California's Surplus Lines Insurers Face Legal Ambiguity Over Earthquake Coverage

What's Happening?

The California property insurance market is experiencing a shift as admitted carriers reduce their coverage in high-risk areas, leading to an increase in surplus lines insurers providing residential property insurance. Surplus lines transactions surged by 119% in the first half of 2025 compared to the previous year. This raises questions about whether surplus lines insurers must comply with California's requirement to offer earthquake insurance alongside residential property policies. The California Insurance Code mandates that admitted insurers offer earthquake insurance, but it is unclear if this applies to surplus lines carriers.

Why It's Important?

The ambiguity surrounding surplus lines insurers' obligations to offer earthquake insurance has significant implications for California homeowners and the insurance market. As surplus lines carriers write more residential policies, the lack of clarity could leave consumers vulnerable in the event of an earthquake. Regulatory guidance is needed to ensure consistent consumer protection across both admitted and surplus lines markets. The issue highlights the need for clear legal frameworks to address emerging insurance challenges in high-risk areas.

What's Next?

The California Department of Insurance may need to issue formal guidance or regulations to clarify the obligations of surplus lines insurers regarding earthquake coverage. This could involve extending existing statutory requirements to surplus lines carriers, ensuring homeowners have access to necessary coverage. The evolving insurance landscape in California will require ongoing dialogue between regulators, insurers, and consumers to address legal and policy challenges.

Beyond the Headlines

The legal gray zone for surplus lines insurers underscores broader issues of regulatory oversight and consumer protection in the insurance industry. As climate-related risks increase, the need for comprehensive coverage and clear policy language becomes more critical. The situation in California may serve as a case study for other states facing similar insurance challenges.