I recently put a home in Sherman Oaks into escrow. It’s a gorgeous San Fernando Valley canyon, 4 level home that had been completely remodeled. While in escrow it was disclosed to my buyer that there had been a small kitchen fire. “No big deal but good to know,” we thought, and our process of investigation continued. The California Residential Purchase Agreement or RPA, contains several default contingency periods. There’s the 17 day contingency for appraisal, 21 days for loan approval and up to 17 for investigation. Investigation includes the physical inspection, title search, HOA document review and insurability. The physical inspection can include, geological, Radon testing, mold test, structural, roof, sewer line, property line survey etc. Often times in this competitive marketplace, the investigation contingency time period gets shortened to as few as 7 days. In fact, in San Francisco and much of the Bay Area, the seller will pay for an inspection, then complete any repairs they intend on doing and then offer the home “As-is.” If the buyer wants to do an inspection of their own, they do so before the home ever enters escrow, before their offer is even accepted and some cases even before they write the offer. Once in escrow, the buyer’s money is pretty much on the table from the get go. When it’s a seller’s market like it is there, a buyer has to be happy to just find a home they can put into escrow.
Back in Sherman Oaks, my client had their physical inspection and also had civil engineer out to do a structural investigation. A Geo had been ordered already by a previous buyer. This hillside home had a 20 foot tall retaining wall holding back a mountain. We had a sewer main inspection and a roofer out to examine the roof. As you can guess, this is a very thorough buyer. At last everything was a go and all they had left do was get insurance.
Since I knew this was a “brush area,” I referred them to my insurance agent of choice, David Lebental of PNL Insurance Services out of Torrance. As an independent broker, David works with the “non captive” companies like National General (formerly GE), Nationwide, Travelers, Lexington and the Rolls Royce of property-casualty insurance companies, Chubb and AIG. These are all “Admitted Carriers” for California. He also offers others including Lloyds of London which is a non admitted carrier. Admitted means they are under the supervision of the California Insurance Commissioner, an elected official and this adds a layer of protection for the consumer. In insurance there are basically 3 tiers of offerings. The consumer direct companies like Progressive, Geico, AAA, General, Liberty Mutual etc., tend be less expensive and very square peg in a square hole type companies. Square holes and round pegs need not apply. I was once dropped by AAA after my wife Tama introduced our car’s bumper to that of a fire fighter’s at the local soccer field parking lot. My client had their cars with Geico. The captive companies would be your Allstate, State Farm, and Farmers. Lastly there are the non captive, relying on independent brokers like David. Because we were in a fire area, I was pretty confident that the captive and consumer direct companies would not be interested in “insuring the risk” posed by this canyon home.
There are a couple reasons I suspected insuring this home might be difficult. First is the high fire zip code factor. Few companies want this niche market. In fact, following the huge San Diego Witch Creek Fire of 2007 which saw 1200 homes burn down, many of the captive companies began reevaluating their exposure to “catastrophic loss.” As a result they stopped renewing policies that came due or when a home resold, refusing to insure that property for the new owner. I had this happen in Calabasas a few years back where State Farm said they had “too much exposure” in Calabasas and refused to re-insure the home for my buyer. The second reason I expected trouble, is the fact that we just had two devastatingly tragic fires in California in 2018; Santa Rosa where 5000 homes were lost and the Thomas Fire in nearby Ventura and Montecito where another 1500 homes burned to the ground. Thirdly, California is once again in a drought so insurance companies are taking a hard look at the risk of insuring in California. And if that wasn’t bad enough, the “small kitchen fire” we had been told about, had actually resulted in a $483,000 claim! Talk about a game changer!
Fortunately, I thought, since the home I was told, had been insured by Travelers and the policy had just been renewed last month, Travelers would want to make back some of that big payout and would welcome the opportunity to reinsure for the new owner. Wrong! Travelers said, “Ah, yeah… thanks but no thanks.” Uh-oh. Sure enough, the recent near half a million dollar claim, put off practically everyone. So that meant my client was going to have to step up their game and get insured through luxury carriers Chubb or AIG, except that Chubb declined too. That left us one carrier, AIG, the best insurance on the planet. But with the best comes, cost. You see, AIG won’t just insure the home as a stand alone policy, they require 3 lines of insurance: Home, auto and an umbrella for liability. Fortunately, the umbrella policy was only $700 so no big deal, but remember my client currently had their cars insured with Geico. Suddenly they went from your budget, cut rate, least expensive auto insurance to most expensive in the market. And lest you think that was all there was too it, there was the issue of how much insurance was required for this home.
The thing about insurance that is so difficult to comprehend is, how much insurance is enough? In the case of the Seller’s Travelers policy, he had insured the home for replacement rebuilding in the amount of $875,000. However, this is a 3,500 square foot home in a very expensive neighborhood. If you do the math, the seller had insured a total rebuild at a cost of just $250 per foot. For some of you out there, that is plenty of money to rebuild your home. But in Los Angeles? No way. Especially if it’s a catastrophic loss like Santa Rosa had. In her LA Times article, “Santa Rosa’s rebuild is anything but easy,” Robin Abcarian writes, “Many of the fire victim’s policies will not nearly cover replacement costs.”
One interviewee credits her insurance agent for “bugging her” every year to update her policy. As a result, she had adequate coverage when many of her neighbors did not. Abcarian goes on to write that “Even the concrete foundations had to be replaced as they were too damaged by the high heat” to be built on top of. Complicating things further is the availability of labor and contractors to do the work even if your claim was paid adequately and quickly. The cost to build when you are one person seeking help, is totally different than when everyone around you is seeking the same limited pool of talent. That’s right, the price shot up.
My client found out that the AIG policy on the Sherman Oaks home, wasn’t for $875,000 rather, $1.5M. AIG would rather over insure than under. So not only did they have to get the most expensive insurance company and have to add their vehicles and an umbrella policy, they had to increase the amount of insurance they had to buy. David explained it this way to me, “The thing about insurance is that you only need it when you need it. It’s about mitigating risk and evaluating risk-reward. You spend $8,000 a year for maybe 20 years, but should you need the insurance, that $160,000 paid out is going to return you $1.5M when you need it most.” When I looked at it that way, it didn’t sound that expensive after all. So the take away here is this: don’t look at insurance as a cost, rather see it as a hedge against total financial ruin. Don’t believe me? Take a trip to Santa Rosa. You can buy a burned out lot for $285,000 from any one of a thousand for sale by people who paid for insurance that was insufficient to let them rebuild. And I ask, “What is the good in that?”