State Farm Cut Policies. Then the Fires Hit.

0:05Sandra, can you tell me about your house in L.A. What words would you use to describe it? I raised four children there. It was homey. It had a view of the ocean. It had, you know, a deck on top. It was home. You know, it was home.

0:24That's Sandra Kaler. She's 74 years old, and the house she's talking about was in the Pacific Palisades neighborhood in Los Angeles. You must have so many, but do you have a favorite memory of the place? You know, it's just so hard to say. It's having, when the kids would have friends over, that was pretty special. They didn't think I noticed, but it was pretty special that they would do that. And then also, like, we had French windows that opened up, and I had a fountain because I loved the sound of water. And that's a very strong memory for me. Sandra and her family lived in that house for 38 years.

1:05And the whole time, the property was covered by California's biggest insurer, State Farm. That was until last year. And then in August, I think it was, we got a letter from them saying that, you know, you were being dropped. And we were going to be dropped. November 25th was the date. November 25th, just six weeks before fires devastated L.A. and burned down Sandra's home.

1:38Thousands of California homeowners have been dropped by State Farm in the past few months. Many of them, like Sandra, live in areas affected by the fires. People should know what State Farm did because we are, you know, many people in our area had State Farm and we trusted them. State Farm's decision forced many homeowners to enroll in an already stretched insurance program backed by the state. and it put even more pressure on California's broken insurance market. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, February 19th.

2:22Coming up on the show, State Farm, the L.A. fires, and California's home insurance crisis.

2:44Did you have any challenges when it came to insuring your home? Oh, no. The house is a very homey kind of town. Everybody uses the services of the town. And there was a state farm agent and someone told us, I think our realtor, when we bought the house, said contact him. And I did. And we set it up with him. And they had all they had our cars and they had the house. And he'd never had a problem. Wasn't super expensive. They were very responsive. For years, Sandra was happy on State Farm. She knew her agent by name. Plus, State Farm kept Sandra's policy inexpensive for decades. Was the risk of fire something you thought about very much living in the Palisades?

3:29You know, we were on a hill, it's true, but there was never a fire there. And when they would say you'd need to evacuate, it would never be because of our area, really. It would be, you know, the next, it would be Malibu or the other direction. So we never felt a personal risk. State Farm is the biggest home and auto insurer in the country, with more than 90 million customers. Its California subsidiary has the largest market share of any insurer in the state, covering a million home policies. And part of why State Farm is so dominant is that it has expanded in the state while other companies have retreated.

4:08So other companies like Allstate, travelers, were pulling back from there. They were looking at very rapidly rising inflation. They were looking at much higher catastrophe risks. And the insurers just looked at it all around and said, this isn't working for us. That's our colleague Jean Eaglesham. But State Farm, after the pandemic, kept on selling in these high-risk regions. And we talked to lots of independent insurance agents, rival agents. And they all said they were incredibly surprised to see that State Farm would agree to insure very high-risk properties. In other words, inexplicably, State Farm was there.

4:52Like a good neighbor, State Farm is there. But it turned out State Farm couldn't afford to be there. Through her reporting, Jean found that while the company was aggressively selling policies at low rates, internally, red flags were waving. The company was taking on too much risk, and they needed to dramatically raise their rates, but they couldn't. In California, insurance companies can only increase rates with the approval of state regulators. And certainly in 2021, 2022, we found State Farm's own internal indications were that they should have been asking for very big rate increases to match the kind of risks that they were adding up.

5:35So they should have been asking for 20, 30 percent or more, but they kept asking for 6.9 percent. A 6.9 % rate increase was the most that State Farm could ask for without risking a public hearing from the California insurance regulators. So you have this old system where State Farm, they're increasing risks, they're putting in very low rate increases, and they're taking on new business that's really effectively they're not charging enough for. State Farm says that its rate requests were made to match price to risk. It added that over the past decade in California, the company has tried to, quote, responsibly limit overexposure in high-risk areas.

6:19So why did State Farm stay so aggressive in California, knowing that it was costing their subsidiary like that? It's really not clear why they were so slow to turn around and stop writing new business and pull back. I mean, I think the company itself would argue that they're owned by policyholders, not by public shareholders. And so they would say we like to stay in places as long as we can. So they would sort of portray it as a sign of their loyalty, if you like, to the market. Independent agents said to us they don't understand at all what State Farm was doing in those years. In 2023, State Farm's era of expansion came to an end with a change in leadership.

7:09The California subsidiary got a new chief executive, Denise Harden. She saw the risk State Farm was exposed to and decided it was time to play hardball. Harden went to the California regulators asking for a rate increase of 28 percent. It's a shockingly high level in the context of the California market. For the biggest insurer in that market to say we need 28 percent just showed how serious things were. And then in May 2023, State Farm pulled back on new home insurance policies. The move put more pressure on regulators. One former insurance commissioner that Jean spoke to described the move as, quote, crossing the Rubicon.

7:54State Farm just announced it has stopped selling new home and business policies in our state. The new policy went into effect Saturday. The insurance company cited wildfire risks and the skyrocketing costs of construction.

8:10State Farm's announcement was a blow to California's insurance market. And the regulators were faced with a decision. They really had to act. So in the fall of that year, we saw the regulator essentially say, I'm going to give the insurers pretty much everything on their wish list. That wish list included approving much bigger rate increases for the state's insurance companies. The regulators also said that State Farm could raise their rates by 20 percent. But it still wasn't enough for State Farm. In March 2024, they announced that they would not be renewing policies for 30 ,000 homeowners in California.

