California's Fire Insurance Crisis

As of mid-May 2024, California has experienced 769 woodland fires and 1,657 structure fires. With wildfires becoming more prevalent in California, many residents are seeking fire insurance. Most standard homeowners insurance policies cover fire damage, including wildfires. However, those in high-risk areas may have limited or excluded coverage and may need to pay more for additional coverage. In California, the average annual premium for conventional homeowner's insurance is around $1,460. However, some homeowners in high-risk areas are paying up to $20,000 a year for fire coverage.

The California FAIR Plan: a state-mandated syndicated fire insurance pool for those who can't get insurance elsewhere

The California Fair Access to Insurance Requirements (FAIR) Plan is a critical insurance option for California residents and businesses who are unable to obtain fire insurance through traditional means. Established over 50 years ago, the FAIR Plan provides basic fire insurance coverage for high-risk properties, filling the gap when traditional insurance companies will not. It is important to note that the FAIR Plan is not a government-backed program but is instead financially supported by California's private home insurance companies.

The FAIR Plan is available to California residents and businesses in urban and rural areas who cannot obtain insurance through regular insurance companies. This includes individuals living in high-risk areas, such as near canyons or wooded areas, who may need to pay more for additional coverage. The FAIR Plan covers up to $1.5 million for a structure and its contents, which in some cases may not be sufficient for the full replacement of a lost home and property.

To be eligible for the California FAIR Plan, individuals must meet certain criteria. Applicants must own a single-family home, townhome, condo, or rental unit in California, and the home must meet specific building requirements. Additionally, homeowners must demonstrate that they have been denied coverage from the private insurance market multiple times, as the FAIR Plan is designed as an insurer of last resort.

The FAIR Plan offers tailored policies to provide basic fire insurance coverage. Licensed insurance agents or brokers registered with the FAIR Plan can assist individuals in purchasing fire insurance and determining eligibility. The FAIR Plan covers owner- or tenant-occupied dwellings with up to four family units and personal property for renters and condo owners. It also includes coverage for business-owned buildings, such as habitational units, retail spaces, manufacturing risks, farms, wineries, and office buildings.

While the FAIR Plan provides essential coverage for those who cannot obtain insurance elsewhere, it is important to note that it is more limited than a standard homeowners insurance policy. A FAIR Plan policy typically covers fewer types of losses and offers fewer policy options compared to private home insurance. However, additional coverage can be added at an additional cost. For example, earthquake coverage must be purchased separately through the California Earthquake Authority (CEA).

In recent years, the California FAIR Plan has faced challenges due to the increasing number of homeowners relying on it. As of January 2024, over 350,000 homes are on the plan, a significant increase from previous years. This has resulted in skyrocketing premiums and concerns about the program's financial stability.

The high cost of fire insurance in California

Fire insurance in California is becoming increasingly unaffordable for many residents, with some homeowners in high-risk areas paying up to $20,000 per year for fire coverage. The high cost of fire insurance is due to a combination of factors, including the increased frequency and severity of wildfires, rising construction costs, and labour shortages. As a result, insurance companies are facing higher claims payouts, which are driving up premiums for customers.

Factors Affecting the Cost of Fire Insurance in California

Wildfire Risk

The primary factor influencing the cost of fire insurance in California is the elevated risk of wildfires in the state. Wildfires have become increasingly prevalent and destructive in California, with the number of acres burned annually by wildfires increasing by 110% between 1979-1988 and 2009-2018. According to the California wildfire danger map, more than 2 million people live in areas deemed very high risk for wildfires. As a result, insurance companies are reluctant to offer coverage in these high-risk areas, leading to higher premiums for customers who can obtain coverage.

Construction Costs and Labour Shortages

The cost of rebuilding homes after a wildfire has increased significantly due to rising construction costs and labour shortages. The average cost of rebuilding a home in California has increased by more than 33% in the past five years. This increase in construction costs is reflected in higher insurance premiums, as insurance companies need to ensure they can cover the cost of potential claims.

Options for Residents Struggling to Afford Fire Insurance

California FAIR Plan

The California FAIR (Fair Access to Insurance Requirements) Plan is a state-administered insurance pool for residents who are unable to obtain coverage on the private market. The FAIR Plan is intended as a last resort and offers more limited coverage at higher premiums than traditional insurance. However, it provides an option for those who cannot find coverage elsewhere.

Excess and Surplus (E&S) Coverage

Excess and surplus insurers specialise in insuring high-risk properties and are not subject to the same regulations as standard insurance companies. While E&S coverage can be expensive, it may be an option for those unable to obtain coverage through the FAIR Plan or traditional insurance companies.

Difficulty in obtaining fire insurance in high-risk areas

Many Californians are finding it increasingly difficult to obtain fire insurance, especially those living in high-risk areas. The state has experienced a sharp increase in wildfires, with the annual number of acres burned by wildfires increasing by 110% between 1979-1988 and 2009-2018. This has led to insurance companies reassessing which homes they will and won't insure, with some companies even pausing writing new policies in the state.

