Insurance in a risky state: Coverage changed after Oakland blaze

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San Jose Mercury News (California)

As more than 1,500 Southern California residents have watched their homes go up in flames this week, many Bay Area residents have had a nagging thought: Are all the state’s homeowners about to be burned — by insurance companies wanting to make up for their losses?

Insurance companies are saying no. Consumer advocates agree that the latest wildfires aren’t likely to make fire insurance more expensive or difficult to get. But, they say, they certainly will be watching the industry closely.

“People should not be worried,” said Amy Bach, executive director of United Policyholders, a San Francisco advocacy group dedicated to educating the public on insurance issues and consumer rights. “That’s not to say we should not see some shenanigans,” she added. “I know we will. There hasn’t been a disaster in the country in the past 15 years where United Policyholders hasn’t gotten a complaint, where people were dropped because they were in the disaster — or they were in the vicinity.”

As catastrophic as the dozens of recent blazes may be for thousands of San Diego and Los Angeles county residents, insurance companies say the fires’ damage already has been figured into the premiums policyholders pay.

“It’s not like the whole state is on fire,” said Carmen Balber with the consumer-advocate Foundation for Taxpayer & Consumer Rights in Santa Monica.

So far, the fires have destroyed at least 1,500 homes, but that number is expected to rise. Insurers said they have sufficient reserves to pay claims that likely will surpass $1 billion, and California remains the nation’s largest — and one of the most lucrative — markets for homeowners insurance.

Bill Sirola with State Farm — whose 1.4 million policyholders make it the largest homeowner insurer in California — said “if you live on a mountain ridge or a steep slope surrounded by forests, you’re already paying a lot for insurance, and you’ll continue paying a lot. If you choose to live in harm’s way, your rates will reflect those risks.”

But California’s booming insurance business didn’t stop Allstate, the nation’s second-largest property-casualty insurer, from announcing earlier this year that it would no longer underwrite new homeowner policies in the state, citing risks from wildfires and earthquakes. The company also is seeking a 12
percent rate increase from its existing customers.

Major insurers are inspecting homes in high-risk areas throughout the West and threatening to cancel coverage if owners don’t clear brush or take other precautions.

It was the 1991 Oakland Hills firestorm, a $1.7 billion urban blaze that scorched the city’s hillsides, killed 25 people and destroyed nearly 3,000 dwellings, that was a turning point for California insurers. State Farm‘s Sirola said before that disaster insurers would routinely offer two kinds of homeowner policies — “stated value,” which set a limit on how much a policyholder could collect to rebuild a home, and “guaranteed-replacement-cost,” with no limit, as long as the homeowner could substantiate the higher cost of rebuilding.

When many homeowners tried to recover higher amounts than insurers thought justifiable, the lawsuits began to fly.

“We learned a lot after Oakland,” said Sirola, “and we changed to offer only one policy — stated coverage with a 20 percent override” for unexpected circumstances during reconstruction. He said what happened in Oakland caused the industry to do away with guaranteed-replacement-cost policies.

Insurers who write the more than 6 million homeowner policies in California say they take the long view when it comes to the state’s penchant for flooding, breaking apart or catching on fire. Rates are set by complicated risk-assessment models, they said, and they are designed to not swing wildly at every new state
of emergency. In fact, many of the companies have lowered their homeowner rates in the past two years.

That doesn’t mean policyholders are on easy street when it comes to negotiating with insurers after a disaster.

Ginger Colletto and her family were vacationing in the Bay Area four years ago when San Diego’s destructive Cedar fire swept through their neighborhood,turning their home to ash. Their insurer, First American Specialty, was great at first, Colletto said, minimizing the red tape and fully covering the costs to rebuild their two-story home.

But it wasn’t long after they had gotten the keys to their new house when they got a letter from their insurance company informing them they were being dropped from coverage.

“They wouldn’t insure us any more,” she said, “but they didn’t blame it directly on the fire. They sent us a notice saying that we were within 100 yards of a fire danger — scrub brush and that type of thing. We’ve been black-marked.”

The Collettos ultimately found a new insurer willing to write them a policy.

The top insurers say they did not drop any of their customers after the Oakland Hills firestorm or San Diego County fires four years ago.

“Since 2003, none of our customers were non-renewed as a result of filing claims from that fire,” said Rich Halberg, a spokesman for Allstate. With 900,000 policyholders, it is still the third largest insurer in the state.

“If your home is in a known brush area, we ask that you maintain proper defensible space. And we did have some non-renewals over that issue after homeowners refused to clear their brush.”

Consumer-rights advocate Balber warned that homeowners should be vigilant when it comes to properly insuring themselves against fire and other disasters.

“The big concern is that consumers who’ve lost their homes this week don’t get adequate payment to rebuild,” she said. “That certainly became an issue after the ’03 fires when a lot of homeowners thought they were insured for full replacement value of their home, only to find their policies had been whittled down over the years without them knowing it.”

Jo McCord, a social worker who lost her home in the Oakland fire, learned that the hard way.

Her original Alvarado Road home had been built in the 1940s, and her insurer initially balked at paying the full costs to replace the home and upgrade it to modern-day standards.

“We kind of had to go to the mat with Farmer’s Insurance and say ‘we weren’t aware that you weren’t going to replace this house with today’s building standards,’ ” McCord said. The dickering went on for months, she said, and likely was only resolved to McCord’s satisfaction because so many other homeowners in the area banded together to take on the insurers.

Things have changed in recent years, however. There now are more laws aimed at protecting the rights of homeowners. Also, there are so many companies wanting to provide insurance in the state that even if one wanted to high-tail it out of fire-prone California, it wouldn’t be a major loss, said Bach, with United Policyholders.

“People,” she said, “are protected.”
The Associated Press contributed to this report. Reach Julie Sevrens Lyons of the San Jose Mercury News at [email protected] or 408-920-5989.

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