Why Commercial Buildings in Los Angeles Are Getting Harder to Insure

By Bobak Kalhor, President, K2 Investment, Inc. — CA DRE #01198998 · Corporate DRE #01201662 — October 2026 · 8 minute read

This piece covers what landlords and tenants have to carry, what it costs now, where the pressure is worst, how it changes what a building is worth, and what to do before you list or open escrow.

Is commercial insurance really getting more expensive in Los Angeles?

Nationally, no. In Los Angeles, yes, and the difference is the whole story.

The national commercial property insurance market peaked in early 2023 and has been softening since. The Council of Insurance Agents and Brokers' quarterly survey showed commercial property premiums rising 20.4 percent in the first quarter of 2023, slowing through 2024, turning negative in late 2025, and falling 6.3 percent in the second quarter of 2026, the largest decline of any line of coverage. Marsh's US property index fell 13 percent in the same quarter. Reinsurance capacity is back, and buildings in most of the country are renewing at lower premiums.

California is the exception, and Los Angeles County is the exception inside California. Three numbers tell the story as of October 2026:

The FAIR Plan is the state's insurer of last resort. When its policy count in one county nearly doubles in three years, that is a count of buildings the regular market walked away from. Surplus lines carriers are the unregulated-rate market that picks up what admitted carriers decline; their California premium grew faster than any state's in 2025.

On the ground, the pattern owners describe is consistent. A Downtown owner we work with carried the same admitted carrier on two mid-century buildings for more than twenty years. In 2024 the carrier non-renewed both. The owner's agent shopped every carrier she had access to and could not find one that would bind. The buildings were eventually placed with a specialty carrier that focuses on Downtown Los Angeles, at close to double the prior premium, with higher deductibles and several coverages reduced or removed. That is the experience that the FAIR Plan and surplus lines numbers above are measuring at scale.

What insurance does a commercial landlord have to carry, and what do tenants carry?

A lender decides what a landlord carries. The lease decides what the tenant carries. Both lists have gotten longer and more expensive.

A landlord with a bank or CMBS loan is typically required to carry property coverage at full replacement cost on a “special form” (every peril except those specifically excluded), twelve months of loss of rents, general liability of at least $1 million per occurrence with an umbrella above it, flood insurance if the building sits in a FEMA high-risk zone, and terrorism coverage. Earthquake coverage is rarely required, which is why most LA commercial buildings do not carry it; older concrete and masonry buildings may instead have to pass a seismic loss study.

SBA borrowers face the tightest rule. Under the SBA's current lending guidance (SOP 50 10 8, effective June 1, 2025), hazard insurance at full replacement cost is required on all pledged collateral, and if the required coverage is not available, the loan cannot be approved. For an owner-user buying a Fashion District building with a 504 loan, that one sentence is the difference between closing and not.

Tenants, under the standard AIR CRE lease forms used across Los Angeles, carry general liability of $1 million per occurrence and $2 million aggregate, coverage on their own contents and improvements, business interruption, and workers' compensation. The landlord's premium is passed through as an operating expense under a triple-net lease, or above the base year under a gross lease. Since January 1, 2025, California's SB 1103 requires landlords of qualifying small-business tenants to document and allocate those pass-throughs proportionally, which has made disputes more common.

Where it lands in the budget. CBRE and NCREIF data showed insurance at about 6 percent of operating expenses for California commercial properties at the end of 2019 and more than 10 percent by 2023. Those are averages for institutional buildings; for an older building on the FAIR Plan with a wrap policy, the share is higher.

What does the California FAIR Plan cover for a commercial building, and what is the limit?

Fire, lightning and internal explosion. Nothing else. Up to $20 million per building. And that is exactly why lenders reject it.

The FAIR Plan's commercial policy is a named-perils form. It covers fire, lightning and internal explosion. Vandalism can be added for an extra premium. It does not cover water damage, theft, liability, earthquake, or, in most cases, business income. The per-building limit was raised from $8.4 million to $20 million in 2023, and a Commercial High Value option up to $100 million per location became available on July 26, 2025, under a Department of Insurance order that expires in July 2028.

