Image: CAL FIRE
There has been massive property damage; estimates are currently ranging from $20 billion to $135 billion. Either of those figures would make these the most destructive fires in Southern California’s history — and, with that wide of an estimate range, I won’t be surprised if the final number ends up being considerably higher.
One of the worst parts about this disaster is that, while the fires were a natural disaster, the magnitude of their impact is man-made. Further, it was predictable:
- Even though the conditions for a declaration were only recently met, a La Niña event had been developing for a while.
- Southern California is currently experiencing one of the driest periods on the historical record. The area also experienced unusually wet winters in 2022-23 and 2023-24. Combined, this meant that quite a bit of vegetation was present, and that it had become extremely flammable.
- The “fire season” in the area traditionally runs from May to October, which means that brush removal, while required, likely had not been a top priority for many homeowners.
- The Santa Ana winds had recently become unusually strong. An extreme fire risk was modeled as early as January 4.
- Housing prices (and property values) in the area have been climbing significantly since 2020.
It didn’t take specialized knowledge to figure out that chances of major, widespread property losses due to wildfires were dramatically increasing. Property insurance companies were well aware of this fact, too, and had been responding accordingly:
[I]n late 2022, Allstate quietly paused writing new home and condo policies…[it] was just the first domino to fall. In May 2023, State Farm announced it would no longer accept new business and personal property and casualty applications…[and] the following March, [they] stated [they] would non-renew around 30,000 home insurance policies beginning July 3, 2024. Farmers followed suit by limiting new policy applications…and USAA also limited policies by raising its wildfire safety standards…[f]rom summer 2023 to early 2024, five other companies — AmGUARD, Falls Lake, The Hartford, Tokio Marine Insurance Co, and American National — stopped writing new home insurance policies in California.
Image: CAL FIRE
These events were a clear warning sign that a destructive event was likely coming. Unfortunately, very few people outside the insurance industry recognized it. Even worse, now that the wildfires are burning, there’s a lot of misinformation popping up about the insurance situation in California. Here are some of the most egregious comments I’ve seen:
The insurance companies knew this was coming.
This statement is actually quite true, but as I note above, it wasn’t the result of any special or insider knowledge. All of the information I’ve quoted and sourced above is publicly available, and can be found with just a bit of research.
Insurance companies started canceling policies when the fires started.
This is not true. Again, as noted above, they had been limiting and non-renewing policies since 2022. (In insurance parlance, a non-renewal is not a cancellation; it’s a decision not to renew a coverage contract once it expires.) Further, California law requires a minimum of 75 days notice of non-renewal, before the existing contract ends. That gives homeowners a little over two months to find another policy.
Insurance companies can face significant fines, sanctions, and even prosecution if they don’t comply with notice guidelines. Given that, it defies logic to think that any insurance company would have taken the risk of the penalties associated with improper non-renewal notices.
Further, actual policy cancellations (i.e., during the contract period) usually happen either because the insured fails to pay premiums or because they provided fraudulent information on their application. Since most mortgage loans require the use of an escrow account to ensure that premiums are paid, cancellations are, in terms of percentage, relatively rare occurrences.
The California Insurance Commissioner has required insurance companies to reinstate the canceled and non-renewed policies…
Image: CDI
Further, California SB 824, which is the legal basis for the January 7 declaration, has specific exclusions for fraudulent applications, risks that were previously known but not declared, and cancellations or non-renewals that are for reasons other than wildfire (and earthquake) risk.
It should also be noted that this protection is currently limited to property insurance in thirty-five zip codes which were affected by the Palisades and Eaton fires. Zip codes outside of these are (currently) not protected, even though the Palisades and Eaton fires aren’t the only fires that have been burning.
No policies are being reinstated. The only thing that has happened is that some policies are protected from cancellations or non-renewals based solely on the assessment of wildfire risks. Cancellations and non-renewals for other reasons are still allowable. The January 7 declaration is also only the most recent of a series of declarations about non-renewals/cancellations in areas affected by wildfires.
…even if they were canceled for non-payment of premium.
Again, this one is absolutely not true. Cancellations for non-payment of premium are not related to a property’s wildfire risk rating, which means they’re exempt from SB 824 protection. California law allows for a 60-day grace period before policies can be canceled for non-payment.
The January 7 press release requests that insurers consider extending the grace period for areas affected by the fires, but it does not require them to do so. If a premium payment is 61+ days late, the policy can be canceled without reinstatement rights, even under the current moratorium.
California recently started prohibiting non-renewals or declinations for wildfire risk.
That’s not quite right. On December 30, 2024, California regulators announced they will begin requiring that insurance carriers offer policies in high-risk areas, but there are limitations on that regulation. Insurers may still choose which policies they want to offer; they just have to offer a certain percentage of policies in high-risk areas. Insurers may also include the cost of reinsurance in the premium rates for high-risk policies. These policies will thus have significantly higher premiums than Californians have already been paying.
Further, the regulation doesn’t actually go into effect until thirty days after December 30. In addition, the regulation doesn’t prohibit carriers from pulling out of California entirely. Compliance is only required if a carrier continues to write new policies in California. As I noted above, several carriers had already stopped doing so, well before these wildfires. They won’t necessarily be required to begin writing policies again, although the regulation could provide an enticement.
The California FAIR plan will insure a property if no one else will.
This statement is oversimplified. The California FAIR plan was designed as a temporary measure of last resort for homeowners who couldn’t find wildfire- or earthquake-related insurance anywhere else. It’s not an insurance carrier. Instead, what it does is assigns these high-risk policies to existing carriers (who are already writing coverage for less-risky properties) on a proportional basis, so that these extremely high risks are shared between the carriers.
Image: California FAIR Plan
Making matters worse, the California FAIR Plan Association recently testified that it’s “dangerously overextended.” A sudden influx of claims could completely exhaust their reserves. Private carriers will only be liable for the first $1 billion in claims shortfall. That’s considerably less than even the most conservative of damage estimates. Or, in other words, there’s a chance that there simply won’t be enough money to pay out all of the insurance claims. Policyholders wouldn’t receive claim payments even if they’d otherwise be eligible for them.
The FAIR plan’s web site also notes that it has not been evaluated by A.M. Best, which means there is no guarantee or even confirmation of solvency. That’s consistent with it being meant as a temporary solution instead of a permanent one, but it means it’s not as secure as a standard homeowners’ policy. As a general rule, on the open market, brokers usually will not place policies with carriers that have ratings at or below B. Some even limit their business to carriers with higher ratings.
Conclusion
I’m not insensitive to the incredible pain and suffering we’ve been seeing out in Southern California; rather the reverse, actually. I’m also quite aware that both of those are exacerbated by the possibility of unpaid insurance claims, or inability to get insurance on properties that still exist. It’s not a pleasant situation to face, and that’s putting it extremely mildly.
The spreading of misinformation and disinformation will only make things worse for the victims, not better. In the case of property insurance, it’s also not necessary; the correct information is available. Let’s try and get the word out about it.