California's insurance crisis is having new implications for the way people buy homes

As California's insurance crisis deepens, many home sellers are now allowing buyers to back out of a deal if they are unhappy with their insurance options.

The California Association of Realtors, the largest trade association in California with approximately 200,000 members, recently added an insurance option to its template for home sales involving its agents. Updating the template, which sellers can customize, protects buyers who can't find affordable home insurance by giving them the option to withdraw or renegotiate their offer, even after their offer is accepted.

Home insurance is required for most mortgage lenders, but as California's insurance woes continue, real estate agents and insurance brokers across the state have reported difficulty getting insurance policies for their clients. Some say it lengthens the escrow process or even discourages people from buying a home.

“It became a problem where you qualified for the loan, went through all the paperwork: 'house appraised, inspections done, everything is fine,' but you couldn't get insurance,” said Ernest Berghof, a Santa Claus-based real estate agent in pink.

Both State Farm and Allstate, the largest and sixth-largest home insurers in the state, respectively, have not offered new home insurance policies in over a year. Others, including Farmers Insurance, have limited the number of policies they take out per month. Costs have also risen — a Chronicle data analysis found the average homeowner pays about $2,000 a year for insurance from the state's 10 largest insurers, more than double the average from a decade ago.

The exact terms of the coverage, which first appeared on forms this summer, are generally negotiable, said Cameron Platt, an East Bay real estate agent and member of the CAR board. However, if a seller offers the contingency clause as standard, the question of whether the cost of insuring the home is “acceptable” rests entirely with the buyer. If the buyer cannot find insurance within a certain period of time – usually 17 days – they must cancel the contract or continue with the deal anyway. Without the contingent liability, the buyer would have to forgo the money he earned, namely a deposit of 1% to 3% of the purchase price.

“It turns out to be a very powerful contingency because there is no real requirement of reasonableness,” Platt added. “That’s not up for debate.”

A well-prepared seller should try to obtain accurate home insurance quotes to provide buyers with enough information to make a confident decision, Platt said. But even these estimates aren't a guarantee that buyers can find insurance at the same price.

For most of last year, Berghof didn't have a single customer purchasing insurance anywhere on the private market. He first noticed the dramatic change in spring 2023.

“It went from 'well, it's not really a big deal' to 'nobody can get insurance,'” Berghof said. “It wasn't property or location specific…It could be a house downtown, not in any fire zone, and just no one takes insurance.”

Instead, buyers would ultimately enroll in the California FAIR Plan – a government-created but privately run insurer of last resort – that is required to accept any property regardless of risk, with a few exceptions (e.g. the condition of the home). or the presence of a marijuana farm). But it often takes time to get feedback on the FAIR plan, which would delay escrow closure, he said.

According to Jessica Perla, a San Francisco-based real estate agent, adding an insurance option to an offer gives the buyer additional time to ensure they can insure the property. She says insurance accidents have become more and more common.

“Two years ago, insurance wasn’t an issue,” she said. “But over the last 18 months it has become something that I have to discuss with my clients at the outset and talk about how we need a special contingency plan for this that has never existed before.”

The impact of California's insurance crisis on the housing market is a growing concern. In recent months, the California Center for Real Estate – a subgroup of CAR – has sponsored two panels on the topic.

At a panel discussion held in July, California Insurance Commissioner Ricardo Lara urged homebuyers to research insurance options as quickly as possible to avoid being caught unprepared. During a podcast interview in June, he said insurance was having a “devastating” impact on real estate, particularly affordable housing.

“No home sale should fall through because of insurance,” Lara told the July panel. “We need to make insurance more accessible, which will lead to greater affordability.”

The combination of the FAIR plan, which is often much more expensive than private market insurance, and high interest rates have made it “virtually impossible” for some first-time homebuyers to afford a home, Berghof said. Although mortgage rates have fallen in recent months, they are still much higher than before the pandemic – as are home and insurance prices in California.

And even lower interest rates could trigger fiercer competition between buyers, driving up home prices even further.

Berghof said he hasn't had a customer take advantage of the emergency insurance yet. But it has caused potential buyers to hold off on making offers on homes, waiting for interest rates to fall and the insurance crisis to improve.

In recent months, Berghof has seen some signs of improvement – customers are able to purchase policies through private market insurers such as CSAA.

“I am optimistic that insurance will no longer seem impossible in the future. It seems hopeful. It seems like we are past the worst,” he said.

But Platt, the CAR director, said it was still very difficult for buyers to get insurance, although that hasn't stopped homes from changing hands.

“I don't think the situation has improved. I just think we’re used to it,” Platt said.

Reach Christian Leonard: [email protected], Reach Megan Fan Munce: [email protected]