The new policy began on Saturday.
The insurance agency cited "historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market" for its decision.
State Farm said while it takes its responsibility to manage risk "seriously" and will continue to work with state policymakers and the California Department of Insurance to help build market capacity in California, the decision was necessary to ensure the company remains in good financial standing.
State Farm says existing customers will not be affected, and the company will continue offering auto insurance in the state, the company said in a press release.
"I think it's going to make a difficult situation worse," said Harvey Rosenfield, founder of Consumer Watchdog and author of Prop. 103 passed decades ago to protect consumers from surging insurance rates.
Rosenfield believes there's an ulterior motive.
"Since they submitted $700 million worth of increases requested in the last few weeks I think they are trying to exert their economic pressure as the state's largest insurance company on the insurance commissioner, Ricardo Lara, in order to pressure him to approve rates that are unjustified," Rosenfield said.
California has experienced record wildfires in the past six years.
State Farm is the second insurance carrier to stop insuring California homes. That will force more owners to use California's FAIR plan, which is the insurer of last resort in high-risk areas, and it doesn't offer full coverage.
"Insurance is for when things go wrong, and fire is something that goes wrong," said Santa Rosa resident Lisa Frazee. "I think if you want to insure in the state of California, which is one of the biggest areas where they insure, then you should have to insure everyone in California."
ABC News contributed to this report.