By Thomas Frank, E&E NEWS
The Los Angeles wildfires could force California residents to pay billions of dollars to bail out the state’s teetering property insurance program, an analysis by POLITICO’s E&E News shows.
A bailout could further destabilize a U.S. insurance market that is becoming highly risky as climate change and development intensify wildfire damage. California — along with hurricane-prone states such as Florida, Louisiana and Texas — have seen insurers stop covering risky areas, forcing hundreds of thousands of people to buy coverage from state-chartered programs.
But the Golden State program, called the California FAIR Plan, has minimal reserves to pay wildfire claims and could impose huge assessments on insurance companies and on millions of policyholders statewide.
“It is inevitable that home insurance for every single homeowner in California will increase” as a result of the wildfires, said Assemblymember David Tangipa (R), who is vice chair of the California Assembly’s Insurance Committee.
“The California FAIR Plan does not have enough funds for the potential liabilities and the payouts that will have to come for this recent fire,” Tangipa added.
E&E News used state maps of the wildfire areas, Census Bureau maps of ZIP codes and FAIR Plan data to estimate the potential cost of claims on the FAIR Plan.
The analysis shows that the FAIR Plan insures roughly $10.5 billion of property in the ZIP codes where mandatory evacuations are in place. That’s billions of dollars more than the FAIR Plan can pay from its own reserves.
The analysis is a rough estimate of the maximum amount the FAIR Plan could be forced to pay based on the wildfire conditions Thursday.
The two largest wildfires — the Palisades Fire and the Eaton Fire — were both at 0 percent containmentThursday, according to the California Department of Forestry and Fire Protection, known as CalFire.
The FAIR Plan itself recently said its exposure in Pacific Palisades, a highly affluent coastal area west of central Los Angeles, is nearly $6 billion.
The FAIR Plan does not routinely disclose its financial condition. But in March, plan President Victoria Roach told California lawmakers that the plan had a $200 million surplus and an additional $2.5 billion in reinsurance that would pay claims when the surplus is exhausted.
In August, Roach told the San Francisco Chronicle that the FAIR Plan surplus was $350 million.
“We are one event away from a very large assessment,” Roach said at the legislative hearing. The FAIR Plan would be forced to impose a $6 billion assessment following a wildfire as destructive as the 2018 Camp Fire, which destroyed 18,000 buildings, Roach said.
There is no estimate of the number of buildings destroyed by the Los Angeles wildfires. CalFire says the Palisades Fire threatens 13,300 homes but has no comparable figure for the Eaton Fire or other smaller wildfires raging this week in Los Angeles.
Many insurance problems in California, including the FAIR Plan’s instability, have developed over years as insurers were unable to increase their rates substantially, insurance industry officials say.
The wildfires will have “widespread, negative impacts for the state’s broader insurance market,” Denise Rappmund, vice president and senior analyst at Moody’s Ratings, said in a statement Thursday.
Experts cautioned against predicting insurance claims as the Los Angeles wildfires are still burning and spreading.
“I have no idea of the scope of this fire,” said Carmen Balber, executive director of California-based Consumer Watchdog. “They’re just getting claims.”
The large number of residents in the wildfire areas with FAIR Plan insurance could complicate their recovery, Balber said, because FAIR Plan policies are less comprehensive than policies sold by insurance companies.
For example, the FAIR Plan does not cover costs of temporary lodging for displaced households or pay for water damage caused during firefighting.
The FAIR Plan covers up to $3 million in damage, which is far more than other state-chartered plans but inadequate in some of the Los Angeles wildfire areas, Balber said.
“You’ve probably got homes that exceed those limits,” she said.
The average home value in Pacific Palisades is $3.5 million, according to the Zillow Home Value Index. California has among the highest housing costs in the nation.
Although President Joe Biden agreed Wednesday to give federal disaster aid to households affected by the wildfires, the amount of money is typically a few thousand dollars and covers only emergency expenses such as minor home repairs.
Reporter Anne C. Mulkern contributed.