The problem is not usually the dollar limit. A 40,000-square-foot industrial building in Central Los Angeles has a replacement cost well under $20 million. The problem is that a FAIR Plan policy, by itself, satisfies almost none of a lender's requirements: no special-form coverage, no water or theft, no liability, no loss of rents. To close the gap the buyer has to buy a “difference in conditions” wrap policy from a surplus lines carrier that layers the missing coverages on top of the FAIR Plan. Wrap policies carry minimum premiums (one widely used program starts at $5,000 with a $5,000 water deductible), exclude vacant buildings, and are priced building by building. For a fully leased newer building the wrap is a nuisance. For a 1920s brick building with 40 percent vacancy and a claims history, the wrap may be unavailable, and without it the lender will not fund.

Two recent changes are worth knowing. After the Palisades and Eaton fires, the FAIR Plan levied a $1 billion assessment on its member insurers on February 11, 2025, about 3 percent of it on commercial lines, and insurers may recover half of it from policyholders, including commercial policyholders, as a separately stated fee over 24 months. And SB 547, signed October 10, 2025, extends California's one-year moratorium on non-renewals after a declared wildfire to commercial policies for the first time. It does not reverse a non-renewal that has already happened, and it does not cover non-renewals for other reasons.

Where is the pressure worst: Downtown, the fire zones, or the flood zones?

Downtown Los Angeles is the weakest commercial submarket in the county. The fire zones have no price discovery at all. Flood-zone buildings are already being repriced.

We pulled every commercial sale in Los Angeles County of $1 million or more and 5,000 square feet or more from CoStar for the two years ending September 30, 2026 (2,360 sales after cleaning), plus CoStar's quarterly market series for every submarket, and the full for-sale inventory as of October 2, 2026. The method is in the note at the end.

County-wide, commercial prices are flat to down and cap rates are drifting up.

Source: CoStar sale comps, pulled October 2, 2026. Portfolio allocations excluded from price per foot.

The last row is the one to watch. In one year the share of commercial sales closing with a recorded loan fell six points, and for industrial it fell nine (from 45 to 36 percent). CoStar does not record why a sale was all-cash. But a market in which more buyers are closing without a lender is a market in which the lender's insurance requirement is harder to meet, and all-cash buyers price accordingly.

Downtown is leading the county down. CoStar's market series tracks a market-level sale price per foot and cap rate for every submarket, every quarter, back to 2016. Of the 167 submarket-and-property-type series in Los Angeles County, Downtown Los Angeles office has the largest two-year decline, and Downtown retail is in the bottom six.

Source: CoStar Markets data export, October 2, 2026. Market-level series, not individual sales. Figures shown as price per square foot / capitalization rate.

The actual closed sales inside the Downtown core (the area bounded by the 110, the 101, the river and Washington Boulevard) show the same thing more sharply: the median price per foot fell from $262 to $227 in one year (13 percent, 104 sales), and Downtown industrial specifically fell from $294 to $242 (18 percent, 49 sales). Financed sales Downtown dropped from 42 percent to 31 percent.

Insurance is not the only reason Downtown is weak; office vacancy, Measure ULA and the concrete retrofit obligation weigh on the same buildings. But insurance is the one that has changed most in two years, and the one that stops a sale cold rather than merely lowering the price. Downtown's stock is also exactly what carriers are retreating from: 1,194 pre-1977 concrete buildings on the city's retrofit list with 6 percent complete, vacancy clauses that strip coverage after 60 days below 31 percent occupancy, and a Fire Department that attributes a third of its fire responses to homeless-related fires, including 153 structure fires in the first nine months of 2026. We will cover what this means building by building in a separate Downtown piece.

