Peter Mac was closing the sale of a home in the Hollywood Hills, a four-bedroom, five-bath estate with an infinity pool perched above the lights of Los Angeles. The new house had been on the market for two years, with the price tumbling to $25.6 million from an original listing of $48 million.
But before the final sign-off in February, Mac presented the buyer with a fire insurance quote: $200,000 a year.
“She almost fell off her chair,” said Mac, a broker with The Agency. “She wanted to renegotiate.”
California’s property insurance crisis is shaking up real estate in some of the most expensive housing markets in the US. Insurers are charging sky-high premiums or abandoning coverage completely in exclusive enclaves such as Bel-Air, Montecito, Beverly Hills and Napa Valley wine country.
It’s part of a nationwide trend driven by climate change, and the fear is that California could become the next Florida. Homeowners insurance in hurricane-prone Florida costs over three times the national average, and more than a dozen insurance companies have stopped writing home policies there. Average premiums in Florida have gone up more than 100% in three years.
In California, the big worry isn’t a Category 5 hurricane. It’s wildfires devouring multimillion dollar hillside estates.
State Farm General Insurance Co., California’s biggest insurer by market share, announced in March it was discontinuing 72,000 policies, including 30,000 homes, ahead of this year’s wildfire season. Nearly 70% of the houses are in ZIP codes where the median sale price was $1 million or higher last year.
The cancellations included 67% of State Farm policies in Bel-Air’s 90077 ZIP code, 69% in the Pacific Palisades’ 90272 and 46% in Beverly Hills’s famous 90210, according to a filing. In Montecito, whose residents include Oprah Winfrey and the Duke and Duchess of Sussex — aka Harry and Meghan — State Farm axed 28% of its policies.
John Morris is one affluent homeowner feeling the heat. For nearly 30 years, he paid his premiums and never filed a claim on the six-bedroom hillside mansion in the Bel-Air neighborhood of Los Angeles, where the average home lists for $8.4 million. In 2022, American International Group canceled his policy, so he switched to State Farm, paying $22,000 a year for a plan that he said covered only about 40% of the $10 million replacement cost of his home.
In early April, Morris’s agent broke the news: His State Farm coverage will end in 2025.
“There will be options, but they’re going to be a lot more expensive,” Morris said. “It’s a problem that’s not going away.”
The squeeze is by no means limited to the wealthy. A BMO survey found about half of California homebuyers fear rising insurance costs will impact their ability to buy or keep a home, while only 18% of households can afford the $5,210 monthly payment — including taxes and insurance — to buy a median priced home, according to the California Association of Realtors.
Still, rising insurance costs are a dealbreaker for some high-end investors. Stephen Shapiro, the co-founder of Westside Estate Agency, passed on buying a $15 million rental home in Bel-Air after he got a $150,000 estimate for annual fire insurance in November 2022. The property also needed special flood insurance because it’s near a reservoir, he said.
“If you’re talking $15,000 a month just for insurance, that offsets the ability to make any money on it, and that was before rates went to where they are now,” Shapiro said.
More than 90% of state-licensed insurers in California are “either not offering new property insurance or have heavy restrictions,” according to an analysis by the Susman Insurance Agency. Over the past 18 months, seven of the 12 major licensed insurance companies have cut back on new policies or renewals amid concerns over disaster risks fueled by climate change and state-imposed limits on premiums.
In April, two affiliates of Tokio Marine Holdings Inc. disclosed plans to cut 12,556 policies.
“Now you might have one option — maybe two — from a carrier that you’ve never heard of before, and it’s offering minimal coverage for a lot of money,” said Karl D. Susman, president of Susman Insurance Agency.
State Insurance Commissioner Ricardo Lara is trying to coax private insurers back to California and stabilize the market, a move the real estate and insurance industries support. As part of the regulatory reforms, insurers will be allowed to raise premiums based on future climate risks and reinsurance costs, as long as they provide a share of coverage in wildfire areas. But the plan won’t go into effect before December at the soonest.
It marks a potential departure from the status quo established by Proposition 103, a consumer-friendly ballot measure passed in 1988 that allows an elected insurance commissioner to review and reject rate hikes. It also restricts insurance companies’ pricing models while giving the public a say in rate-setting.
For now, soaring rebuilding costs of homes in wealthy ZIP codes are driving away insurers, said Rex Frazier, president of the Personal Insurance Federation of California, an industry trade group.
“When a company looks at its exposure, what they’ll try to do is excise the fewest number of policies that drive the biggest reduction in exposure,” he said.
As private insurers withdraw, more homeowners are turning to California’s FAIR plan, the state-created insurer of last resort, which is financed by the dwindling cohort of licensed firms — those that are required to file their rates to the state. The number of dwellings with FAIR coverage more than doubled from 2019 through 2023, to 339,000 homes with about $300 billion in exposure.
“At this point, California faces an unprecedented insurance crisis, and there is not one solution to address it,” Victoria Roach, president of the California FAIR Plan, testified at a hearing last month on industry reform.
When state-licensed insurance companies won’t offer coverage, other insurers step in with policies that can cost $35,000 to $60,000 a year. But that covers only fire – not theft, flood or liability, according to Max Kramer, an independent insurance agent in Topanga Canyon, a community northwest of Los Angeles with high fire risk. Some homeowners have no choice but to pay those bills because their mortgage lenders require insurance, he said. In most cases, the only source of earthquake insurance is the state-backed California Earthquake Authority.
“I’ve been yelled at by more real estate agents than ever lately because of the insurance,” Kramer said. “People are breaking deals that are already in escrow.”
Mac ended up closing the sale on the Hollywood Hills home after the buyer’s agent spent more than a week to find a fire policy for $80,000 — instead of $200,000 — that covers just a fraction of the replacement cost. Such last-minute hangups are increasingly common as insurance gets costlier and harder to come by, Mac said.
“What we’ve noticed is no deal is done until the money has been transferred,” he said.
This article was provided by Bloomberg News.