Money & the Law: Lawmakers seek to ease property insurance concerns

The availability of property insurance is, of course, critical to a functioning economy. Without property insurance, there would be no loans for home, commercial property or vehicle purchases, and the housing, commercial real estate and automotive industries would tank, putting the rest of the economy in a death spiral.

As you might expect, the increase in the number of, and severity of, natural disasters (fires, floods, hurricanes, tornados, hail, etc.), has had a material adverse effect on property insurance markets. The result is that some insurance companies have decided to pull out of certain locations, and Colorado is high on the list of places where property insurance companies in pursuit of a profit might not want to be. (A study published by the Colorado insurance commissioner says Colorado ranks fourth worst among states where property insurance companies have been operating at a loss.) For those insurance companies continuing to insure properties in Colorado, premium increases have been dramatic. The above-referenced study put average premium increases in 2022 at 14.85%.

With these issues swirling around, especially after the East Troublesome and Marshall fires and with global warming threatening to make things worse, in the Colorado General Assembly this year passed two bills meant to address the concern that property insurance in Colorado could become hard to find and/or prohibitively expensive. The more significant of these bills is HB23-1288, named the “Fair Access to Insurance Requirements Plan Act” and (thankfully) more commonly known as the FAIR Act. The FAIR Act creates a new agency, referred to in the bill as “a nonprofit unincorporated public entity.” (The insurance commissioner calls it a “special purpose insurance company.”)

The agency will have a nine-member board appointed by the governor. Seven of the members will represent various parts of the insurance industry. Two members are meant to represent the interests of consumers. Most members have already been appointed and the board has been meeting since October.

Under the FAIR Act, the board is tasked with creating an insurance plan that will provide property owners in high-risk areas, and who have been rejected at least three times by insurance companies doing business in the state, with coverage for their property. In other words, the FAIR Act plan is intended to be an insurance product of last resort. However, since insurance under the plan will be limited to $750,000 for residential properties and $5 million for commercial properties, full coverage will not be available for all properties. Insurance companies licensed to sell property insurance in Colorado will, whether they want to or not, be members of this new agency and they will share losses based on the relative size of their property insurance portfolios. The board has until July 1 to submit its plan to the insurance commissioner. Policies of insurance under the plan most likely won’t be available until 2025.

The second bill passed by the 2023 Legislature, HB23-1174, is much less ambiguous. It extends to 60 days from the current 30 days the time an insurance company must give advance notice of non-renewal or termination of property insurance coverage. This bill also puts in place new rules concerning “full replacement cost” insurance, a step up from “actual cash value” coverage, which may or may not be adequate to rebuild your property if it burns down.

Time will tell whether HB23-1288 and HB23-1174 will have any favorable effect on the availability and cost of property insurance in Colorado. Mother Nature is likely to play a greater role and, much as it might want to, the Colorado Legislature doesn’t get to control what happens there.

Jim Flynn is a business columnist. He is of counsel with the Colorado Springs firm Flynn & Wright LLC. He can be contacted at moneylaw@jtflynn.com.