8:51Their argument was, we just have too much risk on our books. We're still making a loss on every policy we sell. We have to take action now. State Farm's decision left customers scrambling. Just months later, the fires hit. And the risk that State Farm had unloaded suddenly became California's problem. That's next.

9:30Sandra Kaler had never heard of the fair plan until last year. In August, she and her husband were contacted by State Farm, and they were told that the company would stop insuring their home in the Pacific Palisades against fire damage. Her husband began shopping around to find a new policy. Our insurance for State Farm had been something like$3 ,000. You know, it was never very much. And he called around, and I don't know the company, but he found a company that it was going to be$14 ,000. And we went, that's crazy. Yeah. So we went back to State Farm. And they were at that point encouraging us, telling us, you know, you have to do California Fair Plan.

10:12And they made it sound like that was the only game in town. The California Fair Plan was created by the state to make sure all California homeowners have access to basic fire insurance. It typically has high rates and restricted coverage. The fair plan has been getting into increasingly perilous financial situation. Here's our colleague Jean Eaglesham again. So with this crisis in the state, the net effect of the insurers pulling back is it's forced many, many more homeowners onto the fair plan. And because of the way it operates, it essentially has to take all comers. So it's skewed towards the highest risks.

10:53So a normal insurance company would try and balance its risks. It wouldn't have too much exposure in very dangerous areas. The fair plan is the opposite. It's got a ton of exposure in the worst areas. It can't really balance its risks. To offset that exposure, California regulators require that other insurance companies bail out the fair plan in the event of a large-scale disaster. Sandra and her husband didn't know about these details. All they knew was that they had to use the fair plan to ensure against fire. How did the coverage compare between the fair plan and what you had with State Farm previously?

11:32You know, you just don't think of these things. So I never really read it. You know, I sort of accepted like, well, we're not going to have a fire. We don't have fire here. But last month, the fires came. And the estimated$30 billion in damage was the most expensive in U.S. history. Truly an apocalyptic scene. We're on the Pacific Coast Highway right now, where home after home after home, beachfront properties are engulfed in flames. In the Pacific Palisades, the fire that took so much is still growing. It's devastating. All my neighbors up across the top, their houses are gone. Sandra managed to evacuate with her husband and their four pets to a hotel.

12:22In the days that followed, she said she spent a lot of time on the phone, chasing insurance. Sandra filed a claim with State Farm, hoping they might pay something toward the losses on her house.

12:36The claim was denied by an agent. And in the email follow-up, he told me he'd pray for me. What went through your mind with that? I'm looking at your face. You're shaking your head. You know, it was like thoughts and prayers. I've heard it before. But not to me. Sandra's home was recently appraised at$3.5 million. But she won't get that money back. Fair plan payouts are capped at$3 million. Do you think you'll ever see the money? I do? I do. But I feel like, you know, every time I see an article that about that the fair plan is begging for money from the state and that they've already over budgeted, I'm scared.

13:24The L.A. fires have put a huge strain on the fair plan. The insurer recently estimated that its losses from the fires will top four billion dollars and it doesn't have enough to pay for all of that. So it's getting a bailout. Last week, state regulators agreed to let the fare plan collect a billion dollars. And that money is supposed to come from insurance companies like State Farm. And it will, but there's a twist. Last year, regulators changed the rules to allow insurers to pass at least half of these costs on to their customers. So we're now in the process of working out how that's going to be divvied up between the different home insurers.

14:04So how much each company will have to pay. they will then in turn say, OK, we want to pass on half of that to our policyholders. And assuming that's agreed, people will then see that amount added to their next home insurance bill. So you can see policyholders who are in areas far, far away from these fires are going to get an additional charge because of this. I mean, this sounds like pretty bad news for homeowners across the state. even those who aren't anywhere near any of these fire-prone or disaster-prone areas. So the whole market is looking very difficult at the moment, and the expectation is, yeah, home insurance, unfortunately, is going to get even more expensive and even harder to find.

14:54What about State Farm? Where do these fires, where does the situation leave the insurance company? State Farm in California is saying the fires have put it in a dire financial situation. Now they have billions of dollars in claims coming because despite their non-renewals, they're still the biggest home insurer in the market. They still have thousands of policyholders in those affected areas. State Farm said it's helping people recover from the January fires and has paid more than a billion dollars to affected customers. The insurer has asked for an emergency rate increase of 22 percent. But last week, California state regulators pushed back.

15:39In a statement, the insurance commissioner said, quote, The burden is on State Farm to show why this is needed now. State Farm has not met its burden. State Farm has been asked to make its case at a meeting next week. After the fires, Sandra and her husband decided to accelerate a plan to retire in Hawaii. they'd planned to rent out their Palisades home. Now, they're wondering what to do with their burned-out lot. You know what? I hope I never go back. Oh, why is that? Palisades, again, it's 38 years. That's home. I knew where everything was. So many things burned down. The elementary schools burned down.

16:24The high school is non-functional. So this, like right down the street, the stores, you know, where our kids would go to after school to buy French fries and just hang out and be bad because they were kids. And it's like, it's not there anymore. For Sandra, rebuilding her home is out of the question. One reason for this is she isn't confident she'll get insurance again. To me, it's sort of like, it's a place that won't exist anymore. A whole town. I can't even believe that, but it's a whole town, you know, and a whole lifestyle that won't exist anymore.

17:17That's all for today, Wednesday, February 19th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode from Susan Pulliam.

17:30Thanks for listening. See you tomorrow.