Colorado has not learned from the debacles in Florida and California and instead created their own public property insurance plan in the recent legislative session.  Furthermore, the government now dictates the amount of insurance that must be provided by carriers.  What do these two bills mean for your property insurance costs?  Why will these two new bills lead to substantially higher costs for all property owners?



What are the two bills?

HB23-1288 would create a public insurance plan of last resort for homeowners who can’t otherwise get coverage because of wildfires or other natural risks. Though lawmakers previously told the Denver Post that they weren’t aware of any homeowners being refused coverage because of wildfire threats, they sought to stand up a program after the Marshall Fire and after insurance premiums increased.

A related measure, HB23-1174, requires carriers to give homeowners more notice before canceling their insurance policy or allowing it to expire, and it sets specific rules around reconstruction costs.

HB23-1288: State Sponsored property insurance plan

This is a bill looking for a solution.  State-run or state-created insurers of last resort started cropping up in the 1960s in coastal and urban areas where property owners faced high risks — from riots, fires and hurricanes — and couldn’t get traditional coverage from private insurance companies, said Mark Friedlander, a spokesman for the Insurance Information Institute, another insurance industry trade group.

Theoretically, the new state-run policy would insure property owners in extremely high risk areas that are not able to obtain fire insurance.  As a lender in Colorado for over 20 years I have not seen a single instance where insurance was not attainable at a price.  The reason that the issue of not being able to get insurance is even coming up is that insurance providers are drastically raising rates in high-risk areas due to huge losses in the last several years from wildfires.

I’ve been dropped on my properties due to “high fire risk” and live and have lived in the mountains and foothills throughout Colorado.  Every time I was dropped, I was able to obtain insurance albeit at a price and with certain stipulations (tree removal, defensible space, etc…)

How will this impact Colorado’s insurance market? A Cautionary tale from Florida

We can look no further than Florida for what happens with a state run program.  Florida’s insurer of last resort, Citizens Property Insurance Corps., predicts to hit a record with nearly 2 million policyholders by the end of 2023, citing “continued instability” in the state’s insurance market.

According to the Citizens’ 2023 Operating Budget Report, the insurer ended 2022 at just above 1,153,000 policies and they predict to reach the highest number of premiums in their 20-year history by the end of 2023 with nearly 1.7 million.

The insurer averaged about 400,000 policyholders prior to 2020, when the state’s property insurance market started to crumble with several private insurers either going insolvent or pulling out of the state.

In essence the state insurance program has taken a substantial number of people out of the private Florida insurance marketplace and made it unprofitable for many insurance companies.  Remember insurance is a volume game with the objective of taking in more from premiums than you pay out in claims.  As the number of insured declines due to the state subsidizing property owners, private insurance companies are no longer viable.

Who pays for the new state insurance plan and how much?

Anyone not in the state subsidized program will pay via higher rates and taxes/fees that will be needed in order to subsidize a high risk insurance pool.  We have seen in Florida that costs have skyrocketed for insurance.  The same will occur in Colorado.



HB23-1174: minimum rebuild requirements

This bill does not move the needle much but creates more bureaucracy and costs for taxpayers.  The highlights of the bill:

  1. State models the replacement costs: This will cost taxpayers on average 800k/year for the state to get involved.  Every insurance company already spends millions on models of replacement costs at a very detailed level, so for the state to get involved is redundant.  Furthermore, any homeowner can get their own estimate of costs and send it to their insurance agent if there is a disagreement.  Finally, costs are radically different in each area, for example Steamboat vs. Alamosa vs. Downtown Denver.
  2. Requires increases in minimum coverages offered for replacement costs.
    1. Equal to 20% of the limit of insurance for the dwelling for law and ordinance coverage (changed from 10%); and
    2. At least 50% of the limit of the insurance for the dwelling for extended replacement cost coverage (changed from 20%).

The interesting part is that this bill does not mandate that property owners actually increase their coverage.  Many homeowners due to cost will likely opt to stick with lower coverage amounts.  As a lender I see this all the time.  This bill does not do much to really move the needle on property insurance.



Colorado’s proposed plan to get into the insurance business is a bad solution to a problem that is not real.  The overwhelming majority of property owners can obtain insurance at a price.  The real reason that the state is getting involved in the insurance business is because property owners do not like the price of the new coverage.  Remember, the price reflects the risk that insurance companies have and creates incentives and disincentives in the market.   For example, when I renewed my insurance after getting dropped, the new carrier required certain items (removal of trees, protected space, etc…) to get insurance.     Without making these changes, I would have paid a substantially higher price.

This is a terrible idea to create a state-run property insurance fund to subsidize properties in high-risk areas.  A better solution would be to address the root causes of the issues including building in extremely high-risk areas and building requirements like no wood fencing after what happened in the Marshall fire.  Unfortunately, the legislature is misguided in their proposal for a state run insurance program and at the end of the day everyone in the state will pay substantially more to subsidize others as opposed to making structural reforms.

It is unfortunate that neither of these bills address the root cause of losses which is building in very high-risk areas.  To help HB23-1288 could have made a simple change that it will not insure any houses built after 2022, but instead these bills further pass on the costs to all property owners in Colorado to subsidize high risk properties.  A state run insurance carrier is a terrible idea that will lead to unintended consequences including higher prices, less insurance options, and ultimately a taxpayer bailout of the state insurance plan.

The recent failure of California’s insurance market should be headed as most major carriers have pulled out.  The same fate is heading for Colorado with these new bills.



Additional Resources/Reading



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Written by Glen Weinberg, Owner Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors MagazineThe Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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