By Staff Reporters, CLIMATEWIRE
April 17, 2019
Massive wildfires in California are triggering insurance rate hikes and policy cancellations, according to a report from the fire "strike team" convened by Democratic Gov. Gavin Newsom.
The analysis issued Friday described the impact of repeat catastrophic fires in the Golden State as "staggering," with insurance claims for the 2018 wildfire season topping $12 billion. That's hitting insurance companies and their policyholders, it said. "With record high losses from catastrophic wildfires, insurers are responding by filing for rate increases and retrenching their coverage eligibility standards," the report said. The 59-page report -- titled "Wildfires and Climate Change: California's Energy Future" -- looked at the impacts of fires on utilities, residents, insurance companies and a number of other categories, as Newsom and the state Legislature wrestle over how to prevent so many wildfires and deal with their growing scope and costs. The analysis did not put forward any specific solutions, instead discussing the impact of policy options in several fire-related areas.
Those include potentially revising California's policy of holding utilities responsible for fires if their equipment is involved, whether or not they were negligent. But changing the law to strict liability involves rewriting the state constitution, which means petitioning the California Supreme Court, Newsom said. That also would affect insurers: After paying fire claims, they typically seek reimbursement from the utility deemed responsible. Fires already are affecting insurance in a number of ways, the report said. In the last two years, consumers' complaints about insurance companies not renewing policies in high-risk fire areas have doubled. In the same time frame, insurers have asked the California Department of Insurance to approve more than 100 rate increases for homeowners' insurance, more than double the filings in the previous two years, according to the report. Homeowners in areas deemed high for wildfire risk are receiving "double-digit rate increases," the report said. That's pushed more people into the state-backed insurance pool, a last-resort option called the Fair Access to Insurance Requirements (FAIR) Plans.
The amount of people seeking that coverage jumped 50% in the last five years, the report said. The numbers are still small, though, at 33,000 policies for homes with high wildfire risk. Overall, the FAIR Plan insures about 130,000 homes out of approximately 13 million residences in the state. The California Insurance Department noted that that remains a tiny fraction of all residences. There has also been a bump up in the number of homeowners purchasing insurance from surplus line insurers, or companies not regulated by the state. Those policies aren't backed by the California Insurance Guarantee Association, a pool that covers a claim if a member insurer is insolvent. But the total number of homeowners seeking surplus policies is still fewer than 60,000 statewide, the report said.
Trade groups for insurance companies writing policies in California did not respond to requests for interviews. The Personal Insurance Federation of California sent a chart saying that rates in California "are some of the lowest in the nation -- ranked 46th -- when factoring in home value." It also said that "rates are Comparatively Stable: California has a cumulative rate increase of only 8% over the last decade, while the national average is 45%." "As the state develops concrete solutions, we should prioritize efforts to reduce fire risk, protect homeowners' rights to recover damages, and create a special fund to address costs associated with utility caused wildfire," the federation said in a statement. Insurance companies could collect less reimbursement The report's possible solutions to dealing with fires would affect insurance companies and their customers. Among those is creating a disaster fund that utilities and their investors would pay into yearly. It would only pay claims tied to utility-caused catastrophic wildfires, defined in potential future legislation establishing the fund. Claims for smaller utility-caused fires would be paid by that utility's commercial liability insurance policy or self-insurance reserve. Under that disaster fund model, insurers would have to agree to limit what they would get from utilities at fault for blazes.
Another option, according to the analysis, is creating a trust that would reimburse insurers after a wildfire. All insurance companies writing policies in the state would have to agree to accept the amount the trust would pay. Insurers typically do not receive full reimbursement when suing utilities after a fire, the report said. Instead, such claims are often settled at about 50%.
"A potentially valuable feature of the wildfire fund could be that subrogation claims will receive settlements at a stated percentage of the validated amount of their claim," the report said. Limiting what insurers can collect from utilities deemed responsible for starting fires could hurt residents, argued Jamie Court, president of Consumer Watchdog, an advocacy group. He argued that the reason fire premiums so far haven't soared higher is that insurance companies have the right to collect from at-fault utilities. "The governor needs to understand if the utilities are let off the hook for any of their liability, then policyholders and the insurance companies that charge them face greater costs," Court said. Municipal governments that self-insure for fires also will face financial woes if they can't collect full amounts from utilities after a fire, Court said.
Newsom said last week that he needs to keep utilities intact. San Francisco-based Pacific Gas and Electric Co. is in bankruptcy reorganization. Bond-rating agencies have lowered the creditworthiness scores of Southern California Edison in Los Angeles County and San Diego Gas & Electric Co. to just above junk status. Without action, all three could go under, Newsom warned. "We're in real trouble right now as it relates to these utilities being vulnerable to bankruptcy and liquidation," Newsom said. "It's literally about the economy of the state. It's about our ability to attract business." But Court rejected that utilities will go under, adding that PG&E didn't need to declare bankruptcy. While PG&E has said it faces as much as $30 billion in fire-related liabilities, it hasn't been hit with court judgments anywhere near that amount, Court said. Are "the governor and the Legislature out to protect wildfire victims, or are they out to protect the credit ratings and the stock values of the utilities?" Court said. "It should be the former, not the latter."
Rate hikes must get approved Insurers cannot raise rates immediately in California. Proposition 103, passed in 1988, requires insurers to get approval for increases from the California Department of Insurance. They must show the reason the hikes are needed. The department typically takes several months to review a rate filing. Often, that review leads to lower rates, the department said, but it couldn't quantify how typical that's been in the past few years. There are 15 rate requests from 2018 still under department review. Losses from disasters -- including fires -- aren't passed along to policyholders immediately. They're put into a "catastrophe load" that's an average of 20 or more years of disaster-related claims.
Even so, the report said, rates are climbing. Wildfires are hitting insurance and people's wallets in multiple ways, Court said. "It's becoming less available, and it's becoming less valuable," Court said. Many victims of fires "are finding that the replacement cost coverage that they've secured isn't adequate. At the same time, we're finding people being priced out of the market when they try to renew their coverage. So there's a crisis."
After wildfires tore through Northern California wine country in October 2017, prices to rebuild homes soared. Many people found costs exceeded their insurance by amounts that made rebuilding impossible. Some sold their lots at a loss and bought homes elsewhere. Others moved out of state (Climatewire, Aug. 10, 2018).
Court said insurers fail to adequately disclose that residents might need replacement overage well above the insurance package they're buying. "Insurance companies need to be required to disclose anticipated replacement costs to homeowners when they sell a policy, so that homeowners understand their choices and what will happen in the event of a claim," Court said.
Consumer Watchdog also warned that insurance companies might use the current crisis to try to get around California rules on rate increases and cancellations. In addition to Proposition 103 requiring approval for rate hikes, a law passed last year requires insurance companies to renew a policy for a homeowner who has filed a fire claim. But it only covers one year post-fire, Court noted.
The consumer group also wants California Insurance Commissioner Ricardo Lara (D) to require insurance companies to disclose any fossil fuel-related project or company they're insuring. Fossil fuel use worsens climate change, which has made California's fires more extreme by creating more dry brush to burn. Court said there's an inherent conflict in terms of fire insurance policies. "It's like working against your policyholders," Court said. "You're insuring against a fire, and then you're ensuring a more catastrophic fire by underwriting a fossil fuel project." Lara is supposed to respond by Monday. It would be his choice, as no law requires mandates disclosure.