California mandates insurers cover fire zones; homeowners may face higher costs

California is set to enforce a new regulation that will compel insurance companies to offer coverage in fire-prone areas, despite previous reluctance due to wildfire risks. This move by the California Department of Insurance allows insurers to transfer costs associated with covering these high-risk areas onto homeowners.

The rule mandates insurers to increase their coverage in fire-affected regions by 5% every two years until they reach 85% of their market share in California. "If an insurer holds 20 out of every 100 policies in California, 17 of them would have to be in disaster-prone areas," explained Insurance Commissioner Ricardo Lara’s office.

This regulation follows major insurers like Farmers Insurance, Allstate, USAA, and The Hartford pausing new policy issuance for California homeowners. State Farm has also halted sales for new homes and is seeking rate increases up to 52%.

A Realtor.com report indicates that nearly half of all U.S. homes face severe environmental threats, with almost $22 trillion at risk from disasters such as wildfires and floods. In California alone, wildfires have consumed over a million acres this year, affecting real estate transactions significantly.

Cara Ameer from Coldwell Banker highlighted the challenges faced by those seeking insurance in fire zones: "Insurance in fire-prone areas is increasingly becoming very difficult to obtain." This difficulty impacts property values as potential buyers hesitate due to concerns about insurance availability.

Insurers required to write policies in these risky areas can charge customers additional premiums for reinsurance costs. Typically, reinsurance helps providers manage large payouts during natural disasters. Notably, California previously did not allow reinsurance costs to be passed on to consumers.

While Lara calls this development “a historic moment for California,” Consumer Watchdog warns it might lead to substantial hikes in home insurance rates without meeting demand quickly enough. Jamie Court from Consumer Watchdog criticized the plan as being too industry-focused.

The regulation awaits review by the Office of Administrative Law before implementation within 30 days. The department has not provided a consumer cost analysis or opportunity for public comment on this change.

In December, another proposal allowed insurers to factor climate change into rate settings—addressing long-standing complaints about restrictions preventing companies from considering increasing wildfire occurrences when offering policies.

California's history with devastating wildfires includes incidents like the Camp Fire of 2018 that destroyed thousands of homes and left residents struggling for insurance options through programs like the FAIR Plan—a last resort for many unable to secure traditional coverage due to wildfire risks.

Mayor Steve Crowder of Paradise recounted his own struggles securing affordable insurance post-disaster: "My family had no choice but enroll in the FAIR Plan." He noted paying $5,000 annually while insuring below his home's value—common among affected homeowners who sometimes pay much more or forego coverage entirely.