Let’s start with some good news. The insurance crisis of 2023 – 2025 is not limited to California; it’s everywhere! So, we are not alone; we are, however, treated more harshly than most states with the possible exception of Florida and the southeast coastal regions in general.
The crisis is demonstrated by the level of catastrophic losses (Allstate estimates $286,000,000 alone in October due to the two hurricanes). What is interesting, though, is that Allstate is preparing to get aggressive with homeowner’s insurance in 2025; I do not know what they will do with rental properties, however.
Bad fires, such as the recent Mountain Fire in the Camarillo, Santa Paula, and Moorpark areas, also generate losses to insurers in the millions of dollars while reserving for the possibility of having to infuse the Fair Plan which is nearly bankrupt. The CFP’s financial health question is why your CFP premiums have increased dramatically. One major CA insurer is looking at a potential request of $400 to $700 million.
The major loss center to insurance companies, outside catastrophic wild fire claims, is simple water damage caused by broken pipes or appliances which release water that damage your home or rental properties. That is a huge percentage of annual claims.
Another big claim sector is dog bite claims, which are liability claims, as well as the normal trip & fall type of claims which get quite creative.
What is often called a “nuclear verdict” in liability claims is one that has a HUGE verdict which is paid by the insurance company. These verdicts, some experts claim, are the result of growing mistrust of corporations, erosion of tort reform, and the simple normalization of these larger awards (advertising, etc). They are also the result of a new way of pursuing damages by having investors fund the plaintiff attorney’s costs for a piece of the verdict. Sounds impossible, but it is real.
Property owners are faced with some very striking insurance issues, which used to be easy to fix.
Your issues in the current marketplace revolve around residential property & liability insurance availability and affordability, which has been a bit tough on property owners the last two years and will continue to be so for at least another year. And when companies re-enter this space, it will be with different contracts and strict underwriting. Until then, most are looking at higher prices from the secondary market – what we call surplus lines.
St Farm’s exit from apartment insurance, and property in general, has created a nearly overwhelming situation in the marketplace for properties that – in the past – were simply renewed each year by St Farm, sometimes with little scrutiny from the insurance company.
The result of St Farms method of operation are that former St Farm consumers are receiving offers from other insurers that are more expensive and more restrictive.
Right now, I want to answer two questions that were submitted to me, as they are very common:
Why are premiums constantly increasing? Is there a way to limit the increases? One specific member has had no claims and his premium went up 19.8% and he thinks that’s terrible: the answer is, you did well. Pay that premium early & often. That is not much and is lower than the cumulative increase in inflation and the increased cost of insurance over the past 4 years. Many people are seeing much higher increases in costs.
One way – an easy fix you can all do – to reduce your premiums is to increase your deductibles; that’s a relatively easy step which can offer you a meaningful reduction, depending upon the insurance company. If you have already done that, shave off limited coverages; by limited I mean, if there is a $12,000 benefit and it costs $140, you might want to risk dropping the coverage. Ex: Service lines.
Then, start to update your properties: plumbing, electrical, roofs, HVAC systems when applicable, and cut back vegetation from the side of your property and remove tree limbs hanging over your roofs.
Why are insurance companies not taking new clients or canceling accounts without notice?
1. It is all over the board. Some companies left CA, some are on hold, most have now migrated to taking in limited amounts of new policies, some are looking for as much new business as possible using the current, newer and tougher underwriting criteria. We are now moving toward the healing phase of the insurance crisis, so in 6 months you will be seeing more aggressive stances from insurance companies to find new business.
2. If you have been canceled without notice, that is rare; honestly I tend to doubt this will happen to you given the nature of the regulations in CA. The odds are remote. There are notification requirements, and usually there are 2-3 notices of a looming cancellation before you get the actual cancellation notices – at least with the admitted marketplace. There is a variance in the non-admitted marketplace which is still policed by CA.
Two great ways to prevent your policies from being canceled or to ensure you will be notified when your policy is being canceled: Keep your contact information current with your insurance agent and company, and make sure you keep your insurance companies current on your mortgagee clauses and loan numbers. Do not assume that your new loan company, that replaced your prior lender, will tell the insurance company of the need to update the policy with the current loan info. We see a lot of cancellations for not paying the premium due to incorrect lenders info and thus the invoice goes to the wrong mortgage company.
