As California braces for a historic storm, with forecasts predicting intense rainfall and snow, the state's homeowners face a double jeopardy that could leave them with millions in unprotected damages.
The imminent weather event, expected to bring unprecedented flooding and landslides, compounds an existing crisis where several insurers have retreated from the market. That withdrawal has left homeowners with dwindling options for coverage at a time when their vulnerability to natural disasters is peaking.
The storm, powered by a massive influx of moisture, is expected to hit in two waves this weekend and into next week, bringing with it rain and heavy snowfall in the Sierra region, where snow accumulation could surpass five feet in higher terrains.
The atmospheric event, according to The Weather Channel, could be historic and poses a serious flood threat, especially along coastline areas like Los Angeles, Malibu, Santa Barbara, and Santa Cruz. Residents in the areas are advised to make preparations, according to The Weather Channel, and to avoid flooded roadways, along with having plans to reach higher ground.
While residents of the areas make plans to protect themselves, some home insurers are pulling out of the state, leaving homes exposed to millions in potential damages.
The departure of home insurers like The Hartford Financial Services Group Inc (The Hartford), State Farm, and Allstate, who cited increased risks from climate change-related events like wildfires as the reason for leaving the state, adds a layer of uncertainty as Californians brace for the potentially historic storm.
The Hartford last week announced its decision to stop providing new personal property insurance coverage to homeowners in California starting in February, Newsweek previously reported. Existing policyholders will continue to have their policies renewed.
The Hartford's move follows the footsteps of other insurers, including State Farm and Allstate, which also announced their decisions to halt writing new policies in the state due to wildfire risks. Studies have shown that the climate crisis has led to an increase in the frequency and severity of extreme weather events, impacting states like California and Florida.
Smaller insurers have also opted not to renew policies in California in 2024, Newsweek previously reported.
The consequence of the decisions is a shrinking pool of options for California homeowners seeking insurance coverage, while their homes become increasingly susceptible to damage from extreme weather events.
While estimating the exact amount of potential damages proves challenging, Hanna Ogle, The Watkins Insurance Group EVP of Personal Lines, highlighted to Newsweek the predicaments insurance companies confront, and why they are leaving the state. "Like it or not, insurance companies are for-profit entities and have to answer to their shareholders, their boards of directors, or their members. You can't continue to operate a company in the red for very long."
She continued, "The cost of insurance is just a function of whatever the insurance policy covers. In the case of home insurance, we've had nothing but increased costs due to inflation, increased weather-related events, and increased operational expenses for things such as payroll and reinsurance."
Indeed, profits matter, according to Easton Insurance Consulting claims handling expert David Easton. "I would argue that most of the carriers pulling out are very profitable overall, but they don't like their margin in California," Easton told Newsweek via email. "What they are doing is in my opinion an extension of 'red lining'. A term used to describe the red line drawn on a map showing a undesirable neighborhood where they won't allow a policy to be sold. They have drawn a red line around the whole state."
The expert said that this storm will ultimately cost homeowners "multiple millions of dollars," adding that the real damage is going to be on those homeowners who "had coverage for years with a carrier who pulled out of the state forcing homeowners to scramble [to] get much more expensive replacement coverage in spite of the fact most homes don't face flood or landslide exposure."
California Government Steps In
In response to the insurance crisis, California Governor Gavin Newsom activated a state operations center to coordinate efforts and respond to the storms. The state's insurance regulator, California Department of Insurance (CDI), has been urged to take regulatory action to stabilize the insurance market and expand coverage options.
Despite the challenges, demand for California's fire insurer of last resort, FAIR Plan, has surged. FAIR Plan steps in to provide basic fire insurance coverage when private insurers refuse to do so. However, the delays in FAIR Plan's response times have left homeowners uncertain about the renewal of their policies.
The situation in California reflects a broader trend in which insurance companies in some states are reevaluating their coverage in regions prone to extreme weather events. As the risk of wildfires and other natural disasters increases due to climate change, insurers are making difficult decisions that impact homeowners' access to coverage.
Newsweek has reached out to Newsom's office for comment by email on Friday morning.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
About the writer
Aj Fabino is a Newsweek reporter based in Chicago. His focus is reporting on Economy & Finance. Aj joined Newsweek ... Read more
