Californians are facing higher rent due to rising insurance rates

Like single-family homeowners in California, homeowners also face higher insurance premiums. And they pass some of those costs on to their tenants.

Many insurance companies have stopped writing policies in the state because of increased fire risks, but that’s not the only reason. They say that in the event of any catastrophe, the potential costs of replacing any residential or commercial property, from labor to material costs, are simply more expensive now. So even property owners in areas not at high risk for wildfires have canceled their policies because their buildings may need repairs or improvements. Owners must find other insurers or turn to the ever-growing and more expensive FAIR plan, the insurance industry-run plan that is mandated by California law to be the insurer of last resort.

Here, according to some experts, the insurance crisis could worsen the housing crisis. Increased insurance costs for properties other than single-family homes are starting to affect the rental market — in a state where nearly half of residents are renters — and could worsen the state’s housing woes, they say.

Josh Hoover, an insurance broker in the Los Angeles area, deals primarily with commercial accounts and said it’s “nearly impossible” to find coverage for any large structure. At the end of 2022, Allstate said it will stop writing new property insurance in the state, including commercial policies. Then State Farm, the state’s largest insurer, recently canceled policies on tens of thousands of homes, community housing associations, business owners and commercial apartment properties.

“Even buildings made in the ’80s are now considered old, which is ridiculous,” Hoover said. “Most carriers want everything updated within the last 30 years. They want a new roof, electrical redone, plumbing redone – they want you to have copper pipes.”

For owners, “Death by a thousand cuts”

Earlier this year, the Farmers canceled the policy on a 33-unit apartment building in San Bernardino that was built in the 1960s, said its co-owner Uwe Karbenk. Karbenk found an out-of-state insurer instead of opting for the more expensive FAIR plan, but his premium still rose by $28,000 to more than $41,000 a year.

Combined with state laws that limit how much rent is allowed to increase each year — 5 percent plus inflation, or as much as 10 percent in some cases, with possibly other rent control measures down the road — Karbenk said that owning in California is “a bit like death by a thousand cuts.” He added that if his profit margin continues to fall, he would prefer to invest in something other than real estate.

“One of these measures, it’s not a big deal,” Karbenk said. “But over the years, it’s really difficult for mommy to shut up.”

Mike Placido and his wife are definitely a mom and pop. They own two rental properties, a four-unit building in San Gabriel and a duplex in Alhambra. He said they bought the properties as a way to supplement their retirement income when the time comes in a few years.

When State Farm canceled the policy on their San Gabriel property, Placido received an offer from the FAIR plan for $8,600, much higher than their old premium of $2,600. Instead, he was able to put together three different policies from a Florida insurer to get the coverage his old policy provided for $6,500, a 150 percent increase. So he said he plans to raise the rents in January.

“It’s not like I’m a land baron,” Placido said. “I will pass on as much as I can, as much as the market can bear, and I will bear the rest. I have no choice.”

Another concern for renters

About 44 percent of Californians are renters, according to the U.S. Census. The median monthly rent in the state is $2,850, a third higher than the national figure, according to online real estate marketer Zillow. About 30 percent of the state’s renters are considered severely cost-burdened, meaning they spend at least half of their income on housing, according to an analysis by the Public Policy Institute of California. Now their rents could rise to even more burdensome levels.

Shanti Singh, legislative director of the nationwide tenants’ rights group Tenants Together, said it is “still unknown how common it is” for tenants’ rents to rise along with insurance costs, in part because not all landlords say why they are rising the rents. .

“It depends on the owners,” Singh said. “Some are transparent; many of them are not.”

Any significant rent increases have yet to show up in Zillow’s data, which shows that the average rent in California is actually down about $100 compared to last year, although it has climbed more since the start of the year.

Singh said he fears things will get worse for renters as the effects of climate change, such as wildfires, continue to affect the affordability of insurance and, in turn, housing.

“Tenants will have the least recourse,” Singh said. They “always end up bearing a disproportionate burden of what they can afford.”

Housing and climate change

Singh and others facing California’s affordable housing shortage have expressed concern that parts of the state will eventually be unlivable and uninsurable — whichever comes first.

Sarah Karlinsky, director of research at UC Berkeley’s Ternary Center for Housing Innovation, said a lack of sufficient housing in already developed cities means more buildings “on the edge of regions, in places that are more dangerous,” also known as of wild territory. the urban interface, or WUI, in fire parlance.

“If we don’t want to continue down this path, we need to fundamentally rethink our development models,” added Karlinsky.

Laurie Johnson, an urban planner and former chief disaster response and resiliency officer for the California Earthquake Authority, pointed out that some property owners in the state who own their buildings and don’t have mortgages may choose not to insure their properties because of the cost growing. It’s worrying, she said.

“It looks like we want to secure our multifamily stock and we don’t want to take the risk of losing it,” Johnson said. Hoover, the insurance broker, agreed and said some clients have told him they plan to drop their insurance.

Johnson added that just as jurisdictions have called for seismic retrofitting in the event of earthquakes, protection against fires and other catastrophes — and the ability to replace anything that might be lost — is vital: “You’d be displacing so many people.”

The growing risks of climate change make it more important than ever for renters to have their own insurance, said Emily Rogan, senior program officer for United Policyholders, a consumer advocacy group.

Renters insurance would cover the costs for renters to stay “somewhere else while you figure out where to live in the event of a severe weather event,” Rogan said.

Effects on commercial properties and businesses

Small businesses that rent their space will also be affected by the increase in their landlords’ premiums.

John Reed owns a mixed-use commercial property in Oakhurst, outside of Yosemite — an area that has seen wildfires in the past few years. Last year, his fire insurance cost about $2,800, but Berkshire Hathaway canceled the policy. He received three different quotes from the FAIR Plan, the highest being $24,000. Then he found a plan from Lloyd’s of London for about $14,000.

Reed said he will have to pass the increased costs on to his six tenants. “As an owner, I can’t hit them with the whole load at once,” he said. “If I can afford it, I’ll try to spread it over two or three years.”

California Insurance Commissioner Ricardo Lara unveiled a multi-part plan to address the state’s insurance woes, primarily focused on wildfires. For example, insurers will be allowed to use catastrophe models if they agree to write policies in certain areas of the state. But Department of Insurance spokesman Michael Soller pointed out that Lara recently announced a deal with the FAIR Plan that creates a high-value commercial coverage option.

“The reforms will have broad benefits for the availability of insurance,” Soller said.

This story was originally published by CalMatters and distributed through a partnership with The Associated Press.

Copyright 2024 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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