Like a bad neighbor, State Farm just isn’t there for housing providers in California

After California’s largest home insurance provider signaled its intention to discontinue 72,000 home and multifamily policies because of inflation, regulatory costs, and the certainty that Mother Nature will strike. 

Key takeaways:

  • Overregulation has made insurance companies leave California in droves.

  • The Department of Insurance has pledged reform but critics say it is too little, too late.

  • Forward-looking State Farm policyholders are advised to look at their renewal dates.

  • While other companies may be open to writing policies, they are sticklers for the condition of the property..

Managing the intricate details of landlord-tenant relationships is enough for us to do, and we don’t want to enter the murky insurance territory. But it is top of mind to the clients we serve and to us as well, as real estate investors ourselves, that we feel obligated to impart a few thoughts on the exodus of insurance companies throughout the state.

One of our famed governors said that the government is not the solution to our problem but rather, the government is the problem. It’s not just a clever quote; it’s something we have witnessed with droves of rental housing providers leaving California to put their real estate investment dollars in Nevada, Texas, and elsewhere because the Golden State’s regulatory regime is so maddening.

We are now seeing the same phenomenon occur with overregulated insurance carriers fleeing. Unlike utility companies, they don’t have to be here and it is their prerogative to leave. Seven of the 12 largest insurance groups in California have chosen to do so.

 

Department of Insurance Commissioner Ricardo Lara has spoken about the crisis and draws an analogy with the devastating 1994 Northridge earthquake, considered one of the costliest and most significant seismic events in U.S. history.

He told Fox Business, “When the legislature came in and tried to overregulate, they no longer write earthquake insurance in California.”

In a September 2023 press release, Lara announced a “Sustainable Insurance Strategy” with a package of executive actions designed to modernize the state’s insurance market. Critics have said the plan isn’t working, as evidenced by so many insurance companies uninterested in doing business with Californians.

 

What’s next? For that, we reached out to the Department of Insurance and our go-to insurance agent, Jude Winterhalter. 

According to the Department of Insurance, the agency will be eliciting public comments in April, with any anticipated policy changes to take effect in December.

For those owners with existing State Farm policies, take a look at the renewal date. Since changes will not go into effect until late summer, policies up for renewal before then will be protected for another year. Owners who have the unfortunate luck of having their policy scheduled for renewal in September will need to find another insurance provider.

Behind the scenes, talks are underway between State Farm and the Department of Insurance to see if a compromise can be struck between the two in terms of rate hikes. It is our understanding that State Farm wanted to raise rates by 40 percent and that was too steep for the department’s liking.

 

 

Bornstein Law has always admonished housing providers to maintain their properties in good condition, but the scarce supply of insurance providers makes it even more imperative to modernize their buildings to win the favor of selective insurers.

Jude Winterhalter of Jackson Square Insurance Associates says that there are carriers like Honeycomb and others willing and able to write multifamily policies, but are extra careful in evaluating risks. These insurance companies are especially cautious with outdated electrical systems and roofs that have not been maintained, Winterhalter says.

In every time and era, we have told clients to do their part in ensuring a habitable dwelling. It is the landlord’s foremost obligation to maintain the premises in livable condition but it may be prudent to go a step further by making upgrades.

The dearth of insurance companies is just one of many challenges that face rental housing providers, but Bornstein Law is dedicated to helping them power through them.