Wildfires will alter California's homeowners insurance landscape

SACRAMENTO, Calif. (AP) — The wildfires that destroyed homes in multiple 
sections of the Los Angeles area will test California’s efforts to 
stabilize the state’s insurance marketplace after many insurers stopped 
issuing residential policies due to the high fire risk.

The wind-driven blazes that started Tuesday roared through neighborhoods 
from the Pacific Coast inland to Pasadena and the Hollywood Hills. The 
vast property damage in a disaster-prone state with high real estate 
prices and an uncertain insurance landscape could make coverage more 
expensive and even harder to find.

One area likely to feel the impact — and encounter challenges rebuilding — 
is Pacific Palisades, an affluent community sandwiched between the Pacific 
Ocean and the Santa Monica Mountains. This week’s wildfire there has been 
named as the most destructive in the modern history of the city of Los 
Angeles. Flames destroyed businesses, a library, cultural landmarks as 
well as houses.

State authorities previously listed the Palisades as one of the five 
Southern California areas with the highest concentration of potential 
wildfire risks. The community also is among the areas most impacted by an 
unavailability of insurance coverage.

When State Farm decided to discontinue coverage for 72,000 houses and 
apartments in California last year, it dropped nearly 70% of its market 
share in Pacific Palisades, according to the San Francisco Chronicle.

Here’s what to know about California’s residential insurance crisis and 
how the ongoing wildfires may further disrupt the policy market:

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Why does California have a home insurance crisis?
California has seen other major insurers pull back on property coverage in 
the nation’s most populous state as climate change makes wildfires, floods 
and windstorms more common and damaging.

Of the top 20 most destructive wildfires in state history, at least 15 
occurred since 2015. The data did not include the Los Angeles area fires 
this week.

In 2023, seven of the 12 largest insurance companies by market share in 
California either paused or restricted issuing new policies in the state.

That has made it extremely difficult for homeowners in high-risk areas to 
obtain or afford insurance.

What happens to residents who can’t get regular home insurance?
California homeowners in wildfire-prone areas either go without insurance 
or join the Fair Access to Insurance Requirements (FAIR) Plan, which the 
state created as a last resort for homeowners who couldn’t find insurance.

Many people purchase the FAIR Plan to satisfy their mortgage requirements, 
but the policies only cover basic property damage and carry a $3 million 
limit. Given the value of the real estate involved and the limited 
coverage, FAIR Plan policyholders who lost homes in this week’s fires may 
struggle to be made whole.

The policies can be very bare bones, with some options only covering the 
actual cash value of what was lost rather than the true replacement costs, 
said Amy Bach, executive director of the consumer advocacy group United 
Policyholders.

The plan was designed to be a temporary solution, but more Californians 
are relying on it than ever. The number of FAIR residential policies 
issued in the state more than doubled between 2020 and 2024, reaching 
nearly 452,000 policies.

Could claims from the LA fires push the FAIR Plan into insolvency?
Policies sold to FAIR customers primarily fund the plan, but insurers 
would have to pay into the fund if it becomes insolvent or to keep it from 
insolvency. Under a new state rule, insurers could ask the state to 
approve rate increases to recoup the money spent on bailing out the FAIR 
Plan.

FAIR Plan spokesperson Hilary McLean said it could take years to tally 
total losses from the Los Angeles area fires. While it’s too soon for 
reliable loss estimates, the FAIR Plan anticipates being able to pay out 
claims from the wildfires, McLean said.

“We are aware of misinformation being posted online regarding the FAIR 
Plan’s ability to pay claims,” she said in a statement. ”The FAIR Plan has 
payment mechanisms in place, including reinsurance, to ensure all covered 
claims are paid.”

The plan has roughly $700 million in cash on hand and about $2.5 billion 
in reinsurance, according to testimony given to California lawmakers last 
year.

The mean home value in Pacific Palisades and its surrounding areas hovers 
around $3.3 million, according to real estate company Redfin. Owners of 
the most valuable properties probably are not relying on the FAIR Plan 
because of the coverage limit, said Jamie Court, president of nonprofit 
organization Consumer Watchdog.

The claims from the fires will be significant, Court said, “but this is 
not enough to put the industry out of business or the FAIR Plan out of 
business.”

On Thursday state lawmakers introduced a bill that would give the FAIR 
Plan the ability to seek “catastrophe bonds” if it faces liquidity 
challenges.

How has California responded to the insurance crisis?
In a new tactic, state officials undertook a yearlong overhaul to give 
insurers more latitude to raise premiums in exchange for more issuing 
policies in high-risk areas.

A new regulation that took effect this month allows insurers to consider 
climate change when setting their prices. California previously did not 
let insurance companies factor in current or future risks when deciding 
how much to charge. Many companies cited the restriction as their reason 
for retreating from the state’s insurance market.

The state is also in the final stage of approving a rule that would let 
insurance companies pass on the costs of reinsurance to California 
consumers. Insurance companies typically buy reinsurance — or insurance 
for themselves — in case they face huge payouts from natural disasters or 
catastrophic losses. California is the only state that doesn’t already 
allow the cost of reinsurance to be borne by policyholders.

The new rules have prompted Farmers, the second-largest insurer in the 
state, to resume writing new policies for homeowners last month. Consumer 
Watchdog’s Court says the rules also could make it easier for insurers to 
raise rates with little oversight.

How will the fires impact California’s insurance market?
It’s “premature” to assess whether the wind-whipped fires and their 
destruction will put a damper on California’s attempt to preserve home 
insurance options for residents, said Denneile Ritter, a vice president 
with the American Property Casualty Insurance Association, the largest 
national trade association for home, auto and business insurers.

But higher homeowner premiums could be coming soon, RAND economist Lloyd 
Dixon said. If insurers' models signal a potential increase of risk, “then 
you’d expect to see the requests for premium increases by the insurers,” 
he said.

California Insurance Commissioner Ricardo Lara said Wednesday that the 
newly enacted rules allowing climate change consideration in premiums will 
help insurers accurately assess risks and set fair rates. The state is 
also issuing a one-year moratorium prohibiting insurance companies from 
dropping coverage in areas affected by fires.

“Insurance companies are pledging their commitment to California, and we 
will hold them accountable for the promises they have made,” Lara said in 
a statement.

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homeowners-insurance-landscape/