Whether you're a homeowner, a home seller, or a home buyer, it’s important that you have a clear understanding of one of the hottest topics in California right now: fire insurance. Obviously, wildfires are becoming even more common in California, as there are hundreds of them actively burning right now. Just last year, we all remember the scenes of the skies over California glowing bright orange.
If you live near one of the countless forests in California, you may have seen a major jump in your fire insurance premiums. Obviously, insurance companies need to protect themselves against financial loss, and in order to do that, they have to start charging more as fires continue to be a major problem in California.
Moreover, you may have found out that it’s impossible to get fire insurance on your property in California right now. As fires continue to rage, some insurance companies and their risk assessment departments have simply decided that it's simply not fiscally responsible to insure homes in the area right now.
One of the deciding factors that these insurance companies use is referred to as the Wildfire Urban Interface, or WUI. This program says that certain properties are at a heightened risk of fire damage or total loss due to their proximity to a forest. According to the regulations, homes that are within somewhere between five and seven miles from a forest are considered high-risk properties. Perhaps even more concerning, some experts may determine that your home is at risk, even if you don’t meet the five-to-seven-mile distance.
The presence of wildfires all over the state of California means that you can certainly expect to pay higher fire insurance premiums than you would’ve had to pay several years ago. Personally, I saw my fire insurance premiums go up by around 40% in the last year. I have a colleague that I was discussing this with the other day, and he informed me that he had been paying $1,000 per year for fire insurance for the last 10 years. Recently, his insurance company increased his premium to $5,000 annually, an 80% increase! This price increase can happen to anyone at any time, as insurance companies are not required to give you notice of a pending price increase.
I have a good friend who is a mortgage broker that was telling me about the problems that fire insurance has caused in his industry, too. He recently closed a mortgage for a buyer who had to pay $10,000 per year in fire insurance coverage in order to close the transaction on a property that he was buying. That comes to a little more than $800 every month.
This sharp increase in fire insurance tells us a lot about what you need to do if you’re planning to buy a home in California anytime soon. Before you buy, contact some insurance brokers and check on the availability and the cost of fire insurance for the subject property. Again, some insurance companies have increased rates significantly, while others simply won’t ensure homes that fall within a certain geographic area.
Ultimately, I don’t believe that this is a problem that only affects California. After speaking with some other colleagues and connections from around the country, areas that are prone to significant flooding have reported that flood insurance premiums have increased dramatically.
If you’re selling your home, this surge in insurance premium also impacts you. First of all, if people find that it’s going to be harder and more expensive to insure a property that you’re selling than it is going to be to insure another property that’s on the market, they’re more likely to purchase one of those other homes. Not only are people less likely to want to buy a home that’s in or near a fire zone, but they’re also going to look for opportunities to save on their insurance premiums.
However, you’re not helpless in this situation as a seller. There are certainly steps that you can take to help make your home more appealing to potential buyers. One of the first steps that you can take is to contact the insurance company that you presently have coverage through and verify that they are still writing policies for homes in your area. Additionally, you can ask them what the cost of a new policy would be. Obviously, the person who buys your home will have the option and the responsibility to obtain their own insurance coverage, but I recommend attaching the information that your current insurance provider gives you to the disclosure packet. This at least gives buyers a starting point concerning what they may be looking at when shopping for coverage.
As a seller, you should also understand that there are some new requirements that the state of California has put into place. When selling a property, you will be required to disclose whether or not the property is in a location that is considered a high or very high risk. It’s important to note that this disclosure is required, even when you receive a non-contingent offer from a buyer.
Also, there is a Natural Hazard Disclosure report that sellers are legally obligated to provide to buyers. The state of California is unique in the fact that we have multiple types of natural disasters that can damage properties. This disclosure, which is automatically generated when a property is put on the market, will allow buyers to see if the home is considered at risk for earthquakes, floods, fires, and any other natural disaster that may take place in California.
As always, it’s best to work closely with your realtor when compiling this information, whether you’re buying or selling. I recently worked with a client who wanted to buy a property that was considered to be in a wildfire zone. It wasn’t labeled as high or very high risk for fire damage, as wildfires have their own classification. Unfortunately, the report was wrong! In fact, when I reached out to an insurance broker who I know and trust, he informed me that the property was in one of the highest fire risk areas. Insurance rates and legalities are a major aspect of making sure that you get the best deal on a home, whether you’re buying or selling.