Major natural disasters are on the rise, leaving homeowners facing the growing risk of both significant property damage as well as increasing challenges in getting and maintaining appropriate insurance coverage. In 2021, catastrophic wildfires burned more than 2.5 million acres and damaged or destroyed over 3,600 structures in California alone1, with additional tens of thousands of acres burned in Colorado2 and over half a million acres burned in Oregon.3 With catastrophic wildfires like these becoming an annual occurrence, here are some things to know about what options exist to stay properly insured.
Even If You’re Already Insured, Challenges Can Arise
While it would seem reasonable to assume that if you are already insured for your current homes you are protected for whatever may come your way, that is sadly no guarantee that your existing coverage will be sufficient in the event of wildfire damage. As more and more areas in the Western U.S. face greater wildfire risk, what may once have seemed like a remote possibility is increasingly likely for many of us. Particularly if your homeowners policy has been in place for some time, it is good practice to review precisely what is covered and in what circumstances. With rising real estate costs, the cost of rebuilding your home and replacing your belongings may far outstrip what insurance would typically consider standard costs. The kind of large-scale, catastrophic fires we’ve seen in recent years also create increased demand for supplies and labor, driving rebuilding costs even higher.
In some areas, an additional concern is losing existing coverage due to non-renewal by your insurance company or the company deeming the ongoing risk too high and simply deciding to stop offering coverage at all in your area. The problem arose so quickly in the wake of major fires in 2020 and 2021 that, in some instances, regulators have stepped in to ensure that residents can maintain coverage. Those living in areas impacted by many of the recent fires in Northern California were granted a temporary reprieve from losing their coverage. The state imposed a moratorium on cancellations and non-renewals until September of 2022.4 While this is a welcome move for many homeowners, it is a temporary solution, and the long-term state of residents’ ability to maintain sufficient coverage remains a question.
New Policies Can Be Difficult To Come By
New Home Checklist
- Evaluate the risk of natural disaster for your property using assessment tools such as Risk Factor.
- If your new home is in a high-risk area, consider if it makes sense to purchase with cash rather than a mortgage to give yourself more flexibility on how you insure or whether to self-insure.
- If you find yourself struggling to find coverage, ask carriers about additional fire protections you could add to the property or fire abatement you could do that would make it possible for them to issue a policy.
- Carriers with whom you already have a relationship are a good place to start but be prepared to look around.
If you move or buy an additional home, acquiring insurance in what are now deemed high-risk areas can be difficult, if not seemingly impossible. Insurance companies are becoming more and more circumspect when issuing policies, leading some homeowners in high wildfire risk areas to go to as many as ten different carriers before finding one willing to offer them coverage. Some insurers have also begun requiring fire abatement modifications to homes before issuing policies, including significant brush clearing to provide additional fire break around structures and other changes to landscaping, and for good reason. One study indicates that buildings with vegetation in at least half the area within five feet of the structure were destroyed in a wildfire 78% of the time.5
As you consider purchasing a new home, the availability and cost of insurance are worth including in your decision-making process. Suppose you’re deciding between a few properties, for instance. In that case, there may be differences between them that would make one more easily insurable than the others, even if they’re in the same general location. The difference between a home down a narrow canyon road and one a few miles away on a more easily accessed street, just as one example, can be the difference between finding coverage and not.
If you have your heart set on a property that insurers may consider risky, then you may want to weigh the benefits of self-insuring. Certainly, no one relishes the idea of having to pay out of pocket for potentially catastrophic fire damage. But in the highest risk areas, policies can run into the seven figures for the most sought-after properties, if you can find an insurer to issue a policy at all.6 In that case, foregoing traditional homeowners insurance in favor of more specific coverage only for things like your most valuable belongings like art or only for liability may be an option. It is important to consider how you’ll want to insure a home before purchasing. Given mortgage lenders’ insurance expectations, your decisions on how and whether to insure your home may also influence whether and how you choose to finance.
More Than Your Home May Be at Risk
While the most obvious concern in the event of a wildfire, after the safety of you and your family, is your home itself, you should also be aware of other items of significant value that are likely to be damaged or destroyed in the event of a wildfire. Art collections, jewelry, car collections, boats and other recreational equipment are just some examples. In the case of things like fine art, antiques or rare cars, it is of particular importance that you understand what the true value of those items is, if they’re replaceable and if so, what the cost would be, and to what degree they are or are not covered under a standard homeowners policy. Having a current appraisal by an appropriate expert for any of these types of items can help you determine whether you are sufficiently covered and file any necessary claims if you are affected by a wildfire or other disaster. Regardless of the value of your items and the coverage limits of your insurance policy, additional riders may be necessary to fully cover all of your belongings.
If you have made any additions to the home, or if the home as purchased has any additional buildings, make sure that they are appropriately covered under any homeowners policy you may have. In particular, buildings that are separate structures from your main home, such as in-law units or recreation spaces, will typically require other structures coverage to be included in your policy.
As Risk Grows, More Changes May Be Coming
In light of these ever growing natural disaster risks, many insurers are considering significant changes to the way they do business. Many insurance companies are advocating for states to allow them to more aggressively factor in future risk of hazards like wildfires, flooding and mudslides. In California, there is some precedent for carve outs for certain types of damage. The state already allows insurers to exclude earthquake damage from standard coverage, requiring homeowners seeking coverage to purchase a separate earthquake policy. Insurers currently use proprietary models to project future earthquake risk when pricing earthquake insurance. In the future, could we be looking at a scenario where homeowners in areas at high risk of wildfires (or other natural disasters exacerbated by climate change like hurricanes) could find themselves needing two, three or more policies to fully cover their homes? Consumer advocacy groups argue that moving more broadly to the type of underwriting model used for earthquake insurance would increase rates without the kind of transparency otherwise required. Insurance companies, for their part, argue that the kind of widespread damage we’ve seen in the wildfires of recent years presents a potentially existential threat to them, as a bad fire season could cause tens of billions of dollars in damage. Financial consulting firm Milliman states that the 2017 and 2018 fire seasons negated 26 years’ worth of profits for insurers, leaving them with a $10B loss since 1991.7
What Should You Do Now?
As we face more significant and more complex natural disaster risks, insurers and homeowners alike will be forced to reckon with an uncertain future, but you can take a few key actions to manage your risk.
- Review your homeowners policy at least annually to ensure that you are adequately covered, especially if you’ve recently undertaken additions or renovations
- Review your risk of natural disaster using a tool like Risk Factor
- Manage vegetation growth around your property to maintain a sufficient firebreak according to guidelines from your local fire protection agency
- If you do receive a notice of non-renewal, act quickly to acquire new coverage and check with your state insurance department to understand what protections you may have
Sadly, wildfires seem likely here to stay in the Western U.S. and beyond. If you have questions about your insurance coverage, your Wetherby team is available to offer guidance and connect you with additional experts as needed.
1Cal Fire. “2021 Incident Archive.” May 3, 2022.
2 Out There Colorado. “Six wildfires burn around Colorado, scorching nearly 25,000 acres.” June 24, 2021.
3KTVZ. “‘We haven’t peaked yet’: Oregon already outpacing historic, devastating 2020 wildfire season.” July 20, 2021.
4California Department of Insurance. “Commissioner Lara protects insurance coverage for 325,000 Northern California wildfire survivors.” September 20, 2021.
5Forbes. “What to Know About Wildfire Insurance.” February 28, 2022.
6SF Gate. “How Prince Harry and Meghan Markle’s California home of Montecito faces extreme risks in wildfires.“ May 20, 2022.
7Milliman. “Wildfire castastrophe models could spark the changes California needs.” 2019.