It couldn’t have come at a more dangerous time for California homeowners as officials attempt to contain what they acknowledge is a worsening “insurance crisis.” The wind-driven wildfires that are burning out of control in the Los Angeles area.
Amy Bach, executive director of United Policyholders, a nonprofit consumer advocacy organization located in California, said, “We were all thinking 2025 is going to be the year insurers regain their appetite for the market in California, but having this catastrophe hit us right out of the gate is really unfortunate.”
Go here to watch live broadcast.
“Up until this latest disaster,” she said, “we thought we might be turning a corner.”
Last month, the state Department of Insurance published a new rule that aims to change some of the biggest insurance firms’ decisions to either not renew existing policies or refuse to take on new clients in California. The rule allows insurance companies to pass on the cost of reinsurance to customers, but only up to a certain amount that doesn’t go above industry norms.
In order to safeguard themselves against catastrophic claim situations, insurance companies purchase reinsurance.
California was the only state, according to the Insurance Department, that forbade the cost from being passed on.
In exchange, insurers operating within the state are required to once more offer coverage in areas that are prone to fire at a set rate. Last month, another rule was passed that permits insurers to include catastrophe modeling in their prices, provided that they expand the range of policies they sell in underserved regions of the state.
In a prior statement, Insurance Commissioner Ricardo Lara stated, “Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change.” “This is a historic moment for California.”
Consumer advocates, however, criticized the actions, fearing they will simply result in significantly higher premiums.
A request for comment in the wake of the most recent wildfires was not immediately answered by Lara’s office on Wednesday.
One of the most expensive fires in the state is expected to be the ongoing Palisades Fire: More than 11,800 acres have been burnt, and 1,000 houses have been torched, according to fire officials on Wednesday. A J.P. Morgan Insurance analysis suggests insured damages from that fire alone might be close to $10 billion. There have also been at least four more large fires.
The Palisades Fire is “an affluent residential area, with a median home price” of more than $3 million, according to J.P. Morgan analysts.
According to Bach, California residents may spend anywhere from $1,000 to over $40,000 year on property insurance.
Property owners in the state are not required by law to carry insurance, but those who have mortgages are. However, damage from natural catastrophes like earthquakes, floods, and landslides is typically not covered by standard property insurance plans. To safeguard against various kinds of disasters, separate insurance plans are needed.
According to Bach, the issue is not if insurance companies would cover damage, but rather how much and when they will do so.
“For the people who lose their homes in these wildfires, there will be fights over coverage,” she stated.
If they have insurance at all, that is.
When State Farm declared in March that it would no longer renew homeowners’ insurance, some homeowners in the affluent Pacific Palisades enclave devastated by the wildfires were caught off guard.
California’s biggest home insurance provider, State Farm, stated that its choice was “not made lightly.” It attributed its need to safeguard “its bottom line” to expenses related to inflation, disaster exposure, reinsurance, and regulations.
As climate change causes temperatures to rise, fire seasons to lengthen, and drought conditions to worsen, the destruction caused by wildfires in particular—which have resulted in insured property losses in California totaling tens of billions of dollars over the last 10 years—has only gotten worse.
The 30,000 property insurance subscribers being dumped throughout California, according to a nonrenewal letter issued to the state by State Farm, resided in regions that “present the most substantial wildfire or fire following earthquake hazards.” The company’s decision, which took effect last summer, was most detrimental to the Westside area of Los Angeles. Over 1,600 insurance in the Pacific Palisades were not renewed.
Due in part to disaster vulnerability, State Farm had already announced in 2023 that it would no longer provide home insurance to new clients in California. California’s sixth-biggest home insurance provider, Allstate, also announced same year that it was stopping new policy offerings in the state.
In a statement released on Wednesday, State Farm responded to a question concerning its homeowner coverage in the wildfire-affected areas by saying that its “number one priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy.”
Under the Fair Access to Insurance Requirements Plan, which was created in the 1960s, California does have an insurance policy that offers fire insurance coverage for structures that pose a high risk. The insurance companies pay for the basic coverage.
Although homeowners are supposed to utilize it as a last resort, its use has skyrocketed in recent years, rising from about 154,500 residential policies in September 2019 to over 408,400 in June, resulting in a high risk exposure that state officials claim was never intended.
However, there was hope that some insurance providers would be open to filling the gaps in the market. The town of Paradise, the scene of the terrible Camp Fire in 2018—which is regarded as the worst inferno in modern state history—will see the introduction of new homes insurance coverage, according to a Tuesday announcement from Mercury Insurance, an independent home insurer in California.
“The reality is that companies have to manage how much they can handle in the face of destructive wildfires and rising reconstruction costs,” Janet Ruiz, chief spokesperson for the Insurance Information Institute, which represents the insurance industry, told NBC Bay Area.
“California is the fourth-largest insurance market in the world,” Ruiz stated. “We want to be here, we want to be a part of it, but we do need to make some profit.”
According to Bach, customers may benefit if the government is able to persuade insurance companies to return to the market and become competitive.
However, she expressed concern that the recent flames might simply make insurers more cautious.
“Home insurance is an essential good that the private market is increasingly unwilling to provide,” Bach stated. “We are at a crossroads.”