If you make payments directly to your insurance company and you use a recurring credit card method, be certain that you keep the card current with your insurance company.
Back to what is happening now. Companies are increasingly becoming active. Farmers, for example, a year ago was closed after the first week exceeded the one-month max of 7,000 policies. Now, it’s entirely different. In the next few months, many companies will open up for more new policies. But it will be measured.
What is changing is that they are starting to get the rate increases they want. But if they don’t get what they want, which is part of the St Farm story, insurance companies will continue to close certain coverage lines – like insuring condo units – which have been unprofitable for a very long time.
Artificial barriers to allowing the marketplace work is the biggest problem of all. In my opinion, if we just let the marketplace do what a marketplace does, we would not be where we are at this time. 30 years ago, we were being pummeled by direct writers such as St Farm, Farmers, Allstate, etc. But, they ran too many programs under the market rate levels and even the biggest companies are unable to keep that going; it worked when they made 15% on their money – they could run at a negative loss & expense ratio. However, high interest rates don’t last forever. Now, we are writing their policies and they have loss ratios exceeding 110% or more. But, the ebb & flow should not be this drastic; it doesn’t have to be that way, aside from occasional tempests that hit all industries, which then adjust and move on.
Other artificial barriers include the department of insurance. Some of the best apartment and commercial real estate markets asked for a 30% rate increase; sounds like a lot at one time and they were denied. Now, some property owners are receiving 300% rate increases.
Our industry is cyclical. Most companies have been hammered the last 9 of 10 years with bad loss ratios. And, they are losing money. But the political nature of our Dept of Ins will not allow the market to operate and police itself, and obtaining rate increases is difficult. So, it is coming over a 2-3 year period rather than gradually. Ex: If a company starts charging more, then you will shop; the market will work. Once a company starts charging more to regain profitability or they may be greedy – either way, they will lose policyholders. But over a 7-10 year period, their rates will be market competitive as the market will drive this.
As I said, artificial barriers to letting the market work are the biggest problem of all. The best example I can offer is that all insurance companies are “reinsured”. This is the only way they can insure millions of homes and businesses. Think of the World Series of Poker: The people at the last table who win the large pots will not walk away from the tables with all of it. Likely, they sold a percentage of their potential winnings to others who also sold percentages of their potential winnings, and so on. Basically, they hedged against their losses and created a balance and the ability to do more to ensure they can cover several players and not just their own risk. It also offered the players more chances to win. The insurance industry can only work in this way. Whether they are a mutual or a stock company, they lay off some of their risk to others who will purchase it. It’s a huge part of the business, and it allows consumers to pay lower prices than they otherwise would have to pay if just one company was responsible for millions of dollars of loss for a single claim. The risk must be spread out.
But, in California our insurance department does not allow pass-throughs of the increased cost of reinsurance which – again – actually lower the cost of your insurance. I am not clear on if this is for all lines, but reinsurance applies to all levels of insurance. Not allowing pass-throughs is sufficient enough to be one of the top reasons that we are in this currently dysfunctional market. I believe this issue is being addressed and will resolve itself in due course. *
An hour & 15 minutes before this presentation was given, the CA Dept of Insurance announced a 12/5/2024 meeting to begin discussions on passing through reinsurance costs. The initial plan is to discuss a one-size-fits-all approach to allowing reinsurance to be included in rate increases. Hopefully, they will ultimately allow a more market-based approach rather than a dictated approach as each company’s needs are different.
Also, we are seeing very different responses to the current availability crisis.
Safeco, a leading landlord insurer, is dropping certain unprofitable lines of business. In 2025 they will stop writing new renters, condo, motorcycle, and boat insurance along with a few other coverage lines. In 2026, they will start non-renewing these lines of coverage. You can have a loss-leader, but you can’t lose in all lines; something has to go and that will help property owners as Landlord insurance will continue to be a key line for Safeco and presumably Liberty Mutual. Most of the changes are intended to bring better options to you in the future.
Some companies are restricting the flow of new policies so as to maintain solvency and a level of profitability. Others are picking up their ball and going home. What is happening is a major market shift which will reward conscientious property owners in the end. For now, it’s just painful for all.
So, what do you do when your policies are canceled? You know the drill; this also applies to keeping a lid on rate increases: Here it is in black & white:
Property owners must call their insurance broker (often St Farm) and obtain a 5-year claims history (Loss Runs).
