance costs. Sharon Smith, a representative from the California Department of Insurance, and Catherine Blakespear, our district State Senator, spoke at the recent town hall meeting hosted by the RSF Association in June. Essentially, they indicated some type of “deal” is in the works to woo insurers back to California which will be announced and/or go into effect this December. But the overall sentiment in the room was frustration at the state’s lack of action and the astronomical premiums potentially reducing our home values, or stalling home sales.
State’s Response: Regulatory Reforms and the FAIR Plan
According to the California State Insurance Department, Commissioner Lara is introducing a series of reforms to stabilize the market and expand coverage options, especially in wildfire-prone areas. Key initiatives include modernizing the California FAIR Plan, the state’s insurer of last resort, and to offer expanded coverage options.
The big problem for RSF residents losing insurance and defaulting to coverage by the California FAIR Plan, is that coverage is limited to homes valued at $3 million or less, and many if not the majority of houses in the Ranch are valued higher than that. Many assume that the California FAIR plan is some kind of government insurance policy. In actuality, it is a plan underwritten by a collective of California insurance companies. Each company’s portion is determined by their market share. For instance if Farmers Insurance has 20% percent of the market share in California, they will underwrite and pay 20% of the costs of the claims. But there’s a hitch. According to Ruiz, FAIR is insuring $400 billion of risks, although they only have about $5 billion in reserves to pay out in claims. “So what happens if there’s a $100 billion-dollar fire? It will just take them all out,” Ruiz warns.
Underinsured Property
According to Ruiz, some homeowners believe they can under-insure their property and either build back a smaller structure or take a cash settlement, but this is not the case. For instance, if a homeowner insures their property for only 60% of the amount needed to fully rebuild, they would only receive 60% of the insurance they purchased. Additionally, they might end up with actual cash value coverage instead of replacement cost coverage, which can result in paying premiums for inadequate protection.
Another problem Ruiz sees is homeowners choosing to co-insure their property by using FAIR’s $3 million coverage even though their home may be appraised for more. “In our experience, we often see homeowners opting to use the CA Fair Plan’s maximum limit of $3 million even when their property requires significantly more coverage,” Ruiz said. “This can be problematic because the CA Fair Plan comes with co-insurance penalties and will insure a home at its actual cash value rather than replacement cost if it’s not insured at 80% of its value.”
Class Action Lawsuits
In response to the widespread withdrawal of insurance providers and rising premiums, several class action lawsuits have been initiated. The California FAIR Plan was targeted with claims that its standard policies are illegally inadequate. Filed by Kerley Schaffer LLP, the lawsuit alleges that the FAIR Plan’s policies provide substandard fire coverage, violating state laws by defining “direct physical loss” narrowly.
Another significant legal action involves a $75 million settlement with Farmers Insurance, addressing claims of inadequate coverage and business practices. This settlement includes monetary benefits and changes to Farmers’ business model, ensuring better protection for policyholders.
These legal actions highlight the growing discontent among homeowners who have been dropped by their insurers, and they underscore the need for regulatory reforms.
Immediate Steps for Rancho Santa Fe Residents
While the current insurance environment in Rancho Santa Fe is challenging, residents can navigate this crisis by staying informed and taking the following proactive steps.
Seek Alternative Insurers: Given the shrinking availability from major providers, residents should start searching for alternative insurers immediately. While premiums are likely to be higher, securing coverage now can prevent future gaps in coverage. One of the other good insurance policies, if you can get it, is United Services Automobile Association (USAA). However they are only writing policies in California for active military, although they once included retired military and their relatives. With any insurance provider, homeowners should go to AMBEST and check the insurer’s ratings before signing on the dotted line – especially if you’re not using a reputable broker.
Explore Surplus Marketplace Insurance: For those struggling to find coverage, surplus insurers, which operate outside of the state’s standard regulatory framework, may offer a solution. Lloyds of London is one insurer who is underwriting many high-risk, high-valued properties in San Diego County. However, they typically come with extremely higher costs, often exceeding $100,000 a year.
Consider the FAIR Plan: Although the FAIR Plan is often more expensive and offers less comprehensive coverage, it remains a viable last-resort option for homes valued at $3 million or less. The plan is being modernized to provide better coverage, but it’s important to make sure the form is correctly filled out. The plan is like an a la carte menu, and some homeowners may not realize they didn’t add all coverage they want or need.
Mitigation Measures: Engage in wildfire mitigation efforts on your property. This includes clearing vegetation, using fire-resistant materials, and possibly applying fire retardant like Mighty Fire Breaker’s MFB-31 Citrotech – a non-toxic coating that can be sprayed on your home and surrounding areas to reduce the risk of fire damage.
Finally, Rancho Santa Fe residents must stay informed about state-level regulatory changes, participate in our Association workshops, and push for more favorable insurance policies. Californians may pay more for homes, fuel, food and just about everything else compared to the rest of the country. But if it’s any consolation, Ruiz says California insurance premiums are ranked 30th in the U.S. Californians’ premiums average at $2,500 a year while Floridians pay an average of $9,000. They have hurricanes, and we have earthquakes and wildfires. Pick your disaster.
In the meantime, homeowners must fully understand their coverage needs and options to avoid these pitfalls and make sure they have adequate coverage. Let’s cross our fingers that there’s better news coming from Sacramento in December.
Kelli Hillard is a Covenant resident.
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