Like single-family homeowners in California, landlords must pay higher insurance premiums. And they pass some of these costs on to their tenants.

Many insurance companies have stopped writing policies in the state because of the increased wildfire risk, but that’s not the only reason. They say in the event of a disaster, the potential costs of replacing residential or commercial property, from labor to materials, are simply higher now.

Even property owners in areas not considered to be at high risk for wildfire have had their policies canceled because their buildings may need repairs or improvements. Landlords must find other insurers or turn to the ever-expanding and more expensive FAIR Plan, the insurance industry-run plan that California law requires to serve as the insurer of last resort.

On that point, some experts say the insurance crisis could be exacerbating the housing crisis. Increased insurance costs for properties other than single-family homes are beginning to impact the rental market — in a state where nearly half of residents are renters — and could exacerbate the state’s housing problems, they say.

Josh Hoover, a Los Angeles-area insurance broker who serves mostly commercial clients, said it’s “almost impossible” to find insurance for a large building. In late 2022, Allstate announced it would stop writing new property insurance in the state, including commercial policies. Then State Farm, the state’s largest insurer, recently canceled policies on tens of thousands of homeowners, home communities, business owners and commercial residential properties.

“Even buildings from the ’80s are considered old now, which is ridiculous,” Hoover said. “Most providers want everything to have been updated in the last 30 years. They want a new roof, updated electrical, updated plumbing – they want you to have copper pipes.”

For landlords, “death by a thousand cuts”

Earlier this year, Farmers canceled the policy on a 33-unit apartment building in San Bernardino built in the 1960s, said co-owner Uwe Karbenk. Karbenk sought out an out-of-state insurer instead of the more expensive FAIR plan, but his premiums still rose $28,000 to more than $41,000 a year.

Combined with state laws that limit how much he can raise rent each year — 5% plus inflation, or in some cases up to 10%, and possibly other rent control measures planned — Karbenk said being a landlord in California is “a bit like death by a thousand cuts.” He added that if his profit margin continues to shrink, he would rather invest in something other than real estate.

“One of these measures is no big deal,” said Karbenk. “But over the years it becomes really difficult for small family businesses.”

Mike Placido and his wife are definitely a family business. They own two rental properties, a four-unit building in San Gabriel and a duplex in Alhambra. He said they bought the properties to supplement their retirement income when it comes in a few years.

When State Farm canceled the policy on her San Gabriel property, Placido received an offer from FAIR Plan for $8,600, much more than her old premium of $2,600. Instead, he was able to cobble together three different policies from a Florida insurer and get the old policy’s coverage for $6,500, a 150 percent increase. So he plans to raise rents in January.

“I’m not a land baron,” said Placido. “I’ll give away as much as I can, as much as the market will allow, and I’ll cover the rest. I have no other choice.”

Another concern for tenants

According to the U.S. Census, about 44 percent of Californians are renters. The average monthly rent in the state is $2,850, a third higher than the national average, according to online real estate marketer Zillow. About 30 percent of the state’s renters are considered severely cost-burdened, meaning they spend at least half of their income on housing, according to an analysis by the Public Policy Institute of California. Now their rents could rise to even more burdensome levels.

Shanti Singh, legislative director of the national tenants’ rights group Tenants Together, said “it’s still pretty unknown how common it is” for tenants’ rents to rise along with insurance costs, in part because not all landlords disclose the reasons for rent increases.

“It depends on the landlords,” Singh said. “Some are transparent, many are not.”

Zillow’s data so far shows no significant rent increases, showing that the median rent in California actually fell by about $100 compared to last year, but has been rising since the beginning of the year.

In the Bay Area, two tenants who asked not to be identified for fear of retaliation from their landlord said rents in their live-work complex jumped earlier this year, explaining the reason in an email with the subject line “insurance costs.”

Singh fears that the situation for renters will only get worse as the effects of climate change, such as wildfires, continue to affect the affordability of insurance and thus housing.

“Tenants have the least recourse,” Singh said. “They always end up paying a disproportionate share of what they can afford.”

Housing and climate change

Singh and others studying California’s affordable housing shortage expressed concern that certain parts of the state could eventually become uninhabitable and uninsurable, whichever comes first.

Sarah Karlinsky, research director at the Terner Center for Housing Innovation at UC Berkeley, said the lack of sufficient housing in already developed cities means more construction “on the edges of regions, in more dangerous places,” also known as the “wildland urban interface” or, in technical jargon, “wildfire” WUI.

“If we do not want to continue down this path, we must fundamentally rethink our development patterns,” Karlinsky added.

Laurie Johnson, an urban planner and former disaster management officer for the California Earthquake Authority, pointed out that some property owners in the state who own their buildings and don’t have mortgages may choose not to insure their properties because of the rising costs. That’s concerning, she said.

“It feels like we want to keep our multifamily portfolio insured and not take the risk of losing it,” Johnson said. Hoover, the insurance broker, agreed, saying some clients have told him they would forgo insurance.

Johnson added that protection from fire and other disasters – as well as the ability to replace buildings that may be lost – is crucial, as is the requirement for earthquake-resistant retrofitting in the event of earthquakes. “That would cause so many people to lose their homes.”

Given the increasing risks of climate change, it is more important than ever for renters to have their own insurance, says Emily Rogan, senior program officer at the consumer protection organization United Policyholders.

Renters insurance would cover the cost of housing tenants “in another location while you figure out where to live in the event of severe weather,” Rogan said.

Impact on commercial real estate and businesses

Small businesses that rent their premises will also be affected by rising premiums from their landlords.

John Reed owns a mixed-use commercial property in Oakhurst outside Yosemite – an area that has seen many fires in recent years. Last year, his fire insurance cost about $2,800, but Berkshire Hathaway canceled his policy. He got three different quotes from FAIR Plan, the highest being $24,000. Then he found a plan from Lloyd’s of London for about $14,000.

Reed said he had to pass the increased costs on to his six tenants. “As a landlord, I can’t put the entire burden on them at once,” he said. “If I can afford it, I’ll try to spread it out over a two or three year period.”

California Insurance Commissioner Ricardo Lara has unveiled a multi-part plan to address the state’s insurance problems, focusing primarily on wildfires. For example, insurers would be allowed to use catastrophe models if they agree to write policies in certain areas of the state. But Department of Insurance spokesman Michael Soller pointed out that Lara also recently announced a deal with the FAIR Plan, which creates a high-value commercial insurance option.

“The reforms will have a positive impact on the availability of insurance,” said Soller.