I figure my options are to sell and take a loss (not ideal), or preferably find coverage that allows or doesn't care about the K&T.

Or the market tanks and the value of the house goes down and that creates issues (selling at a loss, who brings money to the closing table, etc.

Offset Gains with Capital Losses: If you have other investments that are currently at a loss, selling them can offset the gains from your property sale, reducing your taxable income.5.

Would you prefer they change their policies just to fill your rental quicker and then increase your risk of losses?

Quote from @Landon Mizuguchi: @Michael Plaks if you're living in the house and renting rooms  (e.g. room hacking) you can't claim losses?  

You'll want to keep track of these because they can Increase or decrease your at-risk amount and as a result the losses you can take as a partnerYou or your CPA will need to report these on your IRS Schedule K-1s for each of the partners in LLC. ...

The only thing is WY LLC will flow through the income and losses to our individual CA return. any insight on this matter is greatly appreciated as I’ve heard and saw conflicting things regarding LLC needs to be registered in CAthank you ! 

Some carriers offer loss assessment insurance, which can come into play when the HOA experiences a large covered insurance loss, such as a hail storm requiring roof replacement or a fire requiring building replacement.  

This is great of your accountant who may choose to advise that you liquidate shares during a tax year where you realize some loss elsewhere.

So, an overleveraged property that had no equity to begin with and now an additonal loss from the costs of selling.What could go wrong?