By Brian Kabateck
As climate change brings on more frequent and severe natural disasters, homeowners in several hard-hit states, including Florida, Louisiana, Tennessee, Colorado, Oregon, and California, are facing a related crisis: difficulty getting and renewing insurance coverage for their property.
Over the last few years, California has endured the most devastating wildfire seasons on record. And, scientists say, the state is still getting warmer and drier.
Insurance industry insiders argue that this period of disasters has put insurance companies under intense stress. According to data from the Insurance Information Institute, the Golden State currently has 1.2 million homes at extreme risk from wildfire. Janet Ruiz, a spokesperson for the Institute, told CBS News, “The insurance industry has lost 20 years’ worth of underwriting profit in the last six to eight years.”
Some customers in vulnerable areas have already seen their premiums soar by 600% or more. Others have had their policies dropped. Many are “going naked,” said State Senator Bill Dodd of Napa; constituents in his district and others have been forced to go without insurance.
Then, over the last few months, two insurance industry powerhouses—first Allstate and then State Farm—announced they would no longer issue new homeowners’ policies in California. Citing increased wildfire risk and skyrocketing construction/rebuilding costs, State Farm said, “We take seriously our responsibility to manage risk…It’s necessary to take these actions now to improve the company’s financial strength.”
Big players pulling out of the market reduces competition and inflates costs even more. The policy shortage could also make it more challenging to buy a home, as lenders require insurance.
In a statement to CBS, Farmers Insurance defended rising premiums. “Rates are designed to reflect risk level,” it said. “Homeowners insurance rates are determined using a number of different variables, including historical loss data, loss trends, age and construction type of home.”
Many desperate homeowners are turning to an expensive state-run insurance pool known as the California FAIR Plan, which offers last-resort coverage as a temporary stop-gap until consumers can obtain traditional insurance. The AP reports that FAIR, too, could “face pressure as enrollments surge.”
But, CalMatters reports, “the retraction of California’s biggest home coverage provider is only the latest development in a wildfire-fueled crisis that has smoldered beneath the surface of the state’s insurance market for years.” Insurers have been pulling back piecemeal over time; for example, there was a 42% increase in non-renewals after catastrophic fires in 2017 and 2018.
Can fire mitigation methods provide hope and insurance help for homeowners?
Last fall, California became the first state to move to reduce insurance costs for home and business owners that take specific steps to lower their property’s fire risk.
Aimed at helping homeowners access insurance policies, Safer from Wildfires, a new regulation from the California Department of Insurance, requires insurers to give premium discounts to customers who improve their properties based on new standards of fire hardening. Preventative steps and upgrades may include installing fire-resistant vents and roofs, five feet of defensible space around the structure, removing vegetation and overgrowth, and more.
The regulation also makes new demands on insurance companies, intended to increase transparency. Insurers now must:
- Reveal the tools and models they use to assess risk
- Regularly inform policyholders of their risk scores
- Offer customers a detailed explanation of:
- How the score was reached
- What factors impact the score
- How the property owner can lower their risk score
- How steps to fire-harden home and lower score will impact pricing
- Consider whether/what steps have been taken to reduce risk when setting prices and whether a home is in a certified fire risk-reduction community.
However, when the plan was launched, it received pushback from the insurance industry and consumer advocates alike—albeit for different reasons.
Insurance industry representatives say the rules have gotten ahead of science, and there needs to be more hard data on the effectiveness of fire-hardening methods. They’ve also raised concerns about intellectual property: companies develop and use expensive, innovative, proprietary risk assessment tools to get ahead of competitors, and they’re reluctant to reveal those models publicly.
Advocacy groups like Consumer Watchdog argue the regulation leaves the insurers a crucial loophole or “escape clause”: the new rules require an insurance company to consider preventative steps when setting premiums but not when deciding whether to cover or renew; this allows companies to avoid reducing rates by simply declining coverage for a property they deem too risky. Some homeowners and HOA communities report they’ve spent thousands of dollars on upgrades and have seen no discounts or have been dropped from their plan despite the improvements.
Kabateck LLP has represented thousands of homeowners who suffered damage to their homes due to wildfires or floods. Our mass disaster litigation team has also successfully sued insurance companies that engaged in bad faith by refusing to pay valid claims or severely underpaying valid claims due to damages. KBK has successfully litigated hundreds of cases from California wildfires in 2007, 2008, and 2009.