July 29, 2021

The devastating wildfires in California that did so much damage in the past few years are now impacting pricing and availability of homeowners insurance coverage in the state, affecting everything from primary residences in many suburban locations to popular vacation home spots like Napa Valley, Sonoma, Lake Tahoe and elsewhere. This comes on top of a decades-long increase in the overall national cost of all homeowners claims—including other types of severe natural disasters like extreme hurricanes and tornadoes. Hence, there has been little relief anywhere for the insurance industry. This, in turn, is leading to higher premiums and increasing numbers of non-renewals. We at Sand Hill take this topic very seriously—in our role as trusted advisor and financial counselor—because overall risk management (and asset protection) is a key element of financial success.

Even many homeowners who have hardened their properties and created defensible space around them are experiencing non-renewals. And this is happening in well-developed areas too, not just remote locations. One might ask, “How can an insurance company just not renew? Isn’t the industry regulated?” There are different issues going on here. Any insurance company can refuse to insure a house in the first place (or also simply not renew it); but if they are an admitted (aka “regulated”) carrier, and they do choose to provide coverage, then there are certain controls by the state Insurance Commissioner over the applied premiums that can be charged. But again, the growing concern is for those who receive non-renewal notices. What to do then? There are a few possible options.

Lloyds of London is a syndicate: each participating insurer in the group agrees to cover just a sliver of any specific property. For example, a single house’s coverage might be divided six or seven ways. This enables each insurance company to limit its own risk, and presumably not get wiped out if there are too many simultaneous claims. Another possible option is finding a non-admitted (aka non-regulated) insurance company, which can file and immediately use new rates (whereas a regulated company might need to wait up to 12 months to get approval from the Insurance Commissioner for any rate hikes). Importantly, these non-regulated policies are still handled by brokers, and all brokers in California are regulated by the Insurance Commissioner; so, this should give some comfort to homeowners using such solutions for underlying coverage. Indeed, many large insurance companies have both offerings—a “brand name” regulated company that is recognizable, and a less commonly known non-regulated affiliate.

When all else fails, there is something called the Cal Fair Plan. This is only for fire disaster; it does not cover other perils like water and wind damage or theft, nor the basic underlying personal liability coverage that is part of a standard HO policy. And California is a litigious state, so the personal liability piece is important to address. Therefore, one would want to consider the need to add a “wraparound” policy to get the basic personal liability coverage on the property itself, to be eligible for possibly getting additional amounts of extra umbrella coverage (with higher limits). However, this Cal Fair Plan has been overwhelmed in just the past year alone, which is causing general delays in its operations. It is not a state agency, but rather a pool of private funds—and again, exclusively for very basic fire coverage. And rates are climbing for the Cal Fair Plan too; it exists as a public good, but it must be viable and sustainable, and hence needs to keep offsetting its own increasing costs due to claims.

Finally, self-insurance is another possible option, but it is beyond the scope of this article here; and it is also not appropriate for most people. At least the Cal Fair Plan provides a “last resort” solution; because most people simply cannot afford to self-insure against fire, nor the many other perils of homeownership. Bottom line, there are options, but they get more expensive, and they need proper examination.