Then you start updating your properties if you are able.
Properties cannot have the following panels & circuitry:
Zinsco panels and compatible breakers such as Kerney, Federal Pacific, Stab-Lok breakers, Push-matic, Challenger, Square D panels, and an ever-growing number of electrical panels including Sylvania and GTE.
Panels are not cheap, but it may mean the difference of several thousands of dollars in annual insurance premium or even the ability to obtain insurance coverage at all. Some of these electrical systems will be accepted if they are maintained annually and the activity logged. Your premiums will be quite high, however, and the claims valuation will be ACV in most cases.
Many properties in Los Angeles and Orange counties still have fuses; that is an automatic Fair Plan assignment and an ACV (actual cash value) insurance basis. ACV losses are depreciated which means the property owners need to chip in on repairs over & above their deductibles; they are effectively co-insuring the loss out of their checkbooks.
Insurance companies want to see evidence, where HVAC systems are in place, that these are newer and serviced regularly.
Companies are looking for updated plumbing systems, preferably complete replacements of plumbing systems
Companies want to see newer roofs.
Insurance companies are increasingly less desirous to provide landlord insurance for individual condominium units. Placing coverage can be a real problem.
Pools are not a good idea for rental property, and many companies are again enforcing interior fencing requirements for pools. You may want to remove the pools or increase your rent as you can. That is a great professional property management function.
Insurance companies want your renters to purchase renters insurance; use liability limits of $500,000 as a minimum if available. If the tenant has dogs, have his agent verify that (1) there is full limits coverage for dog bite claims and (2) if there is a breed exclusion. You may not get the full $500,000, but $300,000 as a minimum and stay vigilant on dog bite issues.
They do not want senior housing or student housing – this is more of a multiple unit issue. If you have that exposure, you will be making a lot of phone calls for coverage assistance from the specialty companies.
Companies do not want bars on windows and doors unless they can be released from the inside.
They do not want barbeques within 5 feet of your buildings nor on the tenants’ balconies & decks. We had a huge loss several years ago over an exploding gas-lit barbeque. It happens.
All of this seems quite rational, but all of the bad habits are generally allowed. If you are a property owner, you are expected to act like you are operating a business.
For apartment complexes, companies are even asking about your vendor’s contracts, including additional insured language being on all certificates from the vendors. The companies are looking for vendors’ Workers Compensation certificates, and they want to know your pet policies.
Companies are also asking about Asbestos being present and if there is aluminum wiring present.
What you must understand is that most of these underwriting issues are here to stay. And, these are not all of them. But I have given you enough to understand that this isn’t property ownership or management of 25 years ago. Because of that, we very highly recommend that you obtain professional property management.
Many insurance companies are moving in and out of the Landlord and Apartment coverage line, and others have loosened their underwriting a bit and then tightened it again. Mercury, a company we like a lot and which has stayed in this market space and not left it, demonstrates these changes very well with its apartment program:
Ex: Mercury, a major writer of apartment properties: New business effective the end of August started to show Mercury to be tightening its underwriting standards, and the move is to tightening the acceptability of properties to its product:
Apartments under the age of 30 years are still being scrutinized by maintenance proximity to flammables, and other statistical measures.
Apartments 30 – 39 years in building age will require underwriting review to determine eligibility. This used to be 40-49 years old. There are lots of reasons for this, including slowing down the incoming numbers of applications and providing for controlled growth.
Apartments 40 – 49 years in building age (used to be 50-59) will require:
Underwriting review,
Current color photos of the location’s front, sides, and rear,
Proof of updates to the roof, electrical, HVAC, and plumbing system; and
Evidence of regular pest control maintenance.
Apartments 50 years and older in building age are ineligible. Prior to the 28th, this number was 60 years old.
This type of underwriting is becoming the norm; whether it is Mercury for newer and modestly older buildings or the secondary marketplace for older properties, the companies want information that demonstrates people are taking care of their properties and not just using the properties as a bank. We were recently appointed with a newer insurance company in this marketspace, and one of its primary underwriting criteria is that a property must be well maintained; it can be older but it must be clean and up to date. Underwriting actually means something; it isn’t just a title.
