Last month’s wildfires in Southern California had a devastating impact as 29 people were killed and about 16,000 homes were destroyed. Leading up to the disasters, the state’s largest private home insurer dropped policies in high-risk areas, leaving them financially unprotected after they burned to the ground.
That’s according to a report published Thursday by The Wall Street Journal. The outlet focused on the actions of State Farm before and after the fires, noting that in March 2024, the insurer said it was dropping policies on about 30,000 single-family homes in California. These changes went into effect in July and included about 9,500 homes in neighborhoods impacted by last month’s fires, the Journal estimated through an internal analysis.
The report said that even as other insurers pulled back from wildfire-prone areas of California, State Farm “gobbled up market share — and generated substantial commissions for its agents — by insuring high-value homes in the Pacific Palisades and other Los Angeles neighborhoods” that its competitors found too risky. As of 2022, the company held a 20% market share in the state, and a year later, the $2.7 billion in premiums it had collected from the state’s homeowners represented 70% growth from five years earlier.
The Journal went on to note that even as State Farm’s market share grew, “red flags were emerging” as the premiums being charged were not keeping pace with the levels needed to cover policy risk.
Insurers must have any increases in premiums approved by state regulators. In 2021, the company asked the California Department of Insurance for a 6.9% increase in rates, even as its in-house estimates found that a 31% hike was needed. A year later, it again asked for a 6.9% increase when a 23% hike was required.
Earlier this week, State Farm requested a 22% “emergency” increase in rates on single-family homes in California, along with increases of 15% and 38% on condominiums and multifamily properties, respectively. The company described its financial situation as “dire,” saying it has already paid more than $1 billion and received some 8,700 claims resulting from the January fires.
State Farm is the largest home and auto insurer in the U.S., and it had a net worth of $135 billion at the end of 2023. But it has also sought to “insulate itself from potentially catastrophic losses” by splitting its California offices into its own subsidiary, the Journal reported.
Last year’s pullback in policy coverage left many Southern California homeowners scrambling for coverage. Some were forced into the state’s so-called “last resort,” the California FAIR Plan, which has seen demand soar in recent years but only covers residential properties for up to $3 million. The luxury homes damaged and destroyed last month often exceeded that limit.
The Journal spoke with a resident of Pacific Palisades who lost her home in the blaze. The property had recently been appraised for $3.5 billion but her policy had been cancelled by State Farm only weeks before the disaster. She had switched to the FAIR Plan, which didn’t cover the full value of home, and a desperate attempt to get State Farm to pay the costs was reportedly denied.
Just days before the Palisades, Eaton, Hurst and Sunset fires began, California insurance commissioner Ricardo Lara announced a new regulation that aims to increase home insurance coverage in wildfire-prone areas.
The rule requires all insurers that do business in the state to begin increasing their policies in high-risk wildfire areas by 5% every two years until at least 85% of their policies cover these homes. Previously, the state had no requirements for insurers to offer coverage in these areas. To incentivize insurers, the state is now allowing them to pass the costs of reinsurance to consumers.
Lara’s office issued an update later in January, which noted that the regulation had been reviewed and implemented and is now enforceable. The state also issued and later expanded a moratorium that prohibits insurers from cancelling or not renewing policies in the ZIP codes impacted by or adjacent to the recent wildfires. The one-year moratorium covers all policyholders even if they did not sustain a loss.
Losses to real estate in Southern California vary, but data from Homes.com shows that the Palisades and Eaton fires — the largest blazes that charred some 37,000 acres in total — combined to destroy about 11,000 homes with a total value of nearly $30 billion.
