Adapting to New Realities: California Commercial Insurance in 2025

GM Properties is committed to keeping our clients informed about key trends related to the commercial real estate market in Southern California. Recently, our partner, AIR CRE, held a Town Hall focused on the evolving landscape of commercial property insurance, especially within California. Lead by experts from Liberty Company Insurance Brokers, the session focused on the key factors driving premiums, and strategies for property owners to adapt to the increasingly complex insurance environment in 2025. The following is a summary of the information provided during the session.

Six Key Drivers of Commercial Property Insurance Costs

Catastrophic Losses

The frequency and severity of natural catastrophes, such as hurricanes, floods, wildfires, and severe storms, continue to be major contributors to rising premiums. In 2023, global insured losses reached $118 billion, with 58% of those losses attributed to severe convective storms (SCS). In the U.S., six of the top ten most expensive insurance events in 2023 were related to SCS, showing an upward trend in both the number and cost of catastrophic events.

Reinsurance Costs and Capacity

Reinsurance—the insurance that insurance companies purchase to cover their own risks—has seen rising costs. Although reinsurance capacity improved slightly in 2023, it remains expensive due to the compounded effects of global catastrophic weather events, financial market volatility impacting investments, and inflation. These higher reinsurance costs are being passed on to customers in the form of higher premiums.

Underinsurance

As construction and material costs have soared, many properties remain underinsured. A notable 43% of business owners have not raised their policy limits to reflect current replacement costs. To avoid financial shortfalls in the event of a loss, property owners need accurate asset valuations, which will also directly impact premium rates as insurers adjust for higher property values.

Property Replacement Costs

The cost of rebuilding properties has surged, driven by a 65% increase in structural steel prices and a 37% increase in nonresidential construction costs over the past four years. As supply chain challenges persist, insurers are forced to adjust property replacement values, further pushing up premiums.

Skilled Labor Shortage

The construction industry faces a severe shortage of skilled labor, with 77% of contractors reporting difficulty finding qualified workers. This shortage, coupled with rising labor wages (up 22% over the past four years), leads to increased costs for rebuilding and repairs, which, in turn, raise insurance premiums.

Property Rate Need

Escalating loss trends, driven by natural disasters and severe weather, have outpaced the rate increases needed to cover these losses. Insurers are expected to continue raising rates in the coming years to close the gap between loss trends and the rates they charge.

Global and National Catastrophic Events

Catastrophic Weather Events

Global losses from catastrophic weather events, including earthquakes, floods, hurricanes, and wildfires have been escalating. In December 2024, it was estimated that there was $135 billion in natural catastrophic losses worldwide. This marks the 5th consecutive year that natural catastrophic losses have exceeded $100 billion.

Global Impact of Natural Disasters

Global insured estimated losses reached $144 billion in 2024, with 2/3’s of the losses attributable to the U.S. Total global economic losses, including both insured and non-insured losses for 2024 reached nearly $320 billion. Man-made losses, such as industrial accidents or terrorism, have contributed less significantly, totaling $10 billion in the last decade. Reinsurance companies, have been responding by increasing their rates and/or limiting their capacity in what they perceive is a catastrophic risk area.

Insurance Companies’ Reaction

Increased Risk Aversion

Insurers are adopting a more risk-averse stance, tightening underwriting practices. They are increasingly selective, preferring the “cream of the crop” properties and avoiding older, unprotected, or non-upgraded buildings. The use of big data to assess risk has grown, with insurers relying on data points like wind, hail, lightning, wildfire, and crime risk scores to inform underwriting decisions.

Market Shifts

Properties that once qualified for standard insurance are increasingly being pushed to alternative markets, such as surplus lines carriers or government-backed insurers like the California Fair Plan. These alternative markets often come with higher premiums and more limited coverage options.

Risk Transfer

To manage increasing costs, insurance companies are transferring risks to the insured via exclusions and higher deductibles. Additionally, insurance companies have increased inspections with mandatory loss control recommendations and are implementing ongoing re-underwriting of risks.

California-Specific Market Impacts

Insurance Market Crisis in California

California is experiencing a well-documented insurance crisis, with major insurers such as State Farm and Allstate pulling out of the market due to the high risks associated with the state, particularly from wildfires. This has resulted in a significant reduction in available coverage, despite growing demand. As insurers become more selective, older buildings or those located in high-risk wildfire areas are increasingly excluded from standard coverage options.

Wildfire Impact on Insurance

The ongoing threat of wildfires in California continues to significantly impact the commercial insurance market. Recent wildfires have resulted in losses estimated between $135 billion and $150 billion, further exacerbating the market’s volatility.

