California's home insurance collapse worsens as State Farm dumps 72,000 policies

A firefighter works to protect homes surrounding residences that caught fire due to the CZU Lightning Complex fire in Boulder Creek, California, on Friday, August 22, 2020. (Dylan Bouscher/Bay Area News Group)

State Farm, California's largest insurer, announced it will stop covering 72,000 homes and apartments starting this summer, a move likely to sharply inflate housing costs for affected residents in a state reeling from a series of recent devastating wildfires.

The Illinois-based insurance giant, which accounts for a fifth of California's home insurance market and is the largest property and auto insurer in the U.S., cited rising costs, increased catastrophe risks and outdated regulations in announcing it would not renew California policies for 30 thousand houses and 42 thousand apartments.

“This decision was not made lightly and only after a careful analysis of the financial health of State Farm General,” the company said he said in a March 20 statement. “State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and comply with applicable solvency laws. It is imperative that we take these actions now.”

The announcement comes less than a year after State Farm announced it would not issue new policies in California, citing similar concerns. It comes as the state's elected insurance commissioner embarks on a yearlong overhaul of home insurance regulations aimed at calming California's collapsing market by giving insurers more freedom to raise premiums while extracting commitments from them to expand coverage in fire-risk areas.

The California Department of Insurance said the move raises questions about State Farm's financial health.

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“One of our roles as an insurance regulator is to hold insurance companies accountable for their words and actions,” Deputy Insurance Commissioner Michael Soler said. “Today’s decision by State Farm General raises serious questions about its financial condition – questions that the company must answer to regulators. … We need to be confident that State Farm’s strategy moving forward is to meet its obligations to its California customers.”

But it was not clear whether the department would launch an investigation into State Farm's move.

The company's announcement comes directly after the state Department of Insurance approved a 20% premium increase for the company, said Harvey Rosenfeld, the founder of Consumer Watchdog who authored the state's insurance regulatory system approved by voters in 1988's Proposition 103. That approval was based on the current number of State Farm policyholders, and he said the state should take another look at raising the rate taking into account the new cancellations.

“The commissioner has the authority and responsibility to open an investigation,” Rosenfeld said. “The rate we just approved is excessive based on the fact that you are getting rid of 72,000 policyholders.”

State Farm said the pending coverage cancellations account for just over 2% of its policies in California, but it did not say where they were and what criteria the company used to flag them for non-renewal.

But Carl Sussman, an independent broker and industry expert based in Los Angeles, said those to be dropped will almost certainly be properties in and around prairie areas considered more at risk from wildfires, where obtaining standard coverage has become nearly impossible.

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“You can eliminate the worst risks,” Sussman said.

Property owners who lose their coverage will be left with no choice but the California Fair Plan, Sussman said. The private insurance pool created by the state provides minimal last-resort coverage that can cost much more than a standard insurance policy.

Reliance on the FAIR plan has soared as many of California's largest home insurers began limiting coverage in recent years after a series of devastating wildfires that followed a prolonged drought – 14 of The 20 most destructive wildfires in the state Recorded occurred in the last ten years.

FAIR PLAN NUMBER Policies have doubled in five years, from 154,494 in September 2019 to 339,044 in December. 2023. Total liability exposure exceeded $311 billion in 2023 compared to $112 billion in 2019.

State Farm said non-renewals will begin July 3 for home, business and rental housing policies and Aug. 20 for commercial apartments.

Those who have been notified they will lose coverage should call the insurance department at 800-927-4357 or use its number, Soler said. Insurance.ca.gov Website for help finding new coverage. He said the department is “on track to enact the state’s largest insurance reform in more than 30 years by the December 2024 target date.”

“Changes to outdated regulations will improve choices for all Californians so everyone has options beyond the FAIR Plan,” Soler said.

But that may not come soon enough for canceled State Farm customers.

Sussman said the administration should put all the proposed changes in place at once, rather than juggling them throughout the year. Consumers are struggling now, he said, and it will take time to make any regulatory changes to provide improved coverage options.

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“We are moving quickly to implement them while respecting the robust public review and transparency principles of California law,” Soler said.

“The insurance commissioner gave the industry everything they wanted, and they're still not satisfied,” said Rosenfeld, who has defended the state's regulatory framework and criticized the commissioner's office as being too deferential to the industry.

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