Commercial Property Insurance Gets Scarce in At-Risk Areas

Commercial property insurance rates remain stubbornly high in California for businesses with properties that are susceptible to wildfire risks.

Coverage is relatively easy to find at reasonable prices in any of California’s larger cities, but in small cities and towns, it’s a different story.

Business with facilities in any areas that abut woodlands and other nature areas have seen rates skyrocket, although this year rate increases are more subdued.

To make matters worse, more insurers are either scaling back or ceasing to cover businesses in these areas, resulting in many companies scrambling to find replacement coverage.

Here’s what’s going on and what your options are if your commercial property policy is non-renewed.

What insurers are doing

Businesses in most parts of California’s larger cities are usually not having any problems securing coverage and rates are increasing, sometimes by as much as 10% due to higher rebuilding costs as a result of inflation and the labor shortage.

But the picture changes in smaller cities and towns, where buildings are more spread out and are more likely to be close to fields, forests or other nature areas.

To put it simply: there is a major insurance crunch in those areas.

Insurers are responding in two ways in those areas:

1. They are ceasing to write business in high-risk areas and are issuing non-renewal notices, or
2. They continue writing business, but with more stringent policy terms.

Those that continue to write business are taking a number of steps to rein in their risk.

Increasing deductibles — Many carriers are shifting more of the risk to their policyholders in wildfire-prone areas by increasing their deductibles.

Some companies are being saddled with deductibles that are two-thirds of the policy limits, meaning they are taking on more of the risk than the insurer is. In one case we know of, a pallet maker in a small town saw their premium in 2021 balloon from $15,000 a year to $150,000, with a $100,000 deductible.

Stricter terms — Some insurers are increasing deductibles but also imposing stricter terms for payouts, with some limiting the amount they will pay out if a building is destroyed. That can sometimes be as low as 20% of the value, meaning the rest would have to be covered out of pocket by the property owner.

Property protections — If a business is lucky enough to retain or find coverage, the insurer will usually require them to take certain steps to protect their property against fire. These measures might include:

• Defensible space: Creating defensible space around the perimeter of their building, usually all the way to the property line. You can find a thorough description of how to create a defensible space here.
• Non-combustible materials: Using only non-combustible building materials, such as fire-proof shingles for your roof. The insurer may require you to shore up roofs, gutters, vents and siding and ensure there are no gaps that would allow embers to penetrate.

They may require exterior wall cladding made of noncombustible siding materials such as concrete and brick and install metal or fire-resistant fencing.

• Reliable water supply: Insurers are requiring property owners to clear access to a reliable water supply, including proximity to public hydrants and the possible installation of private-site yard hydrants. The availability of a reliable water supply is critical and should be evaluated frequently.
  You may also consider installing a back-up water supply, such as a fire pump and tank. This is important because in some fires, the water delivery system fails.
• Routine clearing: Insurers are requiring property owners to have a routine property clearing regimen that includes regularly removing dried vegetation from the property and removing debris or other flammable materials. Debris and vegetation are the tinder for large fires.

Your options if canceled

If you’ve been cancelled by your insurer, we can mount a search for replacement coverage. If all California-licensed insurers that we have access to reject your policy, we have two choices:

The non-admitted market — These are insurers that are not licensed in the state of California, but they are viable insurance companies nonetheless.

They can offer policies that may not cover everything a homeowner’s policy from an admitted insurer would have. Policies can often be customized for the insured.

California FAIR Plan — We can only go to the FAIR Plan if you’ve thoroughly exhausted the options available through the voluntary market and been denied coverage. If only one admitted insurance company is willing to write your policy, no matter how steep the premium is, you cannot go to the FAIR Plan for coverage.

Not only are FAIR Plans more expensive, but they offer fewer coverage options and lower policy limits. That said, the limits have doubled in 2022 to $6.8 million per policy.