Don’t Let Lack of Insurance Slam Door on Your Escrow
Dwarfed by the usual traumas and crises involved in purchasing a home, getting homeowners insurance coverage was once low on a home buyer’s long list of worries.
“On the day you closed escrow, you would call your insurance guy and say, ‘Insure me,’ ” said Bel-Air real estate agent Ronald Goldhammer.
“That’s a fantasy now.”
Finding homeowners and renters insurance in most areas of California was already onerous after the 1994 Northridge earthquake made insurance companies skittish about risks here, primarily because the policies must include a quake coverage option. Companies have become stricter with existing customers too, sometimes canceling policies of people with too many claims, something they might have let slide in years past.
But the search became even more frustrating and time-consuming this month after the California Fair Plan--once a safety net for most people who couldn’t get regular insurance--dramatically restricted the sale of new policies.
The lack of available insurance has raised some fears that many home sales may fall through and that the turnaround in the state’s real estate market may be undermined.
However, while insurance problems have delayed and even ruined some real estate deals, the vast majority of home buyers have been able to get a policy--but often after much effort and at considerable expense.
The best way to minimize problems is to begin searching for insurance as soon as possible--particularly if the purchase involves an older home or a buyer who has recently filed claims, according to real estate and insurance agents. A home buyer may want to check for coverage even before making an offer.
“Their chances are good that they will find something, but that something might not be the coverage or the price that they want,” said Lakewood insurance agent Jeff Malone.
Since state law requires insurers to offer quake coverage when they sell a homeowners policy, many insurers have simply stopped selling both in the wake of massive losses from the 1994 earthquake. Companies that control about 14% of the state’s homeowners insurance market are not writing new policies, according to a March survey by the California Department of Insurance.
The issue has been the subject of heated debate in the Legislature. After months of negotiations, key Republican and Democratic leaders agreed on a proposal to allow the state to enter the earthquake insurance business. But legislation to create a California Earthquake Authority, which would be funded primarily by private insurers, has been opposed by consumer groups who argue it would allow the industry to shift the burden of quake coverage to the state. In addition, the authority would have to win a critical federal tax break to begin operations.
Other legal efforts are underway to ease the earthquake requirement--allowing homeowners to at least buy fire and theft insurance more easily--but that runs counter to state policy to increase earthquake protection.
The heightened concern this month began when the state-regulated California Fair Plan announced that it also could not take on too much risk. The Fair Plan, which is a state-regulated pool of insurance funded by private firms, had been a safety net for many of those who could not get coverage elsewhere.
Home buyers like Wendy O’Dey had relied on the Fair Plan after failing to find an affordable policy or coverage at any price through private insurers. After approaching more than two dozen insurers and independent agents, O’Dey found an insurer with a less than stellar financial rating that would sell her a homeowners and earthquake policy--but only if she paid $2,100 in annual premiums.
O’Dey, instead, bought a Fair Plan policy, which was less expensive but lacks liability or theft protection for the 71-year-old home she purchased on the Westside.
“I would rather have a lot more coverage, but it’s better than nothing,” said O’Dey, a 27-year-old singer.
Now that the Fair Plan is only writing policies in brush-fire areas and inner-city neighborhoods, real estate and insurance experts fear the insurance shortage is quickly becoming a full-blown crisis.
“This is one of those ‘you’ve got to be kidding’ kinds of problems,” said Steve Sokol, legal counsel for real estate broker Prudential Jon Douglas Co. “This is potentially a real problem for the buyers and owners of real property.”
The biggest headaches await the buyers of older homes--particularly those built before World War II--that are often not bolted to their foundations. In Highland Park, one turn-of-the-century home fell out of escrow because the buyer failed to find homeowners insurance, real estate agent Bob Taylor said. The home was eventually pulled off the market because it could not be sold.
“It really slows the market [for older homes] and cuts the price,” Taylor said.
Many of the state’s major insurers--such as Fireman’s Fund Insurance Cos. and Farmers Group of Insurance Cos.--continue to write homeowners policies on a selective basis. Home buyers should be prepared for a high degree of scrutiny and growing numbers of restrictions that could prevent them from getting coverage.
