Plumes of smoke rise as wildfire approaches a home during the Fairview Fire near Hemet, Calif., on Sept. 7, 2022. (Patrick T. Fallon/AFP via Getty Images)
The Staggering Cost of Wildfires in California
Until the fires in Hawaii, California accounted for the most wildfire damage in the United States. Twenty-two percent of total acres destroyed by wildfire was in California. This was partly due to drought and poor forest management. California has a suppression over-prevention philosophy when it comes to forest fires.
In the last five years, $18.7 billion in property destruction or damage occurred in California due to wildfires. The closest state in the union to come in second was Colorado, with $2.3 billion.
Private insurance companies have had to foot the bill for damages.
State Farm and Allstate Not Writing New Policies in California
In May 2023, State Farm Insurance announced it would no longer write new California insurance policies. State Farm is the largest insurance carrier in the state. The company cited several reasons for the decision, including:
- growing wildfires
- rising construction costs
- expense of buying reinsurance
Allstate Insurance, the fourth largest carrier, announced it hadn’t been writing new policies for the last year. And Farmers Insurance will be restricting how many new policies it will write. For the moment, all three carriers will continue servicing current policyholders.
Harvey Rosenfield of Consumer Watchdog doesn’t think insurance companies can decide not to sell insurance to new customers. He claims that State Farm is doing this to pressure California’s insurance commissioner to approve a $721 million increase in premiums.
State Farm said it was taking this action to improve its financial strength. In 2021, 2.6 million acres burned in California. State Farm paid out over $4 billion in claims. According to State Farm, the average wildfire claim in California cost $207,000
There are still 100 other insurance companies currently writing policies in California. But Californians buying new homes may not be able to find insurance. This is especially true if the house is in a fire-prone area.
They likely will be forced to go to California’s Fair Access to Insurance Requirements (FAIR) plan to purchase insurance.
Reinsurance Not Accounted for in Premiums
Another reason that insurance companies are leaving California is the reinsurance cost expense. Reinsurance is comparable to insurance for insurance companies. A company like State Farm will purchase reinsurance to help spread the risk of catastrophic losses.
But reinsurance is expensive for the companies to purchase. California is the only state in the union that will not allow an insurance company to pass on the price of reinsurance through the premium. This has created financial problems for many insurance companies.
California’s FAIR Plan Provides Limited Insurance
There’s already a housing shortage in California, and lack of insurance options will likely hinder the building of new homes. It will also further stress the California FAIR Plan Association.
The FAIR Plan is not a taxpayer or government-funded insurance plan. Insurance companies licensed to write policies in California pool their resources to provide insurance. If major insurance companies pull out of California, they will also leave the FAIR Plan. That means fewer resources to pool.
Without the FAIR Plan, homeowners will be forced to go to surplus lines carriers. These insurance companies are non-admitted and, therefore, not covered by the state guaranty fund in case of default.
The FAIR Plan a Last Resort Policy
It was initially designed to provide property owners with a base policy. It is a last resort option for property insurance.
Although the FAIR Plan does cover the fire risk, it is limited. Perils or risks that it doesn’t cover include:
- personal liability
So, if someone is injured or killed on your property, you won’t have liability insurance with the FAIR Plan as you would with a standard insurance policy.
Often, property owners in wildfire-prone and inner-city regions must resort to the FAIR Plan if they cannot find other options.
The FAIR Plan has employees and is overseen by the California Insurance Commissioner and insurance company executive. It collects premiums and is financially backed by insurers writing standard policies in California.
The only coverage you receive from the FAIR Plan is:
- fire or lightning
- internal explosion
Insureds with the FAIR Plan can purchase other coverages for an additional premium.
FAIR Plan and Replacement Cost Coverage
FAIR Plan insureds must pay extra for replacement cost coverage. Replacement cost is the amount your house will cost to rebuild. Because construction costs are high in California, this is advantageous to have.
If you don’t pay extra for replacement cost coverage, you will receive actual cash value for your house. This means you will only receive the current value of your home and not the rebuilding costs. Actual cash value pays out less money.
That means if your house’s actual cash value is $200,000 and it costs $300,000 to rebuild, you will only receive the lower amount unless you pay more premium for the additional coverage. But if you have replacement coverage, you receive the $300,000.
For those with more expensive homes, the maximum amount of insurance the FAIR Plan provides for the combined dwelling and contents is $3 million. That means you will not receive additional funds for contents if it is $3 million to build your house.
Insurance Premiums Not the Only Cost Increase
Fewer options for insurance and higher premiums may be the result if more companies follow suit with State Farm, Allstate, and Farmers Insurance.
If companies stop writing policies or leave the state, this will put pressure on the FAIR Plan and force some insureds to go to surplus lines. Surplus lines have high premiums.
But it goes deeper than just premiums. With limited coverages from the FAIR Plan, residents in high-risk areas will be self-insuring much of their property. Many won’t have adequate coverage for their home and. Remember, your house is only worth actual cash value unless you pay more.
Insurance watchdogs may have thought they were guarding residents against high premiums, but they may have hurt them if homeowners cannot find adequate insurance.
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