Why is California experiencing more frequent and more destructive wildfires?
A California Suburban Neighborhood after Wildfire Burned Hillside Right up to Edge of Homes
California has been experiencing more frequent, and much more destructive wildfires in recent years. In fact, of the 20 worst wildfires to ever hit the state, four of them happened last year, resulting in $12.6 billion in insurance claims.
This year has not been much better with the Mendocino Complex Fire, which was the largest in the state history while the Camp Fire burned most of the town of Paradise, destroying 12,000 homes.
All of these fires have led some insurers to stop writing policies in the state, refusing to renew homeowner policies in fire prone areas. It is very possible that once homeowners in the Paradise area rebuild their homes, they may be unable to find an insurer willing to protect their home, or at least not affordably.
“We’re not in a crisis yet, but all of the trends are in a bad direction,” said Dave Jones in a recent New York Times article. Jones is California’s insurance commissioner. “We’re slowly marching toward a world that’s uninsurable.”
Where People are Moving
Much of the problem lies in the fact that people are moving to what is called the wildland-urban interface, which is defined as the area where towns or cities end and grasslands, forest or scrublands take over. The number of people moving into these areas has grown dramatically over the years and as it stands now, about one third of all American housing is in the wildland-urban interface. Unfortunately, this puts all of these homes at risk of fires.
There are currently eight million houses in California and three million of them are in a wildland-urban interface with a whopping 1.7 million homes in an area that is prone to wildfire. While real estate agents do warn potential homeowners, it rarely deters them. As insurance companies raise premiums due to the risk, some homeowners cut back on coverage or if they are really desperate, they drop it altogether.
California is Responding
In order to protect homeowners from dramatic rate increases, California requires insurance companies to justify their rate increases with plenty of data that clearly shows that the cost of claims is rising. After a major catastrophe, insurance companies are not allowed to raise their rates immediately, they must phase them in over 20 years.
Recently, the insurance advocacy group, United Policyholders, started receiving complaints from homeowners who had gotten letters from their insurance companies cancelling their policies. United Policyholders started to work with state regulators and lawmakers on a law that would require insurers to seek out state approval before pulling out of high-risk areas.
The legislation also required insurers to offer discounts to policyholders that fireproofed their homes. The legislation didn’t pass as written with the only requirement that actually passed being one that required insurers waiting two years before dropping a policyholder after a covered disaster.
Insurers have also started requiring more detailed home inspections prior to writing a policy and in many cases are disqualifying homes based on what they find. Once a homeowner has been disqualify by a carrier they have to find coverage from a smaller “non-admitted” insurer. This means that the insurer doesn’t meet the states regulatory standards, which can be risky for the homeowner as the insurer may not be able to cover claims in a major disaster.
If a homeowner cannot find coverage in the private market they must move to the insurer of last resort, California’s FAIR plan.
What is the FAIR plan?
California set up the FAIR plan in 1968 as insurers fled the Watts section of L.A. due to the riots. It helps people who cannot find insurance coverage, not just because they don’t like their high rates.
The FAIR plan does not use taxpayer money and is operated by the insurance industry. It charges market rates for the risk presented by a property so it is not cheap or subsidized insurance. In addition, these policies only cover fire damage, homeowners must carry a separate policy for damaged caused by other perils such as wind or theft.
Currently there are 4,269 homes covered by the FAIR plan, which is an increase of 3,861 properties in 2014. While these numbers are not that high, it is because the FAIR plan requires homeowners to seek out insurance in the private market and they will require proof that you cannot get coverage in the private market.
As California experiences more and more wildfires, homeowners can expect insurers to pull out of the market, leaving the FAIR plan as the only option for coverage. Due to California’s requirement that insurers wait two years before dumping customers after a major incident, FAIR plan statistics will not reflect the uptick in homeowners not able to find insurance immediately.
Current Wildfire Victims Relying on Loss of Use Coverage
As the Camp fire and Mendocino Complex Fire burned houses to the ground, many homeowners found that they needed to rely on the loss of use part of the policy to help cover living expenses while they rebuild their homes and lives.
This often overlooked portion of a policy can be a financial lifesaver if your house has been completely destroyed by a fire or other major catastrophe. Unfortunately, many California homeowners may be underinsured when it comes to loss of use coverage, leaving them on the hook for living expenses while they wait for their home to be rebuilt.
What Exactly Is Loss of Use?
Loss of Use is the portion of your homeowners policy that covers living expenses the insured incurs if their home is destroyed or determined to be too unstable or dangerous to living in due to a covered loss such as a fire. Loss of use covers expenses that include a temporary residence, transportation and moving costs as well as expenses such as dry cleaning and even restaurant bills.
Loss of use has two parts, additional living expenses and fair rental value. In addition, loss of use is limited to a specific time period. Policy coverage can vary though and many homeowners purchase insurance based on the cost and not the coverage it provides so they may find themselves without the necessary coverage if they have to be out of their home for an extended amount of time.
Loss of use should cover costs that allow the policyholder to maintain their normal standard of living which means instead of cramming everyone into a one bedroom apartment you should be reimbursed for a home that is similar to the one you lost.
Most insurers will supply policyholders with budget worksheets so they can track their expenses and turn in receipts to be reimbursed.
Loss of Use is Time Limited
While details vary between insurers, many policies limit Loss of Use to 12 months. In California, the current law allows for 24 months of loss of use and due to the fires, this will increase to 36 months starting on January 1, 2019.
The problem is that even though 24 months sounds like a long time, it can not be enough to rebuild your home in an area that has been devastated by a wildfire. Insurers and contractors are often overwhelmed after a major fire and finding a contractor whose is not booked out months or years in advance can be difficult.
Adding fuel to the fire so to speak is the fact that California already has one of the most expensive housing markets in the country, which makes finding housing for fire victims both difficult and expensive.
What You Should Do
If your house has recently burned down, here are a few tips on how to deal with the loss of use portion of your policy:
Read Your Policy: The first thing you should do is read your policy and have a full understanding of exactly what you are entitled to receive. If you have any questions about coverage call your agent.
Make a Budget: Determine how long your loss of use policy will be paying out and make a budget and plan that makes the most of that support. If you feel there is no way your home will be rebuilt before your loss of use money runs out make a plan for how you will deal with the additional expenses that will fall to you.
Keep Track of Everything: Keep track of all expenses and all receipts so you can turn them in for reimbursement. Consider opening another bank account or getting a specific credit card that is only for Loss of Use expenses.
Prepare to Fight: If you feel your insurer is denying reimbursement for items that should be covered, escalate it up the management chain. Remember that you are entitled to a living area that is comparable to what you lost, don’t settle for a studio apartment if you lost a three bedroom home.