The fire zones have no commercial market to measure. Across the Palisades, Malibu, Topanga, Altadena and the Pasadena foothills we count eleven commercial sales of $1 million or more in two years, almost all on the unburned fringe; CoStar counts six trades inside the Palisades since the fire, all burned sites bought for land. The January 2025 fires damaged or destroyed 374 commercial buildings, and as of July 6, 2026, insurers had paid $1.81 billion on 2,990 commercial claims. When Palisades Village reopened in August 2026, the brokers quoted agreed that commercial recovery is slower than residential and the wait for insurance payouts is the biggest obstacle. A market with no comparable sales and no settled insurance history cannot be underwritten, whatever the FAIR Plan limit says.

Flood zones are the one place the price already reflects the policy. Buildings in FEMA high-risk flood zones (A, AE, AO, V) are a small part of LA County's commercial stock, but the 43 that sold in the last two years went from a median $337 per foot to $235, a 30 percent drop against a 2 percent decline for everything else. Flood coverage is a separate, lender-mandated policy in those zones, and the federal program's commercial limit is $500,000 for the building, so anything above that is a private excess policy. Treat the sample size with care, but the direction is unambiguous.

Sprinklers. Industrial buildings with a listed sprinkler system sold at a 5 to 6 percent premium per foot over unsprinklered buildings in both years. It is the one physical feature in the data that insurers price directly, and the market now prices it too.

How does insurance cost change cap rates and what a building is worth?

Every dollar of insurance a landlord cannot pass through comes straight off net operating income, and the market capitalizes it. Then the cap rate moves on top of that.

Here is the arithmetic on an illustrative 20,000-square-foot industrial building in Central Los Angeles.

Illustrative model only. The numbers are illustrative; the mechanism is not. Does not describe any specific property or offering.

About a third of that loss is the premium itself ($18,000 a year capitalized at 5.5 percent is $327,000). The rest is the cap rate moving 20 basis points, which is exactly what CoStar's Central Los Angeles industrial series did between 2024 and 2026. Under a triple-net lease the tenant absorbs the premium, but the landlord does not escape: a tenant whose occupancy cost just rose $0.90 a foot will pay less base rent at renewal, and a building whose insurance line is a known problem commands a wider cap rate from every buyer who underwrites it.

One more effect does not show in a cap rate table. Replacement cost, which drives the premium, has moved the opposite direction from value. As one national insurance executive put it in August 2026, an older building “may have lost 20 percent of its market value, but the cost to rebuild it has gone up roughly 40 percent since 2020.” Owners are paying more to insure buildings that are worth less.

Why are commercial deals falling out of escrow over insurance?

Because insurance is checked last and matters first. The policy the seller has does not transfer, the policy the buyer can get does not satisfy the lender, and nobody finds out until week five.

Three mechanisms account for most of the fall-outs we see.

The seller's policy is grandfathered and does not transfer. An owner who has held a building for twenty years may still carry an admitted policy at a rate no carrier would write today. A buyer cannot assume it. The moment title changes, the building is a new submission, underwritten on today's appetite, today's loss runs, and today's vacancy. We have a listing in this position now: the seller's coverage is fine, and every buyer's first question is whether comparable coverage exists at any price. Until a binder quote answers that, no lender will issue a commitment.

The only available policy is the FAIR Plan, and the lender will not accept it alone. An older industrial building in Central Los Angeles that could only be insured through the FAIR Plan lost three successive buyers in escrow for the same reason: the FAIR Plan policy covered fire only, the buyers' lenders required special-form replacement cost, loss of rents and liability, and the wrap coverage needed to bridge the gap was either unavailable for the building or priced at a level that broke the buyers' underwriting. Each buyer learned this after the appraisal and the environmental report were already paid for, because insurance was the last item on the lender's checklist. The seller's price did not change; the building simply could not be financed at it.

The quote arrives late and the number is wrong. Even when coverage is available, buyers budget insurance off the seller's current premium. When the new quote comes back at double, the buyer re-trades the price or walks. The rising all-cash share is partly this: the buyers who close are the ones who do not need a lender to accept the policy.

