Allstate Corp. suspended selling new homeowner policies in California last year and has 50,000 fewer homeowner policies today in the state than in 2006. A spokesperson for Allstate says that the decrease in policies is mostly due to attrition, yet acknowledges it is seeking to manage its exposure to disasters in the state, where multiple wildfires can spark each year during fire season.
Allstate’s move is similar to recent trends on the East and Gulf coasts, where millions of homeowners have been denied coverage because of insurers' desire to minimize risks from rising property losses due to hurricanes that batter those areas each year. Officials say that few Western homeowners have been forced into their states' high-risk pools, unlike in the East. Instead, many homeowners living in hazardous areas are getting fewer choices in residential coverage and are being given fire-safety instructions for their homes.
In recent decades residential development has skyrocketed, with expensive homes and condos being built in fire-prone areas. The density of brush and prolonged droughts make for perfect conditions for disastrous, deadly and costly fires.
According to the Insurance Services Office Inc. (ISO), a single fire in San Diego last year, called the "Witch Fire," resulted in at least $1.33 billion in insured property losses. This year, more than more than 2,000 blazes have occurred in California alone.
In the past, insurance companies were willing to accept most of the risk. Agents would sell policies that promised to fully rebuild a home after a loss, regardless of cost. Then in the early 1990s, a series of natural disasters struck the West Coast, including the devastating Oakland Hills fire of 1991, which caused about $2.8 billion in damages in 2008 dollars, according to the ISO.
Today, in order to curb losses, most insurers put a ceiling on payouts at a percentage above the home's insured value, usually 25% or 50%. Only a few policies still offer "guaranteed replacement," usually for a higher premium.
Insurers are also imposing tougher policy conditions. Some have recently started requiring property owners to increase clearances to as much as 1,500 feet of vegetation from around homes in some fire zones, 15 times greater clearance than required by California law. Allstate says that 1-in-5 houses in high-risk areas it has inspected had hazardous brush conditions.
Agents and brokers say more and more frequently, insurers also are declining to cover homes on steep slopes, because wildfires burn uphill faster. Some are underwriting policies only where the home is located near a professional fire department, not the volunteer fire departments common in some rural areas.
Agents say insurers are also turning to the skies, with most using satellite imaging to inspect properties. More insurers are making physical home inspections and requiring documentation of safety measures such as fire-resistant roofing. Homeowners whose properties are cited for hazards are given a period of time, usually six months, to fix any problems cited by insurers or their policies can be dropped.
In Arizona, insurance companies have increased property inspections in the past 18 months and are ordering homeowners to clear their properties or risk being dropped.
"That is a relatively new phenomenon," says the Arizona Insurance Director, Christina Urias. Companies are taking similar steps in Idaho, Oregon, Washington and Alaska.
To further bolster revenue, some of the largest insurers in California, including State Farm Insurance Cos. and Farmers Insurance Group have asked regulators for permission to increase premiums, in this case 6.9% for both insurers. Allstate's previous request for a 9.3% increase was rejected by California Insurance Commissioner Steve Poizner last month, and the company was instead ordered to cut premiums by 28.5%. Poizner also ordered rate rollbacks for several other home insurers recently.
Insurance companies say these moves help them stay solvent so they can pay claims when disasters occur. Several major insurers point to the huge wildfire losses in San Diego and San Bernardino, among others areas, for their reduced earnings in the last quarter of 2007, and are say losses from tornadoes and severe thunderstorms resulted in lower earnings in the second quarter of 2008.
The insurers’ risk-management tactics often pose problems for consumers, who say they have difficulty getting coverage when because they live too close to brush, hills, or natural canyons.
Also, disputes between homeowners and insurers over claims settlements from last year's wildfire season continue to occur, including complaints about homes being underinsured, a frequent occurrence several years ago. California officials received more than 512 complaints about claims after the 2007 fires in Northern and Southern California, including 93 complaints of being underinsured as of the end of July, according to spokesman Darrel Ng, a smaller proportion than in 2003.
Being underinsured can result from owners' failing to report additions and improvements, and from agents' and insurers' underestimating rebuilding costs or otherwise miscalculating, experts say.