Why State Farm has decided not to insure homes in California

Photo (c) Colin Anderson Productions, Ltd. - Getty Images

Will other states meet the same fate?

State Farm sent a shockwave through California last week when it announced it would no longer write homeowner’s insurance policies in the state. The company pointed to increasing wildfire risks and rising construction costs.

Disastrous fires in recent years wiped out thousands of homes, resulting in huge expenses for State Farm and other carriers operating in the state. In addition to inflation, regulations and other requirements have increased the cost of rebuilding.

Stacy Elmore, the co-founder of The Luxury Pergola, provides home improvement services to many homeowners in California.

“What we see from them is excessive costs in permitting and planning when compared to other states,” she told ConsumerAffairs. “Additionally, the cost of skilled labor is quite high in the state. I expect that we may see a trend of companies choosing to not do business in states that they deem cost prohibitive.”

‘No surprise’

Maureen McDermut, a Realtor with Sotheby's International-Montecito, says the town of Montecito has faced these issues for years.

“Between the high property values, environmental factors like wildfires and mudslides, and rising construction costs, it is no surprise that insurance companies would extend this to the rest of the state,” McDermut said. “It would not surprise me if other states with similar conditions like Florida begin experiencing the same issue. While many in Montecito and other wealthy communities can do without insurance, many throughout the state cannot."

Mark Browne, chair of the Faculty of Risk Management, Insurance and Actuarial Science at the Maurice R. Greenberg School of Risk Management at  St. John's University.

“I believe this is the continuation of a practice, as opposed to a trend, not to write coverage when a premium commensurate with the risk cannot be charged,” Browne told us.

Aftermath of Hurricane Katrina

In fact, insurance companies in the past have declined to write policies in areas prone to natural disasters. After Hurricane Katrina ravaged Mississippi’s Gulf Coast in 2005 State Farm suspended new policies.

Mississippi sued State Farm for allegedly shortchanging policyholders, leaving it to the state to compensate claimants. That case was only settled last year.

Will insurance companies pull out of other states, such as Florida, which faces hurricane risks? Elmore doesn’t think so.

“With a home policy in Florida, you can more accurately predict the hurricane risk,” she said. “They are much more cyclical and severity can follow a reliable statistical distribution. Wildfires are far more random and the intensity of them is highly dependent on forest management and human response.”

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