Challenges in California’s Insurance Market for New Homeowners

Last spring, Alex Hwang, a tech worker, and his wife made a decision to move from their small house in the San Francisco Bay Area to a larger one in Pulte’s Cimarron Ridge development, located in the Inland Empire. The new six-bedroom home was priced at $700,000, offering them a big backyard as well. However, an unexpected issue surfaced during the transaction process.

Pulte, the builder, typically includes an insurance policy in the sale package, and Hwang’s real estate agent assured him that obtaining coverage in this development had never been a problem. Despite being located on a scrubby hill unlike areas prone to wildfires, Hwang was informed that the builder’s agents couldn’t find a comprehensive home insurance policy in the standard regulated market. Instead, the available insurance excluded the fire coverage that most lenders require.

Hwang faced two choices: purchase partial protection via the FAIR Plan, which covers only fire and would require an additional policy for everything else, or explore the surplus lines market. This market consists of mostly out-of-state carriers specializing in high-risk insurance, unbound by price controls or state support. Hwang opted for the surplus line carrier, which led to a high deductible of $25,000 in case of a fire, far above standard amounts.

Hwang’s predicament is becoming common. State data shows a growing reliance on the FAIR Plan even in areas with low fire risks like the Inland Empire. This plan, originally intended for high-risk coastal and mountain regions, expanded to 396 ZIP Codes, covering 11,000 homes deemed low-risk. In areas like the Interstate 215 corridor, demand for insurance exceeds availability in the traditional market, pushing homeowners toward the FAIR Plan or unregulated insurers.

Major carriers are pulling out from many parts of California, refusing to insure even low-risk properties. This challenge forces homeowners to choose between partial protection plans and unregulated market options that offer no state-backed security. The latter accounts for 7% of the market now, rising from 1% in 2021, as reported by Weiss Ratings. Hwang ended up with a policy from Summit Specialty, an out-of-state startup with minimal experience in California risks.

California has been experiencing an insurance market contraction, with regulated carriers withdrawing or limiting their policies due to escalating costs. Attempts by Insurance Commissioner Ricardo Lara to calm concerns have not fully reassured homeowners. According to a Times analysis, areas like the Inland Empire witness soaring enrollment in the FAIR Plan.

Brokers, agents, and homeowners note a surge in unregulated policy sales due to scarcity in conventional markets. The surplus lines market, led by companies like Allstate’s North Light Specialty, is expanding. Despite some suggesting loosening restrictions to aid surplus lines’ participation, Lara’s office emphasizes the need for comprehensive coverage rather than limited, cost-saving plans.

Insurance brokers such as Gilbert Ayon consider surplus lines carriers as critical for homeowners under current conditions. Yet, some homeowners, like Louis from Riverside County, face limited options. Louis experienced difficulties finding an affordable policy for his new home, leading him to settle for a surplus lines policy with a high deductible, reflecting the broader challenges in obtaining coverage amidst California’s insurance market turmoil.

California has fewer home insurance policies available today than 15 years ago, as per state data. Between 2016 and now, the state lost 462,000 policies in 1,300 ZIP Codes. This shift makes finding coverage a priority for homebuyers, as highlighted by Bob Severns, an insurance broker helping navigate these challenges.