Every homeowner in California knows that insurance is a “thing” right now. Increased premiums, decreased options, hoops to jump through, and delineation between flood, fire, and brush combine into an awkward game of Life. When getting a new mortgage — and yes, that means even refinancing the one you already have — there’s quite a bit going on that can impact you. Let’s break it down.
The reason you need insurance coverage when getting a home loan is that the lender is basing the value of the property on the fact that it is a home in which someone can reside. If the property is substantially damaged, then the value is substantially not there. If the property is such that it cannot be lived in, then the value changes. It is the home itself that has value, not simply the dirt. So, insurance must be in place to adequately replace the dwelling should something happen.
The level of insurance, deductible, and rating of the insurance company also all come into place. While a lender in California cannot override the rebuild valuation determined by the insurance carrier, they can ask for evidence of same. This is called a “Replacement Cost Estimator” (RCE), and it’s prudent to ask for this when renewing your coverage this year. For example, let’s say the property is worth $1 million, is a 1,500-square-foot property, and the RCE says it’ll take $200,000 to rebuild. Well, you could be thinking that it certainly costs more than $200 per square foot to build ($200,000 divided by 1,000), but if the RCE says that’s it, and you’re good with it, the lender can’t force you to get more coverage.
The lender can, however, enforce certain deductible levels — the idea that the out-of-pocket amount you pay impacts the amount of premium you pay. The more out of pocket, the less coverage, and the more loss to which the lender could be exposed. The lender can also demand a certain rating of the company. Like eating at a Health Department F-rated restaurant, a lower-rated insurance company may cause grief in the future. And what if you get a policy that meets all criteria and then let it lapse? Well, the lender can “force place” their own policy on you — the cost of which would be added to your monthly payment.
Speaking of payments, the amount of your insurance payment(s) is certainly taken into consideration when qualifying for a loan. While earthquake insurance isn’t typically required if you are near any fault line, being in a certain flood zone does mean your lender, and FEMA, will require flood insurance on the property. The only outlier to this is if perhaps the structure is outside the flood zone, but say the yard is not. Remember, it’s the structure itself we’re looking to insure versus the dirt surrounding it. In any case, the higher the premiums on the insurance you are required to have means the higher the payment for which you must qualify.
And what if you live in a condominium, co-op, or planned unit development — like anywhere with a homeowners’ association (HOA)? Your insurance is actually trickier than when it’s a freestanding house. Now we are looking at the HOA’s insurance — typically called the “Master” policy — as well as what you may need for your individual unit. While there are many HOAs in town where the Master policy covers all of the unit, typically, they are only covering the shell of it. So, walls out, so to speak. As the owner, you most likely are covering the walls in. I like to remind clients to think of it this way: The HOA is the base project and how it was originally built; you are the home project, and how it is used and remodeled, and what’s inside is what counts.
Flood Insurance is a whole other issue when dealing with a condominium, as Fannie and Freddie have different requirements, as well as the fact that sometimes flood lines run through parts of the project here and not there. We’ve seen it where a creek’s flood line would have run through only the community center, yet the entire project needed coverage by one lender, and not with another. Confusing, right? Let’s add in another layer of review based on percentage of rebuild, fidelity bonds, pour-over policies, and board approvals for change, and it’s quite complex when all you wanted to do was move in before the holidays.
Another piece we should all start to consider right now is what is happening in Florida and the East Coast. As we know too well, severe weather events are insanely impactful to a community. Not only are insurance carriers dealing with the aftermath of these recent storms, but many of them are located in these same communities. Expect delays in processing depending on where that office is, and how many people can get to work or are calling in that day.
Lastly, we must understand how our state politics play into what options we have as property owners in California. There are “admitted” and “non-admitted” carriers, based on how that carrier (or insurer) abides by the rules placed forth by our state. These are mainly governed by the Insurance Commissioner — and that’s an elected position. Policies can change according to what may be considered popular versus not popular. We elect people who we think will do best by “us,” not “them.” (Whoever “they” may be at the moment.) For example, Lloyd’s of London isn’t always an admitted carrier — a company that has been in existence since before our country was founded is not really persuaded to change their policies based on what California says is right. This is quite a touchy subject, so I will not spend a lot of time on it here. What I want us to know here is that our landscape is not always one of logic, but also of politics. Your vote really does count!
If this article seems slightly overwhelming, unsettling, and frustrating, well then, welcome to insurance in California. What is true is that it is changing, evolving, and can be quite restrictive as well as expensive. What is also true is that we have more power in our vote to help change this than we may realize, and that many dedicated insurance professionals are truly on your side to help figure it out. Ask questions, be prepared for follow-up, and pay your bill as quickly as you can — being proactive is the best protection of all.
Austin Lampson is a licensed mortgage professional and branch manager of Homeowners Financial Group. She has spent the last quarter-century helping her clients balance math and emotion to achieve their financial goals. Reach Austin at (805) 869-7100 or alampson@homeownersfg.com, or visit austinlampson.com.