Challenges in High-Risk Areas

Homeowners in high-risk areas face significant challenges in obtaining fire insurance. Insurance companies may deny coverage or increase premiums for homes located in these areas. The definition of a high-risk property varies among insurance carriers, but some common factors include proximity to brush or wild fire areas, roof type, wind patterns, and distance to the nearest fire station and fire hydrant.

The FAIR Plan as an Option

For those who cannot secure coverage in the private market, the California FAIR (Fair Access to Insurance Requirements) Plan is an option. The FAIR Plan is not state-backed but is financially supported by private insurance companies operating in the state. It covers up to $1.5 million for a structure and its contents and provides protection from fire, lightning, internal explosions, and smoke. However, it does not include liability protection. Homeowners can purchase a Difference in Conditions (DIC) policy to fill in the gaps and provide coverage for perils not covered by the FAIR Plan, such as water damage, theft, and liability.

Cost of Fire Insurance in High-Risk Areas

The cost of fire insurance in California depends on the home's location and its historic wildfire risk. Homeowners in high-risk areas may have to pay significantly higher premiums. For example, some homeowners in high-fire areas of Southern California are paying up to $20,000 per year or more for fire coverage.

Strategies for Obtaining Insurance in High-Risk Areas

Those struggling to obtain fire insurance in high-risk areas can consider the following strategies:

• Shop around and compare quotes from multiple insurance companies, as some carriers may be more willing to insure high-risk properties than others.
• Contact a broker who represents several companies, as they may have access to more options.
• Consider a surplus or excess line carrier, which provides coverage for homes that standard carriers won't insure. However, these carriers may have stricter eligibility requirements and higher rates.
• Implement fire safety measures and equipment, as some insurance providers offer discounts for homes with fire safety features.

The impact of wildfires on insurance companies in California

California's wildfires have been increasing in frequency and severity, with 15 of the top 20 most destructive wildfires in the state's history occurring since 2015. This has had a significant impact on insurance companies in the state, with some major national insurance companies choosing to stop insuring new homes and businesses, citing the risk of wildfires and the high cost of rebuilding.

Secondly, the increased frequency and severity of wildfires have led to a rise in insurance premiums, deductibles, and policy discontinuance in high-risk areas. Homeowners in these areas may struggle to obtain insurance coverage, as companies are becoming more selective about the homes they insure. This has resulted in a decrease in the availability and affordability of insurance in these areas, with some residents being unable to obtain coverage at all.

The state's Fair Access to Insurance Requirements (FAIR) Plan has become an important alternative for residents who are unable to obtain coverage through traditional means. The FAIR Plan is an insurance program of last resort, financially supported by private insurance companies operating in the state. However, the FAIR Plan has also faced challenges due to the increasing number of enrollees and the high cost of claims. As of January 2024, there were over 350,000 homes on the plan, and premiums have skyrocketed.

Overall, the impact of wildfires on insurance companies in California has been significant, leading to financial losses, changes in the way companies assess risk and set rates, and a decrease in the availability and affordability of insurance in high-risk areas. As wildfires continue to become more frequent and severe, the impact on insurance companies is likely to evolve, and companies will need to adapt to manage their risk and ensure they can provide coverage for their customers.

The role of the California State Fire Marshal in assessing wildfire risk

California's dry Mediterranean climate makes it susceptible to wildfires. The Office of the State Fire Marshal (OSFM) is a CAL FIRE program that aims to protect life and property through fire prevention, engineering, training, education, and enforcement. OSFM plays a crucial role in establishing a fire-safe environment for Californians, providing a foundation for local agencies to build upon.

The State Fire Marshal's Code Development and Analysis Division is responsible for evaluating and formulating fire and life safety regulations and building standards in California. This division drives research and innovation in fire prevention, collaborating with industry, government, and academia to share findings and enhance wildfire risk reduction. They consider various factors, including wildfire-resistant structures, vegetation management, and home vulnerability, to improve firefighter safety.

The OSFM also provides a knowledge hub with curated resources and information for firefighters, building professionals, business owners, researchers, and individuals. This hub offers insights into fire safety, regulations, training, and more. Additionally, OSFM produces Fire Hazard Severity Zone maps, which identify areas of increased fire danger in California. These maps are developed using a science-based and field-tested model that assigns a hazard score based on factors such as fire history, fuel potential, terrain, and typical fire weather.

The State Fire Marshal is mandated to classify lands within State Responsibility Areas into Fire Hazard Severity Zones (FHSZ). These zones help assess the severity of fire hazards and develop strategies to reduce wildfire risks. The FHSZ maps evaluate "hazard" rather than "risk," describing the probability of a fire occurring without considering mitigation measures. "Risk," on the other hand, takes into account modifications such as fuel reduction projects and defensible space.

Overall, the California State Fire Marshal plays a vital role in assessing wildfire risk through research, regulation, and the creation of fire hazard maps. By working closely with various organizations and individuals, the State Fire Marshal helps to establish fire safety protocols and enhance wildfire preparedness across the state.

Frequently asked questions