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The devastating fires in Los Angeles, now being called one of the most expensive natural disasters in US history, are a stark reminder that the changing climate is exacerbating the frequency and severity of extreme weather events, and with it, the cost of homeowner’s insurance across the country. For buyers and their agents, this means that insurance can no longer be an afterthought in the home buying process. Buyers will need to consider both the present and future cost of insuring a particular property, given the requirement for homeowner’s insurance by most lenders and the potential for significant changes to the cost and availability of coverage. Sellers and their agents will need to consider these changing priorities when marketing homes to ensure top dollar for their properties and in fulfilling their disclosure obligations.
Increased weather events lead to increased insurance premiums
Extreme weather events are occurring with increased regularity. In 2024, the US suffered 27 billion dollar weather events, each causing over $1 billion in damages, according to the National Oceanic and Atmospheric Administration (NOAA). For context, that’s three times greater than the annual average of nine billion dollar weather events between 1980 and 2024, and even higher than the recent five-year average of 23 billion dollar weather events per year between 2020 and 2024. Clearly, the frequency of these events is on the rise. The risk of extreme weather events is further exacerbated by phenomena known as cascading catastrophes, wherein one extreme weather event increases the likelihood of other disasters occurring, triggering a chain reaction of catastrophes. For instance, droughts increase the probability of wildfires, which can increase probability of flooding.
The rapidly changing climate landscape and its associated risks have recently led several major property insurers to significantly raise premiums, increase deductibles, reduce coverage, and even exit high-risk markets altogether. Just last year in California, Allstate was granted a rate hike of 34% and State Farm announced that they would not renew 72,000 policies, according to a report by the LA Times. These insurance companies are not alone. Bloomberg reported that seven of the twelve biggest home insurers have limited their coverage in California over the past two years, driven in part by increased fire risk due to climate change. Disasters like the recent wildfires in LA will only make insurers more wary about insuring homes and businesses in high-risk areas.
Options for homeowner insurance plans
So, what options do homeowners have when their coverage is not renewed or insurance rates become too expensive to maintain? In California, many homeowners are turning to the state’s Fair Access to Insurance Requirements Plan (FAIR Plan) or choosing to forgo coverage altogether. For most homebuyers, who require a loan to finance the purchase of their property, going without coverage is not an option since homeowner’s insurance is a required condition of their mortgage. Monthly mortgage payments are generally calculated according to the principal, interest, taxes, and insurance payments owed (though additional fees may apply depending on the type of mortgage obtained and amount of equity the borrower has in the property). Higher insurance premiums, therefore, mean increased monthly mortgage payments, even for those with fixed mortgages. And in fact, in some localities, homeowners are now reportedly paying more for their taxes and insurance than they are on the principal and interest for their mortgage.
Increased reliance on the state’s FAIR plan has serious implications for all California homeowners who could have surcharges billed to their policies to make up for any shortfalls if the FAIR Plan were to be depleted; this includes homeowners covered by private insurance companies. Estimates last year by the non-profit, Consumer Watchdog, projected that surcharge could be $1,000 or more for every California policyholder, though the actual amount of the surcharge will depend on the total bailout required after the full damages of the fire and the current state of FAIR Plan’s finances become known.
Changed market means changed strategies for your buyers
What does this all mean for buyers, sellers, and their agents? As climate change leads to more frequent and severe weather events, and insurance companies respond to changing risk profiles, homeowners may face increased premiums, higher deductibles, limited coverage, and even denial of coverage altogether. All of these outcomes impact affordability and can leave homeowners vulnerable to significant out-of-pocket expenses in the event of a disaster. For buyers, it means that insurance can no longer be an afterthought in the home buying process. Buyers will need to consider both the immediate and long-term costs of insuring a property given the requirement for homeowners insurance by most lenders and the potential for major shifts to the cost and availability of coverage in the future. As buyers become more aware of these risks, they may prioritize properties in safer areas or those with resilient features. This can influence market demand and property values, which has important implications for sellers. Sellers and their agents can respond to these changing priorities by adjusting their marketing strategies to highlight a property’s resilience features or its location in a lower-risk area. Sellers and agents should also familiarize themselves with the disclosure requirements in their jurisdiction. If disclosure of climate-related risks associated with a property is required, such as proximity to flood zones or wildfire-prone areas, it is critical to comply with such mandates. Failure to disclose required information can lead to legal claims against both sellers and their agents. Resources like First Street Foundation’s Risk Factor tool can help both buyers and sellers identify climate risks associated with specific properties in the US and aid buyers and their agents in making more informed purchasing decisions.
The impact of climate change on homeowner’s insurance is profound and multifaceted, affecting not only the cost and availability of coverage but also the dynamics of the real estate market. Buyers and sellers must navigate these changes carefully. As their real estate agent, you can help by providing insights into local regulations, insurance options, and market trends. However, make sure any recommendations stay within your scope of expertise, and advise clients to consult with appropriate professionals for guidance on areas outside of your professional field. Failing to do so could lead to claims of unauthorized legal practice or violations of your obligation to provide services within your area of competency under articles 11 and 13 of the NAR Code of Ethics. If any such claims are made against you, Victor’s Errors and Omissions (E&O) policy may be able to help. Learn more, and get a free quote.