wildfires

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The Associated Press reported in December that insurance claims from California’s November wildfires were already at $9 billion and expected to increase.

State and Federal authorities estimate it will cost at least $3 billion just to clear the debris of the 20,000 destroyed or damaged structures.

In early December a state judge ruled that Merced Property & Casualty Company can’t meet its obligations of about $64 million in outstanding liabilities with assets of only $23 million. The California Conservation & Liquidation Office will start liquidating the company.

Is this just the beginning of more insurance companies going belly-up due to the rash of wildfires the last two years and of homeowners being unable to collect on their policies as a result? Will decisions be made where certain parts of California are uninsurable for fire hazards?

California Insurance Guarantee Association

In the case of Merced’s liquidation, their policyholders are covered by the California Insurance Guarantee Association, which “protects resident claimants in the event of an insurance company insolvency.” But the association does have maximum benefit limitations.

California Department of Forestry and Fire Protection

Ken Pimlott, outgoing director of the California Department of Forestry and Fire Protection, told the Associated Press that the state should consider banning construction in vulnerable areas.

Utilities

Lawsuits are pending against Pacific Gas & Electric for starting the fire that destroyed the town of Paradise and killed at least 86 people after the utility told regulators that a high-voltage power line malfunctioned at the time and spot that investigators believe the fire started. Realizing that their potential fire liability is large enough to bankrupt them, the utility companies are spending significant funds on lobbying and campaign contributions with the goal of a California law that would allow them to pass on the cost of wildfires to their customers in the form of higher electricity rates. A previous lobbying push succeeded in protecting the utilities from having to bear the cost of the 2017 fires and they want the same for 2018.

News Flash:  As of 1/14/19 PG&E declares bankruptcy due to $50 billion in potential liabilities from 2017 and 2018 wildfires.

 

High Risk

Insurance companies don’t have the same recourse and have been choosing to not renew policies for “customers who live in areas that are too risky to cover,” wrote Laura Newberry of the LA Times. “The state estimates that more than one million California homes are considered at high risk for wildfires.” A standard homeowners insurance policy will include coverage in the event of a fire. However if you live it what is classified as a high-risk area you will either have to pay more for the coverage or get insurance through surplus lines. Surplus lines are policies that protect against financial risk regular insurance companies won’t take on and aren’t required to follow same state regulations. The standard policy used to guarantee full replacement, however, that is starting to change. Now insurance companies are limiting that coverage to 20% over the face value of the policy. This is problematic in areas with extensive damage as there will invariably be an uptick in prices to rebuild and insurers may also not cover the cost of bringing your damaged home up to new building codes. To protect yourself purchase an extended replacement cost endorsement which can cover needed extras.

With climate change and continued development in remote areas, destructive wildfires are a fact of life. Insurance companies will be more creative with their policies, and homeowners will need to purchase additional coverage to make sure they are protected, or move out of problem areas.

Interested in an actuarial career in the insurance industry? Contact Smith Hanley Associates’ Actuarial Recruiter, Rory Hauser, at [email protected].


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