CH-CH-CHANGES (COULD KEEP YOU INSURED)

As most everyone has experienced by now, the state of California is in an insurance crisis. It came from multiple factors that occurred over many years, which makes any solution complicated. What can we do about it? Keep our communities insurable by focusing on the most impactful items over which we have control.

One of the factors that led us to this crisis was the narrow passage of Proposition 103 in 1988 that was intended to protect consumers from insurance rates that were excessive, inadequate, or unfairly discriminatory. What appealed to most folks about this proposition in 1988 was that they could be eligible for a “good driver discount” and a 20% deduction on their auto insurance premium.

This proposition also implemented the “intervener” process, which allows a consumer, or their representative, to “intervene” in any rate change requested by a carrier and be granted a hearing where the intervener could prove that the rate is excessive, inadequate, or unfairly discriminatory. To simplify, if an insurance company wants to raise rates, a consumer can step in, challenge the increase, and require the company to justify the new rates at a formal hearing. Though beneficial in protecting consumers, this process can delay rate adjustments significantly.

Sadly, consumers often look at their budget rather than the bigger picture of sustainability. While a consumer who intervenes may not win each case they bring, the carrier’s rate application approval is delayed by 6 months to 2 years. Additionally, the costs associated with the intervention are initially paid for by the carrier. The CA Department of Insurance website shows that from 2013 to 2023, the intervener process has cost over $10 million. These costs can lead to higher premiums for all consumers as insurers seek to recoup these costs.

The delays created by the intervener process have meant that insurance carriers have been unable to be agile with their rate adjustments based on the actual losses they are sustaining. When carriers set rates, they make their best guess about how many claims they will pay (based on LOTS of data), then adjust when their losses are more or less than what they anticipated. But if it takes two years to make those adjustments, rates can’t help but be inadequate.

The result is that instead of the insurance costs steadily increasing at realistic rates, carriers have been charging premiums that have been kept artificially low. After the huge wildfire losses in California between 2017 and 2022 (in particular), the carriers realized they needed to decide whether they could continue doing business in a state that prevents them from protecting themselves from insolvency. Now, we are experiencing huge increases as community associations are declined or canceled in the admitted insurance market and forced to look to the Excess and Surplus marketplace for insurance, bringing increases that are next to impossible to budget for.

To illustrate the point, consider a community that delays painting their tubular steel fence in order to avoid raising their assessments. “We can’t afford that, “might be what the board of directors is thinking. The fence rusts much sooner without maintenance and requires complete replacement, a significant cost increase over maintaining the fence with periodic painting. Similarly, by deferring insurance rate increase requests from carriers for decades, California now faces sharp premium increases, which are difficult for associations to manage. 

So, what can YOU do about it? Make sure that your community is one that insurance carriers would be happy to insure. This means being proactive about any issues that might cause claims and cost the insurance company even more money. For example, a large challenge we see many older associations are facing right now is with their electrical panels. Many panels have proven dangerous and started fires that damaged structures and threatened lives. For a community association, the extra layer of challenge is that these panels MAY be the individual responsibility of the unit owner and not of the association. And yet insurance companies are refusing to provide quotes or canceling coverage because those electrical panels are in the community. (Yes, fire travels.)

So how can you start? 

1. Hire a Consultant: The first step in replacing outdated electrical panels is to hire a professional consultant who can review current panels and develop a replacement plan. 

2. Plan Approval and Custom Panel Fabrication: Your local government will then need to approve the replacement plan. This involves submitting detailed documentation and potentially addressing any city-specific codes or regulations. Custom fabrication may be required to be compatible with existing electrical systems and meet current safety standards.
 

3. Bidding Process and Contractor Selection: After securing city approval and fabricating the panels, the project can proceed to the bidding phase. This includes developing a formal Request for Proposal, bid facilitation, and contractor selection. 
 

Replacing electrical panels is not a quick fix. It requires significant planning and development alongside local utilities, government agencies, and design professionals, but obtaining the proper permits for electrical panel replacement is crucial. 
 

Penalties for deferring this life safety issue are not a minor expense. For example, a recent community in discussion about replacing their panels saw a $100,000 insurance premium increase due solely to their electrical panels being outdated. 

It took time for us to get to this place, and it will take time for us to get ourselves out of it. In the meantime, the more proactive boards and homeowners are in maintaining the safety of their communities, the more likely they are to successfully come out on top in this insurance crisis.

Kimberly Lilley, CIRMS, CMCA, is the Director of Advocacy, PR & Marketing for Berg Insurance Agency in partnership with LaBarre/Oksnee and can be reached at kimberly@berginsurance.com.

Shannon Smith is the Co-Founder and CEO of AD Magellan and can be reached at shannon@admagellan.com.