California Homeowners Insurance Crisis: What To Do If Your Policy Is Dropped

Auto-generated captions cleaned for readability. Commercial breaks and repeated housekeeping have been trimmed; licensing information appears at the bottom of this page. Debbie reads at length from a PolicyGenius explainer by Pat Howard, credited on air, and from a news report on the California FAIR Plan.

Why we're talking about insurance

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and today we're talking about homeowners insurance in California. If you're not in California and you're not just curious, this one may not be for you — but it affects current homeowners and future buyers alike, because if you don't have homeowners insurance, you can't get a loan.

This has been building for months. On the lending side we're having a hard time getting insurance policies for properties that are in escrow trying to close, and the premiums are significantly higher than they used to be. Some condominium complexes in California have lost their insurance entirely, which means we cannot do lending in that complex — so if you're a seller with a condo and your association has lost its coverage, you're going to have a really hard time selling.

So: what can you do to find a policy? Did you get that letter in the mail? Why are people losing their policies? Did your premium go up, and is there anything you can do about it?

The headlines

A few articles I pulled. Money, November 1, 2023: premiums to double for some California homeowners amid insurance crisis. ABC7 News, January 3, 2024: State Farm home insurance to increase in California by an average of 20%.

And the one I want to work through with you, because they explained it better than anyone — a PolicyGenius piece by Pat Howard called “California home insurance crisis explained.” It covers what happened, why it's going on, and what your resources are.

If you own a home in California and you're insured by State Farm or Allstate, those are two of the carriers that chose to stop writing policies in the state. Some said they'd honor the policies already written; others said they're cancelling and won't hold them any longer.

The wildfire numbers

It comes down to wildfires and the weather. Wildfires have burned 10 million acres of forest and destroyed 39,000 homes in California over the last five years — a glimpse of how dire the state's climate crisis has become. And at exactly the moment it's more vital than ever for homeowners to have adequate coverage, many carriers have decided not to insure homes in certain parts of the state, and others have left the home insurance market altogether.

Shopping through an independent agent or broker is often your best bet, but several companies have stopped writing new business in California until market conditions improve.

A rundown of who and when: one carrier began dropping policies in the Bay Area as of August 2023. Farmers Insurance limited new home policies as of July 2023 — sticking with what it had already written but not writing new ones. Allstate stopped selling new policies as of June 2023. State Farm stopped as of May 26, 2023. When names that size step out of a state, it takes an enormous amount of resource off the table for buyers and homeowners trying to find coverage.

Q&A: should you leave the state over this?

Willie says he's never bought a house before, has no idea where to start, and is looking to buy in another state.

A lot of people have left California, and for lots of reasons — things have gotten so expensive, and this is one more. But before everyone decides California is horrendous: plenty of people fled during the pandemic, with Texas one of the biggest destinations, and I can tell you, being licensed in both and doing a lot of loans in Texas, that Texas homeowners insurance was actually quite a bit more expensive than California's. They're now running about the same.

So it isn't that policies are so incomprehensible you can't buy a home, or can't keep the one you live in, or have to flee to another state. It's that everybody needs to be prepared for what that number is going to be.

What I now put in a payment quote

Here's how much it's moved. When I put together a monthly payment quote for a client on, say, a $600,000 or $700,000 sales price, I used to estimate about $65 or $70 a month for homeowners insurance — that would take us back to roughly 2015, 2016, maybe 2017. Through 2018, 2019 and 2020, that number went from $65 to about $80 a month.

Today, in 2024, I'd assume more like $120 a month. I have personally doubled the number I use when quoting a client a monthly payment for the same sales price.

Inflation moves everything, but there's a specific reason behind this one. With the wildfires we've had, the insurance companies are losing an enormous amount of money paying out on policies they never anticipated. That's why you have insurance, and it's why your lender requires it. But carriers also have budgets and have to be profitable, and what they were paying out went through the roof to the point that they weren't profitable in any way — losing money hand over fist. So they had to bring prices up.

If you're a homeowner and you haven't received your renewal notice yet, be ready. You may well see a significant increase. Get ahead of it and start shopping. Insurance brokers are a great place to start — when we're helping a client secure a policy we don't go to one place, we go to several to find the best coverage at the best price. We're happy to give you names of brokers we use. Start researching prices now, so that when the renewal or the cancellation letter arrives, you already know where to go.