Insurers that command 81% of the California insurance market imposed restrictions in March, up from 55% in May 1995, according to a survey by the Department of Insurance.
For example, the Automobile Club of Southern California will sell its auto insurance customers a homeowners policy, but not if their house was built in the 1930s and needs to be retrofitted or if it is located on an active earthquake fault. Farmers doesn’t care about the age of the home but might turn down an application if the plumbing and electrical systems are in bad shape.
Even finding an insurance company that can write a policy doesn’t mean that company will still be accepting new business once an escrow closes.
“I would be sure and check . . . the possibility of that quote still being valid in 30 to 60 days when escrow closes,” said Malone, the Lakewood insurance agent.
Some insurers are offering bare-bones coverage that will meet lenders’ minimum insurance requirements. Such stripped-down policies cover fire damage and little else. In contrast, a typical homeowners insurance offers everything from fire to liability to theft coverage.
Home buyers who have run out of options might also want to consider applying for insurance through so called surplus-line carriers. Surplus-line companies, such as Lloyd’s of London, deal in coverage considered too risky by most traditional insurers.
Surplus-line coverage, which is more expensive than regular homeowners insurance, is offered by companies that do not belong to a state insurance guarantee fund that pays off the claims of failed firms. While a home buyer might be willing to take that chance, many lenders are not.
“If the lender won’t accept the insurer, you are back in the same situation,” said Phil Gross, senior insurance policy officer for the Department of Insurance.
Home buyers should also consider seeking coverage through insurance brokerages owned or affiliated with their mortgage lender or real estate agency. These insurance agents are under additional pressure to find coverage since their lending or real estate partner stands to lose business if insurance coverage cannot be found. However, even these insurance agents have their limits.
“If a customer has more than three losses in three years, we cannot offer them any insurance,” said Carl Formato, president of MSS Insurance Agency Inc., a subsidiary of American Savings Bank.
Faced with all sorts of potential insurance roadblocks, Ventura County real estate manager Nancy Amorteguy instructs her staff to begin looking for insurance as soon as an escrow opens.
“It’s the first thing we are starting with [because] it’s going to be a huge problem,” she said.
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The Art of Policymaking
A decrease in the availability of homeowners insurance means that many home buyers will have to devote much more time and effort to finding coverage. Here are some tips for finding a policy and keeping your home purchase on track:
* Start early. Begin searching for insurance as soon as escrow begins--especially if you are buying an older home or have filed claims in recent years.
* Check with your current home insurer to see whether it will cover your new home. You can also ask whether your auto insurer will sell you a homeowners policy.
* Call several insurance companies directly as well as several independent agents. Ask your real estate agent to search for insurance.
* Ask your mortgage lender or real estate agent whether it is affiliated with an insurance firm or agent. One or both of them will be motivated to find a policy in order to make the sale.
* Be vigilant. An insurer that agrees to sell you a policy could change its mind or impose new restrictions by the time escrow closes. Call your agent frequently to make sure there have been no changes.
* Consider buying a policy from a surplus-line insurer. But be forewarned that this is an expensive as well as potentially risky proposition. Many lenders will reject a surplus-line policy.
* Be persistent. An independent agent that couldn’t sell you a policy a week ago might have picked up a new insurer. Also, many insurance firms periodically adjust how much insurance they can sell. If they were sold out in June, they might be able to sell you a policy in July.
* Consider the California Fair Plan. The insurance pool still sells stripped-down property coverage for those living in designated brush-fire areas and inner-city neighborhoods.
* If necessary, buy only fire insurance. The policy will fulfill the minimum insurance required by lenders; however, it provides no liability, theft or other protection normally available under a homeowners policy.
Pricey Premiums
The cost of homeowners insurance varies greatly throughout the state. Average annual premium for a $150,000 policy on a 10-year-old wood-frame house:
Los Angeles County: $614
Orange County: 488
San Bernardino/Riverside: 548
San Diego/Imperial: 482
Central California: 533
San Francisco Bay Area: 572
Sacramento area: 603
Northern California: 594
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Source: California Department of Insurance