The for-sale market shows how thin the pipeline is. As of October 2, 2026, 1,142 commercial listings of $1 million or more and 5,000 square feet or more are on the market in Los Angeles County, and 51 of them, 4.5 percent, are under contract or in escrow. Industrial sellers have repriced (median asking $292 per foot against $278 closing); office sellers are still asking 33 percent above what closes and retail sellers 28 percent. The listings in escrow today have been on the market longer than the active ones (182 days against 161), the signature of a market where escrow is slow and conditional.

Neither standard California commercial purchase contract protects a buyer directly. The AIR CRE form has no insurance contingency; the CAR commercial form folds insurability into the general investigation contingency. The buyer's real protection is the due diligence period, and it is only as good as what gets done in week one. We will publish the observed fall-out rate from the current escrow pipeline in a November update to this article.

What should a buyer or seller do about insurance before opening escrow?

Move insurance from the last week of escrow to the first week of marketing.

What we can do

Send us the address of a building you own or are considering. We will tell you what a buyer's lender is going to require, whether the building can be insured to that standard at a price that supports the value, and what that means for the number before you list it or offer on it. No fee, no obligation. For owners in Downtown's eight districts, we have been doing this since 1995 and we know which carriers are still writing which blocks.

Contact K2 Investment  |  (213) 624-0490  |  bk@k2investments.com
530 E. 8th Street, Suite 400, Los Angeles, CA 90014  |  DRE #01198998  |  Corp. DRE #01201662

Related reading: Measure ULA in 2026: what sellers pay and the two dead zones  |  What's selling in Downtown LA, and for how much  |  Five ways a retail deal dies in escrow  |  Seismic retrofit and Measure ULA costs in DTLA

Frequently asked questions

Does the California FAIR Plan cover commercial buildings? Yes. The FAIR Plan writes commercial property up to $20 million per building, with a high-value option up to $100 million per location since July 2025. It covers fire, lightning and internal explosion only; water, theft, liability and earthquake are excluded and must be bought separately.

Why will a lender not accept a FAIR Plan policy on a commercial building? Because lenders require special-form replacement cost coverage, loss of rents and liability, and a FAIR Plan policy provides none of those. The borrower has to add a difference-in-conditions wrap policy, and if the wrap is unavailable or unaffordable for that building, the loan does not fund.

Can a buyer assume the seller's commercial property insurance policy? No. The policy ends at closing and the building is re-underwritten for the new owner on current carrier appetite, current loss runs and current occupancy. A long-held building with a low legacy premium should be assumed to cost materially more to insure after a sale.

How much does commercial property insurance cost per square foot in Los Angeles? Moody's CMBS data put LA insurance costs in 2023 at roughly $0.37 per square foot for industrial, $0.50 for office and $0.51 for retail, growing 7 to 10 percent a year since 2017. Those are institutional-quality buildings with admitted coverage. Older buildings placed through the FAIR Plan plus a wrap, or through surplus lines, commonly run two to four times that.

Can a buyer cancel a commercial purchase in California if the building cannot be insured? Only through the general investigation or due diligence contingency. The AIR CRE purchase agreement has no insurance contingency, and the CAR commercial form includes insurability inside the investigation contingency. Buyers should order the insurance quote in the first week so the answer arrives before the contingency expires.

Does the one-year wildfire non-renewal moratorium apply to commercial buildings? It does now. SB 547, signed October 10, 2025, extends California's one-year moratorium on non-renewals and cancellations after a declared wildfire to commercial policies. It does not apply to non-renewals for other reasons, and it did not apply to the January 2025 fires.

Bobak Kalhor is the president of K2 Investment Inc., a commercial real estate brokerage founded in 1995 and based at 530 E. 8th Street, Suite 400, Los Angeles, CA 90014. DRE #01198998; Corp. DRE #01201662. This article is general information from a licensed real estate broker as of October 2026. It is not insurance, legal or tax advice. Coverage terms, lender requirements and FAIR Plan limits change; confirm current terms with your insurance broker, lender and counsel before relying on them. Illustrative examples are labeled as such and are not representations about any specific property.