Wildfires and the Impact on the Home Insurance Market

The impact of California’s most destructive wildfires continue to permeate throughout the state.  The substantial losses include more than a hundred fatalities from the Camp Fire in 2018 and Tubbs Fire in 2017, tens of thousands of buildings burned, massive evacuations and whole communities displaced.  California insurers have identified at least $20 billion in liabilities arising from wildfires caused by PG&E.  In the wake of these losses, homeowners throughout the state and particularly in areas affected by wildfires face uncertainty about the availability of hazard insurance to cover the risk of fires.

The California Insurance Commissioner, Ricardo Lara, has exercised authority under a 2018 law to impose a one-year moratorium on non-renewals in areas declared to be in a state of emergency because of a wildfire.[1]  When confronted with a non-renewal notice, a homeowner might be able to shop around for a new policy, but coverage is probably going to be substantially more expensive. In response to data showing increasing rates of non-renewals, the Insurance Commissioner exercised authority under the new law to impose a moratorium on insurance companies from refusing to renew homeowners’ policies for areas where there was a declared wildfire emergency and the adjacent zip codes.  According to the press release announcing the order, the December 2019 order covers more than 800,000 residential policies.[2]  In addition to imposing a moratorium, the Insurance Commissioner called for a “voluntary” statewide moratorium on non-renewals, encouraging insurers to continue offering policies.

The rise of non-renewals is a foreseeable response to the devastating fires in the past few years and the claims by homeowners in communities ravaged by wildfires.  The extent of these claims is illustrated in the Chapter 11 bankruptcy proceedings for PG&E, which were commenced in January, 2019.  In December, 2019, PG&E agreed to pay $13.5 billion in compensation to the victims of the 2017 and 2018 wildfires.  From the payments to wildfire victims, the U.S. Federal Emergency Management Agency (FEMA) is claiming $4 billion as reimbursement for disaster assistance; this claim is being challenged by attorneys representing victims as well as state lawmakers, arguing it takes away from the victims.  Additionally, insurers have asserted subrogation claims of more than $20 billion, of which PG&E has agreed to pay $11 billion.

The potential for substantial losses from wildfires was known.  Indeed, the state’s insurers were “reinsured” for these types of losses.  With those policies coming into effect, the arrangements of primary insurers to share risk is being tested.  This is one of the major factors affecting whether insurers will continue to offer policies in fire-prone communities throughout the state.  When re-insurance is unavailable or becomes more expensive, it increases the exposure for the primary insurers and impacts the availability of policies.  In addition to the risk of being uninsured, a homeowner typically secures a basic hazard liability policy to satisfy the requirements of mortgage lenders.

The moratorium under SB 824 allows the state to force insurers to offer renewals for one year after the declaration of an emergency.  After that, there may be significant questions about the availability and price for homeowner policies in communities throughout the state.  One option might be the “FAIR Plan,” which is an association of insurers established under state law to be an insurer of last resort.  In 2019, the Insurance Commissioner issued an order that the FAIR Plan offer a typical homeowners’ policy (also referred to as an HO-3 policy).  In response, the FAIR Plan filed a legal challenge to the validity of this order, and a Los Angeles County Superior Court recently granted a preliminary injunction.

Currently, the Legislature is considering Assembly Bill 2367, which would require insurers to offer or renew policies for existing homes that meet certain standards for “fire-hardening.”  The bill requires development of standards to make homes more fire resistant.  Such measures might include providing defensible space or using construction materials that reduce the risk of a major loss.  The push towards fire-hardening homes is a common sense policy, but it will also likely require significant cost of construction.  Other costs will inevitably be passed to consumers.  For instance, California also established a $21 billion fund to help cover wildfire liabilities, which will be funded in part through a new fee (approximately $2.50/month) on utility bills.

While the prospect of insurance coverage being unavailable or unaffordable has drawn a multitude of responses, it also reflects the ongoing risk from wildfires and the potential for widespread losses that will never be made whole through insurance.  The uncertainty regarding insurance should further prompt efforts to avoid significant losses from wildfires.  The location of communities and how they are constructed and designed has to be considered as a potential long-term strategy to avoid future devastating fires, especially at a time when there is demand for construction of new housing.  Insurers have taken action by scrutinizing where policies will be issued, and some policies now require mitigation or fire-hardening measures to protect a home.  In the end, the realization of losses over the past several years may not entirely eliminate the availability of homeowners’ insurance, but it may cause significant changes to the coverage that is made available, how claims are handled, and consumers paying further costs for the losses from wildfires.

[1] Insurance Commissioner Lara was a sponsor of the legislation  (SB 824) while in the State Senate.

[2] A bulletin issued by the Insurance Commissioner identifies the covered zip codes: http://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/MandatoryMoratoriumOnNonRenewalsAfterRecentWildfireActivity.pdf