And, if you didn’t fully grasp what I just advised you, now you know one of the primary sources of the insurance crisis: Los Angeles and Orange County properties are getting old. Your best strategy to get the best coverage and pricing is to update your properties in order to access the best coverage and rates from the newer and older companies alike. Along with the companies obtaining rate adequacy, this is where all of the roads meet. Older properties typically are more likely to have insurable damage that is age-related (pipe breaks, electrical fires, roof damage that allows rain to penetrate, etc) People often will wait until something happens before they will replace wiring, piping, and roofing.
That leads property owners to their #1 mode of defense against outrageous pricing: Updating your properties. It can help to prevent claims and reduce your exposures to unnecessary risk, such as habitability claims which have always been excluded but these exclusions are being re-written to be quite ominous. We used to call these “failure to maintain” exclusions, but this is all about habitability of the properties.
Updated properties can get preferred insurance coverage and rates through specialty carriers that value people who pay attention to their properties. We know this is easier said than done; long-term property owners are getting hurt with rent control as they cannot pass through enough of the costs to better their properties. So, they often do not make the updates until the damage is done, and then their new insurance rates skyrocket.
These issues apply as much to 1-4 unit properties as they do to the apartment class of business. Generally speaking, the preferred insurers want newer homes or older homes as long as they have had plumbing, heating, roofing and wiring updates including complete replacement. Some companies are more aggressive about updates than are others, but even those companies will often require a write up from a general contractor or licensed roofing, plumbing or electrical specialist.
However, the 1-4 unit properties have their own insurance protection issues which, along with aging properties, include the difficulty of property management companies to obtain additional insured status from many insurance products.
Property managers can loosely categorize companies into 3 categories:
1. Companies which will not offer additional insured status. That begins to dilute the available pool of companies that will offer insurance protection which is acceptable to property management.
2. Companies whose contracts provide coverage for property managers but which will not issue additional insured endorsements. (Mercury, Travelers)
3. Companies that freely add the additional insured endorsement plus discount policy premiums because a professional organization is managing it. Safeco is one of these companies. There are others.
This situation is not getting better anytime soon. The numbers of companies offering a separate additional insured endorsement are shrinking. At some point you will/your property manager will accept additional interest endorsement with a copy of the policy proving additional insured status. It is inevitable.
Another way to deal with this situation is to create your own master policy or encourage your property management company to create a master policy. The coverage forms are made for portfolio investors that own lots of 1-4 unit properties, and these master policies can help you. There are also master policy programs that will work with more than 4 units.
One of the greatest values of the master policies is that they will either waive a vacancy clause or just modestly increase the deductible. This type of program has re-emerged in the past few years as a viable alternative to the personal, landlord insurance marketplace. This product is written on commercial property forms, so you do not have some of the personal insurance coverage niceties, but it does the job in most cases. In this policy structure, the property management company will usually obtain its additional insured request from the investor’s insurance company. And if the property management company has a master policy, they are the named insured #1 and covered along with you. The pricing in these programs are comparable to the competitive, newer insurance contracts from companies such as Steadily and other, similar programs.
Before we wrap up the residential insurance issues, I want to alert you to language in some of the newer insurance programs that is appearing on apartments as well as 1-4 unit properties:
The Habitability Exclusion, aka the Maintenance & Habitability Exclusion as named by some companies that wish to soft-sell the product.
This endorsement, found increasingly on all levels of insurance (primary as well as secondary markets) typically reads as follows:
This insurance does not provide “bodily injury”, “property damage” or “personal and advertising injury” arising directly or indirectly out of the alleged or actual:
a. violation(s) of a health and safety codes, civil or federal codes, state or municipality law, regulation, or rule as it pertains to the “habitability” or maintenance of any long or short term habitational unit, including but not limited to:
1) Housing and Urban Development laws, ordinances or statutes;
2) rent stabilization laws and ordinances;
3) Federal, state or local Section 8 (government subsidized) programs;
4) any administrative rules or regulations pertaining to the foregoing laws or regulations; or
b. failure to maintain any premises in, or restore any premises to, a safe, sanitary, healthy, habitable and tenantable condition; or
c. wrongful eviction, either actual or constructive, arising out of a. or b. above.
This exclusion applies even if negligence or other wrongdoing is alleged in the supervision, hiring, employment, training, investigation, reporting to authorities, or monitoring of others by an insured if the “occurrence” which caused the “bodily injury”, “property damage”, or “personal and advertising injury” involves any one or more of a., b. or c. above.