Why the increases came when they did

Back to the article. Insurance companies need to remain profitable enough to comply with state law and pay the claims of their existing customers, and that has become increasingly difficult in recent years due to wildfire losses and other factors — that's a PolicyGenius property and casualty strategy manager quoted in the piece.

Here's the scale. California insurers paid a record $15.4 billion in losses in 2017 and $13.6 billion in 2018, from by far the two most destructive wildfire seasons in state history. For context: annual losses never once eclipsed $5 billion before 2017, and have not exceeded that amount since 2018. After two straight years of insurers paying $1.85 in losses for every $1 of premium, the California Department of Insurance approved 71 rate increase requests from 50 different companies in 2019.

Which explains the timing. When I was quoting clients in 2016, 2017, 2018 and even 2019, I was still using the same number — because carriers have to get approval to increase their rates. We didn't see those increases hit until after that.

Q&A: why did my payment go up?

So many of my clients have called and said: why did my monthly payment go up? You put me in a fixed rate loan. You told me my payment wasn't going to change. Let me explain it properly.

Your payment includes principal and interest — what you owe monthly to pay down the balance you borrowed. On top of that, for I'd say 95% of the loans we write, the payment also includes your property taxes and your homeowners insurance. Instead of writing one big check for the insurance policy when it comes due, or scrambling when the tax bill lands, we take the money every month and put it into an escrow account, and those bills get paid out of it. You're budgeting on a monthly basis for things that have to be paid.

On a fixed rate loan — 10, 15, 20, 30 years, whatever the term — the principal and interest payment will never move. It's fixed for the life of the loan and it will never change. But your property taxes can be increased by the county, and your homeowners insurance can be increased by your carrier, and those change the total monthly payment. It is not the mortgage company willy-nilly changing your payment or your interest rate or your balance. It's the pieces we don't control.

Q&A: the foreclosure market

Nunes Investments asks how the foreclosure market is doing — off topic, but I love it, because you guide where the show goes.

Right now it's still very stable. We're not seeing a lot of foreclosures hit the market. The majority of homeowners have a lot of equity in their properties, so for someone to lose a home to foreclosure wouldn't make sense — even if they're having a hard time making payments and getting behind, even once you start seeing notices of default filed with the counties. At the point of a notice of default you still have another 90 days to get the home listed, sold, and the loan paid off. Why sit on a home and let it go to foreclosure when you have equity? You're far better off selling and taking your cash.

So the foreclosure market is very slow and very steady, and the forecast is still slim. That doesn't mean it couldn't happen — it means we're not currently forecasting an event that brings a wave of foreclosures to market.

The tipping point, and the FAIR Plan

The crisis reached its tipping point in 2019. That year more than 230,000 policies weren't renewed by insurance companies, up 42% from 2018 — and new policies written under the California FAIR Plan, the state-mandated program designed as a last-resort option for homeowners who can't find coverage on the private market, increased by 29%.

So let me explain what the FAIR Plan is, because I think it matters and because if you're buying a house and find out you'll need one, you want to stop and shop that insurance before you decide to continue on with the purchase. Here's how a news explainer put it, and it's the clearest version I've read:

The California FAIR Plan is offered to homeowners who can't find any other insurance, often because their home is in a wildfire-prone area. Known as the insurer of last resort, it is becoming tens of thousands of homeowners' only resort. It covers only a few perils, so homeowners need to buy an additional policy for other coverage. It also usually costs more than insurance bought on the private market — and for many, the price was about to go up starting with those renewing in December, possibly by as much as double.

Let me unpack “only a few perils.” The FAIR Plan is for a home the private sector believes is in a fire zone with a high chance of going up in smoke. The private market says we've had so many losses we can't afford to cover that anymore. The FAIR Plan says fine, we'll cover it — and nothing else. So all of the things a normal homeowners policy handles — slips and falls, a pipe breaking, a flood inside your house, your personal belongings, your wedding rings, the pictures on the walls, your artwork — are not necessarily covered. Which means you have to buy the FAIR Plan and a second policy that wraps around it to cover everything else.

It has been getting harder and more expensive for a couple of years, but we're now truly feeling it. As that article said: if your policy hadn't come up for renewal as of December of 2023, expect a fairly large increase at renewal this year. We have clients out searching for homes, entering escrow, under contract, trying to find insurance — and it is definitely more expensive than it would have been six months, a year, two years, three years ago.

