Identifying Homeowners Insurance Red Flags In California

Homeowners Insurance Red Flags In California

You may have heard that 7 of the top 12 insurance companies have left California. And an increasing number of companies are denying or canceling policies. 

These insurance companies have been overwhelmed by the escalating risk of wildfires and other natural disasters. There were big fire seasons in 2017 and 2018, and it wiped out decades of profit for insurance companies. To make matters worse, construction costs have gone up for many years in staggering numbers. In an attempt to protect consumers from insurance costs being too high, the California Department of Real Estate refused to approve any rate hikes, and unfortunately, this really backfired. The result of so many carriers leaving has meant that some homeowners are left with houses that are only insurable through really expensive plans. 

Here are four things that can affect your insurance rates, or that may prevent you from getting insurance.

If you’re thinking of selling a home, it’s important that you’re aware of issues that may come up in escrow so that you’re not caught off guard. Or better yet, you can mitigate these issues up front.

Four Potential Issues that Affect Insurance Coverage

So let’s start with the red flags that may mean that your current house (or a future house) is at risk for pricier coverage or even cancellation.  

Reason #1: Knob and Tube Wiring

Knob and tube wiring has posed increasing challenges in recent months, particularly in many San Francisco homes where it’s prevalent. Originating between the 1880s and 1950s, it was once a standard electrical choice but is now considered outdated. While some carriers still insure homes with knob and tube, many do not, making it a potential hurdle for homeowners. Updating the electrical system is possible but can be notably expensive. Typically, individuals address knob and tube issues during kitchen or bathroom remodels, and usually, they focus on those specific areas.

For a comprehensive electrical update throughout the entire house, a down-to-the-studs construction project becomes necessary. When encountering knob and tube wiring in a disclosure package or when preparing to list a house, we scrutinize additional factors that, in combination with knob and tube, serve as red flags.

If you own or are contemplating buying a house with knob and tube wiring and it falls into any of the following categories, obtaining supplemental insurance through the California Fair Plan Act might be inevitable. This often translates to higher rates compared to more conventional carriers. 

  • First, the condition of the foundation is crucial – if it’s subpar or made of brick, it presents a challenge. 
  • Second, the age of the roof matters; if it exceeds 20 years, insurance might be problematic. 
  • Third, the type of plumbing, particularly galvanized, can be a concern. 
  • Lastly, the age of the home, especially if built before 1900, may pose insurance challenges.

It’s important to note that these factors become significant issues only in combination with knob and tube wiring.

Reason #2: Previous Claims

Insurance companies factor in your claims history when determining coverage costs. Therefore, it’s worth considering the implications before filing a claim for minor incidents, such as a stolen jacket from your car. In the current environment, having two or more claims, regardless of their size, may hinder your ability to secure new coverage from most carriers. 

Additionally, if you’ve made a claim exceeding $25,000 in the last 3 to 5 years, many insurance companies might decline to underwrite a new policy for you. While alternatives will exist, they often come with a substantially higher price tag.

It’s crucial to recognize that insurance providers possess the right not to renew policies and can terminate them based on claims histories. Understanding these considerations can be instrumental in making informed decisions about when and how to file insurance claims.

Reason  #3: Older Construction

Insuring properties built before 1900 has been a prolonged challenge in San Francisco, given the city’s abundance of such homes. While a considerable number of carriers exhibit reluctance, there are insurers willing to extend coverage. 

A notable recent trend is the heightened scrutiny by insurance companies concerning deferred maintenance issues. The selection of the 1900 cutoff date is grounded in the recognition that houses predating this era often feature outdated components like wiring, plumbing, and roofing, rendering them more vulnerable to risks such as fire and water damage. 

Furthermore, the materials used in these older homes are susceptible to deterioration, with some considered obsolete and prohibited in modern construction. A prime example is lead-based pipes, prevalent before the 1970s, which pose significant health risks due to lead leaching into the drinking water. Understanding these dynamics is crucial for navigating the challenges associated with insuring older properties in San Francisco.

Reason #4: High-Risk Locations

Insurance companies evaluate the risk linked to properties located in regions susceptible to frequent wildfires or other natural disasters, categorizing them as high-risk environments. The implementation of the California Fair Plan aims to provide coverage for such high-risk areas. 

Although San Francisco faces challenges like earthquakes and sporadic landslides, insurance concerns in high-risk coverage zones within the city have been relatively minimal. However, for individuals considering homes in wooded areas outside of San Francisco, seeking guidance from a Realtor regarding insurance carriers, services, and pricing is essential, given that relocating one’s home isn’t a viable option. But, there are several steps you can take to mitigate issues. 

Changes in CA’s Insurance Landscape

In the coming months, the state insurance department plans to implement reforms, aiming to expand options for homeowners. I’ll address these changes and potential solutions in upcoming videos and blogs, so stay tuned. I’ll dig more into how we got here and what we can do about it. 

For more information about real estate in and around San Francisco, check out the content on our blog or reach out to us anytime.

January 18, 2024
Buying a Home , Homeowner , Selling a Home
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