The following definition is added to Section V – DEFINITIONS:
“Habitability” means a safe living environment that is fit for occupancy by human beings in a sanitary, healthy, livable, or useable condition
I am aware of property management companies which have advised their clients that this endorsement is not acceptable. I am not certain that this is a stance they will be able to maintain for very long. I think this one is here to stay. Although it may be too early to say, many preferred apartment underwriters have adopted elements of this endorsement. Just be aware that the wrongful eviction coverage was pretty much watered down to very little coverage with this endorsement. Most property managers will have coverage for this.
Mold is another coverage conundrum. There may be very limited property limits for repairs and there is generally no coverage for liability on the 1-4 unit property forms. On the preferred companies commercial forms, there often is a limited amount of property coverage, and again nothing for liability in general. There are a few ways to help with this situation, and it has a number of added benefits. The best way to handle this exposure is to go to the property and inspect it. We recommend that you add an additional inspection during the year; if you inspect twice, start doing it three times – and so on. You may more quickly find mold growth so that you can attack it quickly; you also may find that the tenants are not alerting you to leaky sinks and water damage next to the shower and toilet areas, which will eventually – if not treated – turn into dry rot and mold. You might even find that the tenants’ children are practicing their artwork with wax crayons on the interior walls. Then, your property owner will also be able to determine more quickly, along with your input, if a renewal lease will be offered.
There is a lot still to talk about, but before I go to look at your direct protection, please accept the following advice:
Always provide your insurance specialists with accurate information and discard nuanced comments. A couple of months ago, we were asked to quote on a property and the caller was unwilling to answer our questions. She was unhappy that her best quote at that time was $8,000 for a six-unit, but that likely was her best offer – or close to it – because she was not forthright and was refusing to give us the informational tools we need to succeed for her.
Protection for owners or managers of real estate:
For 1-4 unit properties, the most common limit of liability is $500,000, as these are “personal” Landlord Insurance policies. The coverage limits being asked by property managers seems to trend toward $1,000,000. If a person has only the $500,000 option as a maximum limit of coverage, that person must be careful about accepting a personal excess policy to cover the excess requirement. Many personal umbrellas will not extend coverage through to an additional interest and most definitely not through to an additional insured on a primary policy. When this situation occurs, and again it occurs quite often, it is because the definition of “who is an insured” in the umbrella policy is usually limited to the named insured and resident relatives. There are exceptions, but you must be aware of this – particularly if you sign a management agreement indemnifying a property management company for up to $1,000,000 of insurable claims.
For commercial residential properties (apartment insurance packages), usually there is no issue with having the property management company named on the policy.
Not at all to be minimized are other coverages that should be reviewed. If you are a property manager, you need these coverages; if you are a client of a property manager, you must aske if your property management company has Cyber & Crime, Directors & Officers liability, and Employment Practices Liability where you pick up discrimination and other employment exposures and then add a Third Party endorsement which extends many of these protections to non-employee claimants. This is more of an apartment complex set of coverages, but be aware of these exposures.
You also need to ensure that your property managers have E&O, Tenant Discrimination, and Fair Housing protection in their insurance portfolio.
Coverages most property owners need:
Your primary Apartment Package or Landlord policy coverage including dwelling, rent-ready contents, rental income protection, and liability insurance.
If you have employees or perhaps a tenant receiving a break on rent to help you (collect rents, clean units for showings, etc.), you have an employee. You need Workers Compensation.
Earthquake insurance, and possibly Flood protection.
Excess Liability protection (aka “umbrella”)
Many preferred insurers will add modest cyber, crime (money/security stolen from you), and other additional protection if you qualify for their programs. Mercury will even add bed bug coverage up to $50,000
The primary insurance companies in this area of the state and writing new policies include Mercury, Travelers, Farmers, Amtrust, Seneca, Cal Mutual (mostly NorCal), CIG, and USG. Some of these companies will pause here and there, but the highlighted companies are good. Others are returning (not St Farm).
The secondary market for apartments includes organizations such as CORE, CRC, Moxy, Distinguished, and Amwins. These markets have a lot of the same companies but occasionally will have a specialty program dedicated to them. Common insurers in the secondary market to which these companies go include Westchester (Chubb), Atlantic Specialty, occasionally Kinsale, and others. Your agents will have favorite outlets that work with specific companies to help you.