Some insurance companies have been declining to renew homeowners’ policies in fire-prone areas. When the houses that burned this year are rebuilt, their owners may find that no one is writing insurance there—at least not at affordable prices.
“We’re not in a crisis yet, but all of the trends are in a bad direction,” said Dave Jones, who is completing his eighth and final year as California’s insurance commissioner. “We’re slowly marching toward a world that’s uninsurable.”
Here’s what you need to know about California’s insurance crisis:
About a third of all American housing and about 3 million of California’s 8 million homes stand on the wildland-urban interface—quiet, scenic realms where towns and cities end and forests, grasslands or scrublands begin. But houses close to vegetation pose complex risks—including the danger of fires.
In California, about 1.7 million are considered highly prone to wildfire. Real estate agents warn homebuyers, but they pay little attention, said Alice Hill, a research fellow at the Hoover Institution who studies climate change and other catastrophic events. She ignored past warnings herself, she said. When she lived outside Los Angeles, she received a notice from the local fire department, saying that her property was at extreme hazard and would not be defended in a wildfire.
“It didn’t change our landscaping,” she said. “We planted trees right next to the house” — a big no-no in fire country. And when insurance premiums spiral upward, she said, many people try to save money by cutting back on their insurance coverage, or dropping it entirely.
“It’s a known risk, and people just hope it won’t happen to them.”
What is California doing about it?
California requires insurers to justify increases with reams of data showing that their cost of paying claims is rising. And after a catastrophic year, insurers are not allowed to raise rates right away, but must phase in the increase over 20 years.
After last year’s fires, United Policyholders, an advocacy group, heard from homeowners who had received letters from their insurers, stating that their coverage would end in 45 days. The group set to work with regulators and lawmakers on a legislative package that would have required insurers to seek state approval before pulling out of high-risk areas, mandated discounts to policyholders who fireproofed their homes and given regulators the power to make sure that insurers’ wildfire models were sound.
The only provision that became law was a two-year moratorium barring insurers from dropping policyholders for two years after a “covered disaster,” said Amy Bach, the group’s executive director.
Insurers are also stepping up home inspections, she said, sometimes disqualifying houses with risks they hadn’t cared about before.
When that happens, the owner must try to find coverage elsewhere, possibly from a “non-admitted” insurer, one that does not meet the state’s regulatory standards. That can be risky. If all else fails, they can get insurance from California’s property insurer of last resort, the FAIR Plan.
How does the FAIR Plan work?
The FAIR Plan was set up in 1968, after riots prompted property insurers to pull out of the Watts section of Los Angeles. It has since evolved to also provide coverage for people shut out of the market because of wildfire risk.