Is California facing a home insurance crisis like hurricane-ravaged Florida?

"It was just out of the blue. I'm definitely in a pinch. Now I'm just kind of scrambling to get quotes," said Don Baker, a Boulder Creek homeowner whose policy was cancelled.

Farmers Insurance had covered Don Baker’s light-gray house with powder-blue trim since he and his family moved to Boulder Creek 13 years ago. A few weeks ago, he got notice his policy won’t be renewed after it expires in August.

Baker looked around and got an offer from State Farm to cover his home nestled among redwood trees in the Santa Cruz Mountains. But the agent withdrew it the next day, just before the nation’s largest insurer issued its stunning May 26 announcement that it won’t write new home policies anywhere in California.

“It was just out of the blue,” the 56-year-old roofer said. “I’m definitely in a pinch. Now I’m just kind of scrambling to get quotes.”

Baker is among millions of Californians seeing their home insurance rates rise sharply — if they can keep their policies at all. And it isn’t just affecting people who live in areas scorched by fires or inundated by floods.

Sharon Reeves said State Farm notified her last month that her policy on her San Ramon condominium — a policy she’s had for some 50 years — won’t be renewed. She believes it’s because she filed two claims in the past six years for hotel stays when her unit was damaged by a neighbor’s pipe leak. But she said she never was given the option of paying more than her $500 monthly premium.

“It’s devastating,” Reeves, 71, said. “I feel like I have to move out. I’m on Social Security. I can’t afford to be uninsured.”

Even those who are still insured are feeling the pinch. Leslie and David Granger have seen their AAA premiums for their south San Jose home soar, from under $1,000 a year in 2019 to $1,867 this year. They were told it was due to “wild fire devastation throughout the state of California,” plus inflation, increased labor costs, and increased rebuilding materials costs. The couple said they felt sandbagged by the hikes.

Industry experts say California faces a long-overdue reckoning with the true cost of insuring homes in a state increasingly ravaged by catastrophic wildfires and winter storms. As state regulators keep a lid on premium hikes, fewer companies are willing to write policies, driving up rates for those still in the game.

“When carriers start walking away, that’s serious,” said Patrick Sullivan, senior editor of Orange County-based Risk Information Inc. “Something’s got to give. I think we’re in this kind of inflection point where California moves in the direction of Florida — Florida is not a market I’d want to replicate.”

National insurers like State Farm that dominate markets in most states have just a small presence in Florida, where more than half of insurers based in the state are on a financial health watch list and seven have liquidated in the past year and a half, CNN reported this month.

The hurricane-battered Sunshine State has consistently posted the country’s highest average rates for the most common homeowner policy, at $2,165 in 2020, up 8.9% in one year and 7.5% over a decade, according to Risk Information’s January Property Insurance Report.

California’s average rate for the same policy in 2020 was $1,241, up 5.4% over the previous year and 28.3% over 10 years, but still below the U.S. average rate of $1,311, the Property Insurance Report said.

Of California’s 20 most destructive wildfires on record, 13 have scorched the Golden State since 2017. Insurers say they must price policies to reflect mounting risks, driven by a warming climate, increased home-building in the so-called wildland urban interface, years of fire suppression and now rising construction costs driven by record inflation.

“2018, that’s when the world changed,” said Seren Taylor, senior legislative advocate for the Personal Insurance Federation of California, referring to the state’s most destructive wildfire, the Camp Fire, which destroyed the town of Paradise that year. “In the past five years, we’ve just seen a new level of risk associated with wildfire.”

Home insurers, Taylor explained, count on rates building up a reserve of funds over years to cover the occasional catastrophe. But losses from the 2017 and 2018 wildfire seasons wiped out nearly twice the combined underwriting profits for California homeowners’ insurers for the previous 26 years, he said.

Insurers say California’s unusual regulatory structure, with an elected insurance commissioner and a 1988 ballot measure — Proposition 103 — that rolled back rates and requires insurers to get state approval for increases, has kept prices too low, spawning a growing crisis after recent wildfires. The companies also point to state policies that don’t allow them to base rates on projected risk, such as potential climate change-related catastrophes. And they cannot pass on costs of “reinsurance” policies they buy on the global markets to cover their own losses when payouts exceed premiums.

State Farm, California’s largest home insurer, isn’t the first to cap policies in the state. Last fall, Allstate stopped writing new policies because “the cost to insure new home customers in California is far higher than the price they would pay for policies.”

And companies still writing policies are shedding customers seen as high risk, and raising rates on those they cover.

“This is the worst marketplace I’ve ever seen in 36 years,” said Lance Brick of Concord’s Brick Insurance. “It’s not just affecting people on the borderline of the mountains or foothills or whatever. In the last three years I’ve had to rewrite 50 people at a minimum for being non-renewed — all in the Bay Area.”

Prop 103’s author, Harvey Rosenfield of Consumer Watchdog, says insurers are creating a crisis to force state officials into blessing massive rate hikes.

“These companies have been fighting a 35-year jihad against Prop 103,” Rosenfield said, defending the state’s regulations as merely making insurers base their requested rate hikes on actual costs. Risk projections, he said, are based on proprietary formulas and not on reality — no one foresaw last winter’s torrential rains.

Insurance Commissioner Ricardo Lara has downplayed the significance of State Farm’s action. Lara’s office said  that 115 other insurers continue to write residential policies throughout the state, even near fire-prone wildland areas.

“We are aware of only a handful of companies that have paused writing like State Farm and Allstate or stopped writing certain lines of insurance altogether like AIG and Chubb,” said Michael Soller, an insurance department spokesman.

He said regulators “use every tool” to protect consumers and that California law dictates that rates are not “excessive, or unfairly discriminatory.”

Those who cannot find a policy on the insurance market may apply for bare-bones, smoke-and-fire only coverage through California’s FAIR Plan, which the state’s insurers help fund to provide coverage for homeowners in high-risk areas. But total costs can be two or three times that of a typical homeowner policy, as the owner typically must also buy a “difference in conditions” policy to cover other risks like water damage.

The number of California FAIR plan policies has nearly doubled since 2018, and now accounts for 3% of the total. Homeowners like Baker hope that’s not where they end up.

“I’m the sole provider for my family, with one child in college and another in high school,” Baker said. “This is the last thing I needed was my insurance jacked up.”