Homeowner’s insurance in California – Monterey Herald

Question: I have been careful to invest over the years and am fortunate to have a number of rentals. I have been notified by my insurer, State Farm, that they will most likely not renew my homeowner’s policies when they come up for renewal next year. I understand this is becoming a genuine problem in California and I am at a loss as to what I should do. If I sell, I will be out the monthly rental income and I need that to live on. Do you have any recommendations?

Answer: You are right. Homeowner’s insurance is becoming a challenge due to our “high fire area.” In addition, we have homes in flood or windstorm areas further heightening the risk to insurers. In the past year, seven of California’s top insurance companies have either stopped writing policies in our state or severely restricted new business.

According to California Insurance Commissioner Ricardo Lara, the pull out of insurance companies is because, unlike most states, California “tightly restricts how insurance companies can price policies.” Lara’s proposal is to release the restrictions and allow companies to price policies taking into consideration future risks. Frankly, I am not sure how much this will help homeowners. Many owners have already seen their insurance premiums increase five-fold over the past few years which makes the economics of homeownership more challenging. Combine the cost to buy a home with what may be significant increases in insurance costs due to “future risk” and California homeownership will become even out of reach – especially for first time buyers.

Here are a couple things for you to consider before liquidating your rental property investments. First, will you be able to replace the investment with another investment, say stock and bonds, that will provide you with the income and growth you currently get from the rentals?

You also did not mention capital gains taxes that would be due and payable on the sale of a highly appreciated property. You have invested over time so, while you may make a substantial profit over what you paid for the property, you will most likely have significant capital gains taxes on sale, as well.

You could do a 1031 Exchange on your rentals wherein you would sell your California rental and, within the time allowed in this kind of structure, buy another rental in a more “insurance favorable” state. This would help you defer your capital gains taxes while keeping the rental income flowing.

If you are charitable by nature, you could set up a Charitable Remainder Trust which would provide you with income during your lifetime and, at your death, whatever principal remains in the trust would go to a charity of your choice. You can work with your estate planning attorney to determine if the income you would receive from the CRT will replace the rental income you are presently receiving.

Finally, you could “self-insure” your property. This means that you stop paying insurance company premiums, save those premiums and hope you will have enough saved should you need to rebuild the home after a catastrophic loss such as a wildfire. If you have a mortgage on the property, your lender will require you to have insurance coverage however, so you need to keep that in mind. Along these lines, a mortgage company requires you to have insurance but, if you do not, they will insure the property to cover their risk exposure. Historically, mortgage lender insurance has been exceedingly expensive but, because of the challenges in our insurance industry, their premiums are seeming a more reasonable option.

It is a dilemma, but you are fortunate to have options. Work with your attorney or financial advisor, put pencil to paper and figure out which option is best for you.

Liza Horvath has over 30 years of experience in the estate planning and trust fields and is a licensed professional fiduciary. Liza currently serves as president of Monterey Trust Management. This is not intended to be legal or tax advice. If you have a question, call (831) 646-5262 or email liza@montereytrust.com.