California's home insurance crisis may lead to higher rents

Renters in California may see their rents increase as landlords transfer rising insurance costs onto their tenants.

Multiple major insurers, including Farmers, Allstate, and State Farm, are pulling back in the state, forcing homeowners and landlords to turn to expensive alternatives. State Farm recently dropped 42,000 landlord policies, largely in areas at risk for wildfires. Historically, landlords can pass their costs onto tenants by raising rents.

Renters make up 44% of California’s population, according to U.S. Census Bureau data. The median gross rent in California is $1,870 per month — 36% higher than the national median, Census data shows. About a third of California renters spend more than half their income on rent, according to the Public Policy Institute of California.

“It’s still kind of an unknown how common it is” for landlords to pass insurance costs to tenants in the form of higher rents, Shanti Singh, legislative director for Tenants Together, told CalMatters. “Some are transparent; a lot of them aren’t.”

California’s growing wildfire problem is increasing rates for landlord insurance. High financial risk and the rising costs of materials and labor are driving insurers to seek drastic rate increases, non-renew policies in high-risk areas, and restrict new business in the state. Some insurers have stopped doing business in California altogether. The tightening insurance market may force many landlords to increase rent to help cover their rising costs.

Californians pay some of the highest rents in the country. State law caps rent increases at 5% to 10% annually, depending on inflation. But with a high median rent as a starting point, even a 5% increase could add hundreds to a tenant’s annual rent.

“Tenants are going to have the least recourse,” Singh said. They “always end up bearing a disproportionate brunt of what they can afford.”

While tenants can protect their personal property with renters insurance, the coverage doesn’t apply to the rental unit structure. If landlords forgo property insurance due to the high cost, their tenants could be left homeless and without recourse if a disaster destroys the rental property.

California has an upcoming ballot initiative that will further address rent caps. Proposition 33 seeks to grant counties more power in setting rent limits for any housing and limit how much landlords can increase rent for new tenants.

Ricardo Lara, California’s insurance commissioner, recently struck an agreement with insurers that will allow them to use predictive catastrophe models in rate-setting. Previously, insurance companies could only use catastrophe modeling for earthquake insurance. In exchange, insurers must agree to write more policies in high-risk areas.

Finally, Lara is spearheading the Sustainable Insurance Strategy. It includes requiring insurers to write in high-risk areas, moving homeowners off California’s FAIR Plan reworking risk categorization and expanding the FAIR Plan’s coverage limits for affordable housing projects.