California Fair Plan

The California Fair Plan, a state-backed insurer of last resort, is seeing an increasing demand for coverage as private insurers withdraw. However, the plan is under financial pressure, with reinsurance reserves dwindling. As a result, the Plan has levied assessments against California insurance carriers based on written premiums, increasing the potential for more insurers to exit the market. Property owners in high-risk areas should be prepared for continued uncertainty in the marketplace, as insurers may raise premiums or withdraw coverage altogether.

Liability and Umbrella Insurance Challenges

Liability Insurance

The liability insurance market is also experiencing a rise in claims, driven in part by social inflation, where claims and settlements are increasing due to changes in the legal environment and litigation trends. In 2023, nuclear verdicts (claims over $10 million) increased by 27%, and thermonuclear verdicts (claims over $100 million) rose by 35%. These claims contribute to rising premiums in the liability insurance market.

New Exclusions in Liability Insurance

Insurers are adding more exclusions to liability policies, such as habitability exclusions, firearms exclusions, assault and battery exclusions, and exclusions for animal-related injuries (e.g., dog bites). This results in shrinking coverage for property owners, and umbrella policies, which provide additional coverage, are becoming more common to fill the gaps in standard policies.

Umbrella Insurance Market

As the frequency of large claims grows, insurers are becoming more cautious with umbrella policies. Shared layers or “tower limits,” where multiple insurers cover different portions of a single claim, are increasingly the norm. While this can help provide higher coverage limits, it also results in higher premiums.

Best Practices for Building Owners and Property Managers

Documenting Physical Updates

Property owners should ensure they maintain detailed documentation of all physical updates to their buildings. This includes keeping records of major renovations, such as roof repairs, plumbing updates, and electrical system overhauls, with supporting evidence like invoices, permits, and photos. This will help ensure that insurance coverage aligns with the property’s true value and condition.

Regular Inspections

Conducting regular inspections of properties is essential to demonstrate to insurers that the buildings are well-maintained. This includes first-party and third-party inspections to assess building systems, safety features, and fire sprinkler systems.

Capital Expenditure Plans

Insurers look favorably on properties that regularly invest in capital improvements. Property owners should focus on key areas—roof, electrical, and plumbing systems—and make timely upgrades to reduce risks and ensure adequate coverage.

Risk Management and Loss Control

Implementing a robust risk management strategy that includes loss control programs, safety protocols, and emergency preparedness plans is vital. This can demonstrate to insurers that risks are being mitigated and could result in lower premium increases.

Master Policies for Multiple Properties

Owners with multiple properties should consider bundling them under a master policy. This approach simplifies coverage and may result in cost savings. Working closely with an insurance broker to create a comprehensive submission with detailed building narratives, inspection reports, and loss histories is crucial.

Strategies for Insurance Programs and Renewals

Align with Lender Requirements
Property owners should ensure that their insurance policies meet the lender’s coverage expectations and risk tolerance. It’s crucial to verify that policy limits and exclusions align with the lender’s criteria.

Develop a Tailored Strategy
Customize your property insurance plan based on the specific needs of the lender. Risk assessments and data analytics should be integrated to make informed decisions and better understand potential exposures.

Collaborative Approach
Establish open communication with your lender, ensuring that both parties work together to identify risks and develop strategies to mitigate them. This collaboration can help streamline the insurance process and avoid complications during policy renewals.

Optimize Coverage & Costs
Striking the right balance between comprehensive coverage and competitive premium rates is vital. Work with brokers and insurance providers to navigate exclusions, underwriting challenges, and to tailor the coverage to meet business needs while minimizing costs.

Build Trust & Transparency
Consistently maintain clear and up-to-date documentation on your properties. Ensure that your insurance strategy aligns with both business objectives and lender requirements, fostering a trusted relationship with insurers and lenders alike.

Master Policies and Risk Pooling
For owners with multiple properties, bundling properties under a single master policy can simplify coverage and potentially lower premiums. Consider joining risk purchasing groups to access better coverage options at competitive rates, particularly for properties with similar risk profiles.

Higher Deductibles & Lender Coordination
In some cases, negotiating higher deductibles can help reduce premiums. Owners should work with lenders well ahead of renewal time to discuss possible deductible increases, especially for properties with multiple claims that might otherwise drive up insurance costs.

Enhanced Inspections and Risk Management
Insurers are increasingly requiring documented proof of inspections, particularly for older buildings. Property owners should prioritize regular roof, electrical, plumbing, and fire sprinkler inspections to demonstrate their property’s risk management efforts.

Looking Ahead

The speakers articulated how the rapidly evolving commercial property insurance landscape, where global events, industry reactions, and local challenges—especially in California—are reshaping the market. Property owners and managers must adopt proactive risk management strategies, including maintaining up-to-date documentation, conducting regular inspections, and working closely with insurance brokers to secure comprehensive coverage at competitive rates. Given the ongoing volatility, especially in wildfire-prone areas like California, it’s critical to stay informed and adjust insurance strategies accordingly.