Insurance belongs in the pre-approval conversation now

This is why I want to talk about insurance up front. If we're working on your pre-approval: where are you looking to buy? What area, what county, what city — give me a specific neighborhood. Let's look it up and figure out whether you're in a fire zone, what kind of insurance will be needed, and let's get an idea of a quote from an agent before writing the offer on the home. You want to know you're good to go before you commit.

Insurance used to be casual, on the back burner — we'd estimate the insurance, estimate the taxes, get pretty close to what you'd see once you were in the transaction. Now it's something we explore and take care of with you up front, because it determines the price range you should actually be shopping in. So we're going to do that digging for you.

Five things to do if you're dropped, repriced, or can't find coverage

One: contact your insurer if your policy is cancelled or non-renewed. If you get a notice that your policy won't be renewed, contact your agent and ask whether there are specific property upgrades or steps you can take to mitigate your home's risk and keep the policy. A lot of people don't know that's possible — even in a fire area, a carrier may be willing to keep writing you if you make certain improvements, like fire-resistant roofing or work around the property that protects it. You'd need to get very specific with your agent about which improvements would do it. It's worth the effort, because if you end up on the FAIR Plan instead, it gets significantly more expensive.

Two: take steps to fireproof your home. Reducing wildfire risk makes your property more attractive to insurers and can earn premium discounts. Programs like the Wildfire Prepared Home initiative, offered through the Insurance Institute for Business and Home Safety, and Department of Insurance fireproofing designations both apply if you install fire-resistant roofing or create defensible space around your home. You may also be eligible for additional discounts if you're in a Firewise community. You can look up whether your neighborhood is one — those communities go above and beyond, with more than just fire hydrants down every street; if you're up against a hill they may have installed sprinkler systems to keep the foliage green rather than dry.

Three: contact a local agent. Many insurance companies in California have restricted which agents can sell their policies, so contact a local agent familiar with California's insurance landscape. If you're having trouble finding an agent licensed to sell anything other than the FAIR Plan, the Department of Insurance has a home insurance finder tool that gives you a list of agents in your area and the companies they represent — search for the California home insurance finder tool, enter your state and city, and it will list them. And as I said earlier: if you want the name and number of a good insurance broker, we're happy to refer you. We use several, and we dig around ourselves for clients in process to get better coverage at a lower price.

Four: contact the California FAIR Plan. It's the state's program of last resort, providing coverage to homeowners denied coverage on the voluntary market. If you can't find coverage because of wildfire risk or other factors, it's a suitable short-term option — but keep in mind FAIR Plans are often significantly pricier and more limited, generally with no coverage for liability, water damage or theft. To fill that gap you'll want a difference in conditions, or DIC, policy: the wraparound we talked about.

Five: consider an excess and surplus carrier. An E&S carrier specializes in insuring high-risk properties considered too risky for traditional insurers. Keep in mind these policies are not backed by the California Insurance Guarantee Association — which means if your house is destroyed and the insurer doesn't have the funds to pay your claim, you could be left footing the bill yourself. You can find a list of E&S brokers on the Surplus Line Association of California website.

I would not suggest the E&S route. If you already own the home, have no intention of selling, your policy was dropped, you can't find private coverage, and the FAIR Plan is so expensive you'd basically lose the house paying for it — then E&S is one more option to look into. Something is better than nothing. But that's the order.

Wrap-up

About 75% of my listeners are in California, so I wanted to make sure we addressed this — we have quite a few loans in progress, purchases and refinances, where insurance is becoming a problem, and we're rolling up our sleeves to get the best quotes we can for those clients. We'll do the same for you.

Things are starting to move, by the way: we've taken in more phone calls and more loan applications over the last couple of weeks than we did in most of 2023. You want to get out ahead of the herd — start with the pre-approval now so your chances of buying successfully in 2024 are good.

You can reach us at 844-935-3634, that's 844-WE-LEND-4, seven days a week — and if we miss you, leave a message; the voicemail says two hours but you'll usually hear back within 15 or 20 minutes. That same number takes texts. At mortgagemomradio.com you can book an appointment or email me directly. And if you're listening on radio Saturday and want to watch me record it live, text the word MOM to that same number and you'll get one text a week with the topic and a link to join — no spam, no selling your information, just the notification. I'll see you next Wednesday, right about 1 p.m. Pacific. Talk to you all real soon.