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2005 Insurance Reference Manual

Personal Insurance Federation of California Insurance Reference Book

Pressures Influencing Homeowners Insurance Costs

Homeowners insurance premiums in California have remained relatively flat the past decade. However, a number of forces have contributed to rising costs and a tighter market for homeowners insurance. Any legislative activity that seeks to improve the condition of California 's homeowners insurance market should focus on those factors that would reduce the costs of insurance rather than impose additional regulation that would add to cost burdens and potentially reduce availability for consumers.

The top five reasons California 's homeowners insurance rates are increasing are:

1. Skyrocketing water damage claims

  • Text Box: Did you know?? For every dollar collected in premiums in 2003, homeowners insurers paid out $1.25 in homeowners claims, according to the Insurance Information Institute. California insurers paid nearly $4 billion for household water damage claims between 1997 and 2003. In 1997, water-related claims paid by insurers representing two-thirds of the market totaled $206 million. By 2003, the amount more than doubled to $428.5 million.*

  • In 1997, the average water claim filed in California cost $2,484 to repair. In 2003, the average water claim cost more than doubled to $5,256 per claim.

  • The increase in water claims can be attributed to many things. Consider: the average home in California once had only one bathroom, but today homes average two or three. Washing machines used to be located on the first floor or basement, but today many are located on the second or third floor. Standard carpet and linoleum have been replaced with more costly hardwood and tile options.

2. Mold claims and litigation costs

  • Mold claims and litigation costs skyrocketed in California from 2000-2002. Fueled in large part by the experience in Texas where a consumer won a $32 million court judgment involving her insurer's handling of a mold claim. The verdict was later reduced, after appeal, to $4 million, but its negative impact had been felt. Since then, insurers have been hit with thousands of "toxic mold" lawsuits, but today in California , that has been mitigated by recent legislative action.

3. Increased home values in California

  • The rapid increase in home values over the past five years has contributed greatly to the increased costs for homeowners insurance. According to the California Association of REALTORS®, California's average home is valued at $323,000, and in many regions the average home value exceeds $450,000.

4. Escalating home repair costs

  • Along with escalating home values, the cost of repairing a home has also increased. The average home repair cost in California has increased by 25 percent over the past five years.

5. Increased fraud

  • According to the National Insurance Crime Bureau, insurance fraud costs Americans more than $45 billion a year.

  • Every California household spends an extra $300 per year in insurance premiums to pay for fraud.

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