California recently announced new wildfire insurance rules that might be a glimpse into the future for Washington State homeowners having trouble getting insurance coverage in wildfire-prone parts of Washington. California’s new rules help people who can no longer get homeowner’s insurance coverage due to increased wildfire risk. The new rules expand a California state-run program acting as the insurer of last resort for homeowners living in areas at high risk of wildfires.
Like Washington and Oregon, California has seen significant damage from large wildfires in recent years. This has caused many insurance companies to cancel homeowner’s insurance policies for homes in high-risk areas. Even where coverage remains available, premiums have increased significantly. Many California homeowners have complained about being abruptly dropped by their homeowner’s carriers, or facing exorbitant price increases. In 2017 and 2018, California wildfires caused over 124,000 claims and about $26 billion in losses. Like other mass-disaster claims, wildfire insurance claims are often difficult due to the scope of the losses and the size of the claims.
California’s Fair Access to Insurance Requirements (FAIR) plan collects contributions from California insurance companies to support a fire loss coverage fund. Starting in April, FAIR will cover up to $3 million in damages, and will eventually be expanded to cover other non-fire liabilities, such as water damage or personal liability, typically covered by traditional homeowners insurance. The goal is that homeowners covered by FAIR should have adequate coverage without having to buy additional insurance.
The move was, predictably, applauded by consumer advocates but criticized by the insurance industry, which said the changes could hurt consumer choice.
Washington is predicted to have a particularly severe wildfire season in 2019. Wildfires are increasing as development pushes further into wilderness areas and wildfire risk pushes into parts of Washington previously assumed to be too wet to be at risk.
Here are some tips to make sure your insurance coverage is ready for wildfire season:
Read your policy and confirm it covers wildfire damage. Most homeowner’s insurance policies traditionally covered fire damage. But some policies exclude wildfire or disaster related losses.
Confirm your coverage limits are sufficient. If you bought your home many years ago, rising property values and construction costs may render your existing coverage inadequate.
Make sure your policy covers your entire loss in the event of a wildfire. For instance, confirm your policy will pay your living expenses in the event you need to relocate while your home is rebuilt (known as “Additional Living Expense” coverage).
Make an inventory of important and valuable contents to make sure the insurer covers the cost to replace these items in the event they are lost in a wildfire.
Finally, be ready to go to bat and make sure you get the coverage you are paying for. . After a big disaster like a wildfire, there are so many claims insurers can’t investigate them all properly, so they just stop trying. Disaster-related insurance claims are notorious for shoddy investigating, unresponsive staff, and overworked, poorly-trained adjusters pressured to cut corners to close out claims fast.
California’s increasingly-destructive wildfires are estimated to trigger billions of dollars in insurance claims. As of November 2018, estimates show 15 wildfires in California destroying nearly 7,000 homes and business; 31 people have been killed and nearly 300,000 evacuated. Beyond the loss of life and property damage implications for typical homeowner’s insurance coverage, the fires and attendant evacuations also potentially implicate business interruption or other commercial insurance provisions. Furthermore, the approximately 300,000 evacuated people will have significant additional living-expense claims under their homeowner’s coverage due to being forced to pay for temporary shelter and relocation costs.
Total losses are estimated at approximately $6.8 billion so far. The price tag to rebuild will be particularly high because construction demand is already up from the 2017 wildfires and the strong housing market, leading to increased demand for construction labor and materials. This high price tag translates to greater losses for homeowners and their insurance carriers.
California’s current wildfires are now the most destructive and deadliest on record. From an insurance perspective, the destruction is particularly acute in high-property-value areas like Malibu.
The California wildfires serve as a reminder to policyholders to make sure they’re adequately covered for disaster losses, and to always act proactively to protect their rights after a loss.
Hawaii homeowners who incurred damage or lost their homes entirely now face uncertainty over whether their insurance will cover the damage. The Seattle Times recently interviewed several Hawaii residents who expressed concern over whether they will have any coverage. The eruption has so far destroyed about two dozen homes on Hawaii’s Big Island. Authorities reported about 20 cracks in the ground spewing toxic gas and lava as of Tuesday.
Few insurers write policies covering structures in the area because the U.S. Geological Survey classifies it as a high lava risk. Homeowners may have been able to obtain coverage through the Hawaii Property Insurance Association, a nonprofit insurance group created by the state government to fill the gap in coverage for people living in lava risk areas.
Even people living outside the affected areas are questioning whether their policy covers lava damage. While fire insurance policies may cover lava, homeowner’s policies often have explicit exclusions for lava damage.
This can lead to complex coverage questions: if lava causes a forest fire and the fire, not the lava, burns your house down, can the insurer deny payment based on a lava exclusion? In Washington, the answer’s probably not. Washington applies the “efficient proximate cause” rule that can ultimately require the company to cover a loss if the causal chain of events includes a covered loss, despite the involvement of an excluded cause.
Ultimately, insurance coverage issues will cause at-risk homeowners to suffer significant uncertainty in addition to existing concerns about natural disasters.
CBS’ recent investigation found the federal National Flood Insurance Program (“NFIP”), intended to benefit homeowners caught in flood disasters, actually winds up paying most of its money to help insurers avoid paying claims.
The problem is NFIP doesn’t pay flood victims directly. Instead, NFIP collects premiums and taxpayer dollars, then turns the money over to private insurers with minimal oversight. Exacerbating the problem is most homeowners living in federally-designated “flood plains” are legally required to purchase flood coverage (sometimes by the government, sometimes by their mortgage lender).
A 2016 federal oversight report found NFIP often pays insurers more than it pays the homeowners it’s supposed to benefit. The report called out one example in which NFIP paid an insurer over $87,000 to defend a claim worth a maximum of $25,000. The report noted some insurance defense attorneys ran up the bill by, for instance, insisting on live, in-person testimony (typically including legal fees, court reporter fees, travel expenses and a conference room) just to verify receipts. Another problem is NFIP will automatically pay, without scrutiny, any insurer defense “expert” expense as long as it falls below $2,500.
The report emphasized many of these problems plagued the victims of 2012 Superstorm Sandy, which caused extensive flooding in New Jersey and other Mid-Atlantic areas. One estimate suggested Superstorm Sandy flood claims were underpaid by at least $189 million.
Part of the problem is the NFIP is essentially a risk-free investment for participating insurers, because any shortfalls are backed by taxpayer money. But after huge losses following Hurricane Katrina, Congress started to investigate the NFIP’s losses and suggested shuttering the program. That gives insurers in more recent disasters like Superstorm Sandy a huge incentive to lowball claims, keep NFIP’s losses low, and lower the risk Congress acts to reform or deactivate NFIP.