State Farm will not renew 72,000 home insurance policies in California this year, raising renewed concerns about the effects of the state’s regulatory and litigation environment, as well as the impact of catastrophic events including wildfires.
The Illinois-based insurer said on March 20 it would not renew 30,000 home-insurance policies and 42,000 policies covering commercial apartments. The non-renewals will begin on July 3 and eventually affect 2% of State Farm’s policy count in California, according to the company.
“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs and the limitations of working within decades-old insurance regulations,” the company said in the announcement about the non-renewals. “... We also recognize (California Insurance Commissioner Ricardo Lara’s) proposed regulatory reforms, such as streamlining the rate application process, accounting for catastrophe modeling and reinsurance costs in rates, and addressing FAIR Plan vulnerabilities.”
California’s FAIR Plan, which was created by the governor and state Legislature, is an insurer of last resort. It’s a private association whose operations are overseen by insurers rather than taxpayers.
California Deputy Insurance Commissioner Michael Soller expressed concern about State Farm’s decision.
“State Farm General’s decision … raises serious questions about its financial situation – questions the company must answer to regulators,” Soller said in an email to the Southern California Record. “... In this particular situation, we have been working with State Farm’s home state of Illinois to get a full picture of its financial condition and plan for improvement. We need to be confident in State Farm’s strategy moving forward to live up to its obligations to its California customers.”
The department expressed confidence that insurance conditions will improve in the state and vowed to help those affected by the State Farm announcement so that they will not suffer a lapse in coverage.
“California is on track for enacting the state’s largest insurance reform in over 30 years,” Soller said.
Business groups have blamed the state’s property insurance issues not just on catastrophic wildfires but on the regulatory environment and a civil justice system that spawns waves of litigated claims in the wake of disastrous events such as floods and fires.
Victor Gomez, executive director of California Citizens Against Lawsuit Abuse, noted in a recent opinion piece that California ranked third on the 2023-2024 Judicial Hellholes report published by the American Tort Reform Foundation. Such jurisdictions have reputations for being linchpins for unjust or excessive litigation, according to Gomez.
“Businesses, small and large, are struggling to stay afloat, yet California’s leadership failed to ease unjust liability burdens and further stacked the deck against their survival,” he said. “In fact, almost 60% of Californians believe that lawmakers are not doing enough to combat lawsuit abuse. …”
The process has been criticized for providing a bonanza for trial attorneys but not so much for the injured parties.
California homeowner insurance rates remain relatively low, at less than $2.5 for every $1,000 of home value, compared to states such as Louisiana and Oklahoma, where homeowner premiums cost more than $8 per $1,000 in value, according to the Federal Home Loan Mortgage Corp., or Freddie Mac.
“(In California) insurance companies offering (homeowners) insurance are subject to strict regulation, which limits the rates they can charge,” Freddie Mac said in a report this month. “This may in part explain why we observe a relatively lower HO insurance rate in (California), compared to other similarly disaster-prone states such as (Louisiana and Mississippi).”