Insurers in California have started declining to provide insurance or renew coverage for community associations in the state, citing significant losses resulting from natural disasters. However, this issue isn’t unique to California, as condo and HOA (homeowners’ association) insurers across the nation are becoming cautious and increasing their rates. Here’s what you should be aware of regarding this situation.

The Crisis in California

The primary issue in California is related to fire insurance, as highlighted by Ryan Gesell, CIRMS, CMCA, who serves as the Vice President of Cline in Los Angeles, specializing in community association insurance. While the challenge itself is not new, the actions taken by insurers in response to it are.  In California, fire insurance operates under a standard fire policy (SFP) framework. This SFP is a named-peril policy that hasn’t seen significant revisions since 1943, and it doesn’t allow underwriters to exclude wildfire as a peril. Attempting to do so would breach the California insurance code. Therefore, there’s a need for legislative intervention to address this problem.  Gesell points out that insurers are hesitant to underwrite risks in high-brush zones or nearby areas due to these constraints. They are restricted from excluding such risks and raising rates significantly. In California, insurers cannot increase rates beyond what’s on file with the Department of Insurance without proper permission.

As a result, preferred carriers are increasingly reluctant to offer coverage, leaving community associations with only one option: excess and surplus lines (E&S) markets. These non-admitted insurers are located outside California and have the freedom to adjust their rates without seeking approval from the Department of Insurance, which is notoriously challenging to work with.  However, the E&S carriers operating in California are facing a deluge of submissions. Many community associations are turning to them, but these carriers are now starting to limit their exposure. E&S carriers use risk modeling software to assess the potential risk of wildfire for specific communities. This model is continuously updated with new data. In the past, they might have insured communities with risk scores of 40 or 50, but now they are only willing to take on risks with scores up to 20 or 30. The predicament for condos and HOAs in California is that E&S carriers are not obligated to provide insurance quotes. Consequently, they are extending quotes only to the best-protected and strategically positioned communities.

Several factors affect the ability to obtain a quote and coverage

For example, communities with enclosed soffits and fire sprinklers inside units and on nearby hillsides monitored around the clock by an independent fire protection agent have a better chance. Additionally, communities located at the bottom of hills are more likely to receive quotes.  Post-disaster rebuilding costs are also on the rise, prompting insurers to increase premiums simultaneously. This creates financial challenges for communities. Some may only afford one-year premiums that necessitate a special assessment, or they may find themselves underinsured with substantial risk.  Sandra L. Gottlieb, a legal counselor, is working to find solutions for her clients facing insurance-related issues. Some clients have not been dropped but instead non-renewed. In one instance, an insurer insisted on excluding coverage for a specific part of a community, leaving the association responsible for demonstrating that any fire didn’t originate from that excluded area.

Can California condos and HOAs self-insure?

In most cases, they cannot because their governing documents require them to obtain insurance.  There have been some attempts to alleviate the problem. The California Department of Insurance is working to expand the California FAIR Plan, which serves as the carrier of last resort. However, this plan has limitations and currently only offers basic fire coverage, with a maximum coverage of $5.6 million. It primarily benefits smaller communities.  The California legislature plays a crucial role in resolving this crisis. Legislative action is needed to address the standard fire policy issue. However, a comprehensive solution may take two to three years to materialize, offering more accessible coverage options for condo associations and homeowners at lower rates.  While facing these challenges, condos, and HOAs are encouraged to engage with their legislative representatives to advocate for a resolution. Ultimately, legislative intervention is essential to solve this complex issue.

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