Consumers are facing unprecedented insurance challenges in California and across the country. Even though catastrophic events haven’t been happening in San Francisco, we’re still experiencing insurance difficulties in transactions. Knowing how to navigate the insurance industry has never been more important.
How did we get here? Insurance companies are operating at record losses. The past few years of wildfire and flood events have sent the insurance industry reeling. 2022 was the eighth consecutive year in which the United States experienced at least ten catastrophes which resulted in more than $1 billion in losses, according to the American Property Casualty Insurance Association (APCIA).
Claims are more frequent—and more costly. The cost of an average claim has risen significantly due to higher rebuild costs. Labor and materials are at all-time highs, with contractors charging an average of $450-$650 per square foot. These costs are then passed on to the insurance companies on every claim.
Insurance companies are paying out more than they’re taking in. Carriers must adjust their premium rates based on their loss ratios so they can remain solvent. However, the California Department of Insurance limits rate increases, which leads to insurers pulling out of California in order to stay in business.
What are we seeing in San Francisco? There are a few things that are affecting buyers’ ability to get insurance in the city—a building’s age/condition, the location’s crime score and prior claims on the property. These have always been factors, but insurers are tightening up their guidelines. For example, many insurers will avoid issuing policies on properties with known knob and tube wiring. If buyers or sellers aren’t willing or able to update the electrical prior to close of escrow, the more expensive California FAIR Plan (CAFP) or Lloyds of London may be temporary last resorts. You can switch over to a lower-cost policy with a new insurer once you update the electrical.
Condo policies are typically not a problem. We’re not seeing issues with buyers getting insurance on individual “walls-in” condo policies. This is because the HOA policy is the one that covers the building and addresses rebuild and other common area costs.
Buyers: Make sure you include an insurance contingency in an offer on a property, especially if there are aspects of the property to which insurers might object.
Once in contract, get insurance quotes within the first week so you know how much you’ll be paying for insurance.
Sellers: Have a single-family house or multi-unit building you’re planning to list that has known knob and tube wiring? Get an estimate from a licensed electrician and consider updating the electrical as part of your pre-sale prep work. And make sure you pull your CLUE report, which states past insurance claims on the property.
[Special thanks to my favorite insurance broker Roger Larson of Larson Family Insurance, who provided excellent information for this post.]