While insurers say that finding better ways to assess risk is critical to offering insurance at appropriate rates, homeowners are still dealing with underinsurance in the aftermath of major wildfires like Colorado's Marshall Fire. And, while regulators have pushed for lower rates for policyholders who take precautions to protect their homes from wildfires, consumer advocates argue that more oversight is required to expand coverage.
On May 11, a firefighter works to extinguish flames from a wildfire in Laguna Niguel, California. Homeowners are struggling with underinsurance as a result of major wildfires, and consumer advocates say more oversight is needed to expand coverage. (AP Photographer: Marco Jose Sanchez)
An advocacy group, Consumer Watchdog, claimed in a July report that insurance companies in California routinely sold policies with provisions that violated state law. According to Consumer Watchdog, insurers frequently classify smoke damage as distinct from fire damage in order to limit coverage responsibilities.
According to Consumer Watchdog, these provisions were also included in policies issued by California's insurer of last resort, the FAIR Plan. The FAIR Plan is an insurance pool comprised of all California insurance carriers licensed to sell insurance.
"Once the regulators allow the FAIR Plan to get away with something, some of the companies try to do the same," said Consumer Watchdog founder Harvey Rosenfield in an interview with Law360. "The only way to police the market here is to penalize companies that use these provisions and ensure that they reimburse policyholders whose claims were improperly denied or restricted."
Many of the report's findings have been strongly disputed by the California Department of Insurance, which has called some of them "demonstrably false" and has stated that the department does not approve any part of an insurer's rate filings that violate the law.
A CDI spokesperson, Michael Soller, told Law360 that the department's staff has determined that "more than half" of the cases cited in the report are false. When asked for examples, he cited eight filings mentioned in the report, including one "wildfire smoke, soot, and ash limitation" filing from First American Property & Casualty Co. that he claimed was flagged by the department, prompting the insurer to withdraw the form.
"The department launched our investigation into the FAIR Plan's handling of smoke damage claims in order to gather facts," Soller said. "The investigatory hearing [earlier in July] is a critical step in our ongoing oversight of the FAIR Plan to protect consumers."
The Consumer Watchdog report also mentioned Travelers as having smoke damage language in its policies, but the report did not include specific policy language for that carrier. Travelers also disputed Consumer Watchdog's findings. On Friday, a Travelers spokesperson told Law360 that the insurer has no policy sublimits for smoke damage, referring to policy provisions that limit coverage for specific types of loss.
Dylan Schaffer, a Kerley Schaffer LLP partner who has represented FAIR Plan policyholders, told Law360 that the insurance pool has a habit of denying claims based on an unreasonable "permanent physical damage" requirement. He claimed that the association duped the CDI into agreeing to the requirement.
"The problem is that FAIR Plan lied about what it meant when they approved it," Schaffer explained. "Of course, they did that because if they said it would reduce our liability, the [department] would have asked them to lower rates."
The CDI has been keeping an eye on the FAIR Plan. According to a market conduct audit conducted by the CDI and released in May, the FAIR Plan failed to conduct adequate investigations into homeowners' claims and issue policies that were equivalent to or better than California's own standards.
When asked about the Consumer Watchdog report, a FAIR Plan representative told Law360 on Friday that the organization takes its commitment to providing basic property coverage to all California homeowners seriously.
"The FAIR Plan will pay to remediate direct physical loss caused by a covered peril at properties it covers," according to a statement provided by a public relations firm on behalf of the FAIR Plan. "The California Department of Insurance negotiated and approved our policy language in this matter."
CDI officials had previously warned the FAIR Plan of potential policy violations.
"FAIR Plan specifically represented to the department that its proposed revisions to the dwelling fire policy, including its new definition of 'direct physical loss,' would not reduce or eliminate any existing coverages," CDI general counsel Kenneth B. Schnoll wrote in a letter last year to FAIR Plan president Anneliese Jivan. "Since then, the Department has become aware of pending policyholder litigation concerning FAIR Plan's alleged improper denial of fire and/or smoke damage claims."
The FAIR Plan is used to issue about 3% of California homeowners policies.
Underwriters were well aware of the recent claims history in states such as California, according to Eric C. Scheiner, a Kennedys partner who has represented insurers and handled wildfire claims. However, risk assessment may be hampered in the future due to a lack of data on larger geographic areas, as well as new areas at risk of wildfires or drought conditions.
According to Scheiner, "some carriers will either exclude wildfire exposure or have a separate wildfire tower for a given insured." "Or you'll have a wildfire sublimit, or they'll only allow, say, one aggregate limit to apply to a wildfire in a given year."
According to Scheiner, insurers will consider the prices offered by reinsurance companies when deciding on policy provisions or restrictions. According to him, the increasing size and strength of wildfires has a direct impact on the types of policy limits that insurers will include in their policies.
The emergence of artificial intelligence tools is one new development in the wildfire risk assessment landscape. Zesty.ai, headquartered in Oakland, California, has collaborated with carriers such as Cincinnati Insurance Companies, Travelers Insurance, and Farmers Insurance.
According to David Evans, a member of the American Academy of Actuaries' property and casualty committee, artificial intelligence tools could provide insurers with similar value as catastrophe models used for individual risk pricing.
"When done correctly," he says, "either a catastrophe model or an AI model will be a powerful tool for underwriting and pricing location-level risk." "On the AI side, caution must be exercised to avoid overfitting to past events and overly volatile local estimates, which can be mitigated in a catastrophe model environment that bases risk estimates on scientific principles rather than statistical data from previous events."
According to data published by the Insurance Information Institute, an industry trade group, five of the ten most destructive wildfires in California history have occurred in the last five years. According to the institute, seven of the ten largest California fires by area have occurred in the last five years. Experts have also warned that hot weather and strong winds that last beyond the normal fire season will exacerbate losses.
On Wednesday, Eric M. Nelson, Travelers' senior vice president of enterprise catastrophe risk management, told a panel of risk management and catastrophe modeling experts that embers were to blame for most structure destruction, and that changing weather patterns could cause embers to fly farther.
"Weather patterns and drought conditions that continue into the fall really create a difficult environment for us to fight these fires," Nelson said at the Travelers-hosted panel.
Travelers Companies Inc. reported a 29 percent drop in core income in the second quarter compared to the same quarter last year on Thursday, blaming the drop on higher catastrophe losses and lower investment income. According to the insurer's filing with the Securities and Exchange Commission, catastrophic losses were lower and investment income was higher in the second quarter of last year.
The National Oceanic and Atmospheric Administration reported last year that Western drought and heat caused an estimated $9.4 billion in damages in 2021. The Dixie Fire, California's second-largest ever, and the Marshall Fire in Colorado, it said, caused an estimated $11.2 billion in damage.
Aside from climate change, experts believe that population growth in high-risk areas is contributing to wildfire losses. Wildfire suppression and forest management techniques are also of concern. The largest wildfire to hit New Mexico in April was discovered to have started as a result of a prescribed burn by the US Forest Service.
Fires set in record-breaking heat in Europe and the United Kingdom have also highlighted that areas previously spared from extreme fire hazards are now at risk as the climate continues to warm.
Ellie Mulholland, the London-based director of the Commonwealth Climate and Law Initiative, said that for most people, temperatures of 40 degrees Celsius in England and wildfires on the outskirts of London were unthinkable.
"After a big signal like this, we increasingly see an updating of time horizons and risk perception, particularly among those sitting on boards or in senior management," Mulholland told Law360. "When extreme weather events predicted for the future occur today, it's a signal to update our thinking."