As the housing insurance crisis continues to have a significant impact on the market, California has implemented a new protective clause in its standard real estate contracts. This provision enables buyers to back out of a transaction if they are unable to secure satisfactory insurance coverage, with sellers being required to fully refund the deposit.
A recent report from the San Francisco Chronicle highlighted that the California Association of Realtors, representing approximately 200,000 members, introduced this clause into its template contracts over the summer. Real estate agents who do not actively update their contracts will automatically include this new provision. If potential buyers cannot find affordable insurance, they have the option to withdraw from the purchase, or the parties can renegotiate the terms.
Local realtor Ernest Berghof from Santa Rosa expressed that insurance has become a major obstacle for both buyers and sellers. Even after completing appraisals and inspections, a transaction can fall apart simply due to the unavailability of affordable insurance or excessively high premiums.
Currently, State Farm holds the title of California’s largest homeowners’ insurance provider, with Allstate ranking sixth. Both insurers ceased issuing new policies over a year ago, while companies like Farmers Insurance are now limited to a small number of policies each month. Analysis from the Chronicle reveals that the average annual premium for homeowners’ insurance has soared to around $2,000, doubling from what it was just ten years ago.
Realtor Cameron Platt from the East Bay explained that under the standard contract terms, if sellers agree, the burden of securing insurance ultimately lies with the buyers. If buyers fail to obtain insurance within a typical timeframe of 17 days, they can cancel the contract, and the seller must refund their deposit. Previously, buyers who canceled without such provisions would lose 1-3% of their deposit.
Berghof noted that in the past year, none of his buyer clients have successfully secured insurance from private companies. This trend started in spring 2023, and even in areas with low wildfire risk, buyers are still struggling to find coverage, as insurers remain hesitant to issue new policies.
In desperation, buyers are increasingly resorting to the FAIR Plan, a state-mandated program that allows insurance through private companies. While the FAIR Plan cannot deny coverage unless the property is in extremely poor condition or used for marijuana cultivation, the premiums can be steep, coverage amounts may be limited, and the processing times can be lengthy, potentially delaying transactions significantly.
