State Farm Soon to Follow Other Insurance Carriers “Out the Door” in California

State Farm Soon to Follow Other Insurance Carriers “Out the Door” in California

By Daniel Yukelson, Executive Director

State Farm General Insurance Group (“State Farm” is reducing exposure to the California insurance market, which has been a growing trend among insurance carriers. As part of its exposure reduction efforts, State Farm has announced that it will be cancelling approximately 42,000 apartment insurance policies.

In a March 20, 2024, letter to California Insurance Commissioner, Ricardo Lara, State Farm’s Chief Executive Officer, Denise Hardin, advised, that State Farm’s “capital position has severely deteriorated, and we are increasingly concerned about its financial well-being.” In the letter, Ms. Hardin explained that between 2016 and 2023, State Farm’s policy holder surplus declined from $4.1 billion to just $1.3 billion resulting in just $0.50 per dollar of risk exposure. This steep decline, according to Ms. Hardin, was due to “…significant wildfire losses for several years, windstorm catastrophes in early 2023 and increasing trends in non-catastrophe water losses and liability claims (especially commercial lines and personal umbrella policies), without the additional premium needed to support those cost increases…” Taken together, these risk exposures have resulted in substantial underwriting losses.

State Farm’s letter goes on to express a need to increase rates more rapidly. Rate increases in California can often take up to 3-years for final approval due, in part, to regulatory red-tape and intervenors that challenge and delay requested rate increases by acting as consumer watchdogs. In California, these interveners may participate in the insurance rate application process, investigative hearings, or regulatory hearings involving property and casualty insurance, and at the end of the proceedings, submit a Request for Award of Compensation. As Ms. Hardin points out, “…rapid review and approval of a new rate[s] appropriate to the circumstances – along with all other upcoming and pending State Farm’s rate filings – will be critical to State Farm’s survival, especially in light of potential intervenor delays.”

With the actions that State Farm had to take regarding the apartment building market involving 42,000 to be cancelled policies and an unknown number of buildings effected (some policies have multiple locations), this will surely have a ripple effect on the already stressed commercial insurance marketplace. In addition to State Farm, two other major insurance carriers have decided to make substantial changes with one cancelling the majority of their agents to reduce policy writings in California, and another that will “non-renew” all  apartment building insurance policies effective June 2024, and there certainly will be more insurance companies to follow.

Because of several factors, there are only a handful of preferred markets for apartment buildings that remain at reasonable rates. There is no certainty how long the existing insurance markets will be able to write policies, and to make matters worse, with the huge flood of owners looking for coverage, it will stress the system to a possible breaking point. Property owners are now being forced to look to the excess and surplus lines insurance markets at 2x to 4x the cost of their existing policies, and policies that have substantially reduced or limited coverage, including policies that offer only co-insurance that is just not accepted by mortgage lenders. Surplus lines insurance, also known as excess lines insurance, is a type of property and casualty insurance that covers risks that are too high or too rare for a regular insurance company to handle, and is often used to cover risks that conventional insurers avoid because of lack of historical data to properly price their policies.

There’s also an alternative for homeowners through the FAIR Plan, but it remains understaffed and cannot handle the current load of work associated with the growing numbers of home Insurance quotes submitted, and the FAIR Plan would unlikely be able to handle the quote process for commercial buildings with it’s present guidelines and procedures. The FAIR Plan was established so that all California property owners have access to basic fire insurance when access to coverage in the traditional market is not available through no fault of the property owner, and it is not rated or evaluated by A.M. Best. The California FAIR Plan Association was established to meet the needs of California homeowners unable to find insurance in the traditional marketplace. The FAIR Plan is not a state agency, nor is it a public entity. There is no public or taxpayer funding of the FAIR Plan. The FAIR Plan is a syndicated fire insurance pool comprised of all insurers licensed to conduct property/casualty business in California.

To make matters worse, most if not all insurance carriers require that owners replace certain types of electrical panels at their buildings prior to binding coverage. Moreover, the Surplus lines Companies are tacking on a “Habitability Exclusion” to almost every policy, and because of this, they are willing to write some new policies. Habitability lawsuits are one of the major issues facing insurance carriers writing apartment building policies, and these types of claims are driving up exposures to loss, and forcing many companies to get out of this line of insurance as litigating involving habitability claims have been increasing along with water damage claims. 

Perhaps if the California Department of Insurance will consider allowing the admitted carriers that are still willing to write apartment building policies the right to include a “Habitability Exclusion“ on their renewal policies without going through the lengthy rate approval process, more admitted carriers will be willing to participate in the apartment insurance market. Insurance experts have expressed grave concern that if the Department of Insurance fails to act quickly, then very few companies will remain to serve the marketplace, and then all property owners will be forced to seek coverage through surplus lines carriers. And the, property owners will still not have sufficient coverage, but with a huge increase in premiums.

Right now, we can only contemplate a bumpy road ahead for California’s insurance market, and hope that Commissioner Lara’s contemplated reforms to modernize the California insurance marketplace will be implemented quickly and universally accepted. In concluding her letter, Ms. Hardin sends a chilling warning to the insurance commissioner: “The swift capital depletion of State Farm is an alarm signaling the grave need for rapid and transformational action, including the critical need for rapid review and approval of currently pending and future rate filings.”