By Saul Elbein, THE HILL
August 4, 2021
Years of destructive wildfires are leaving millions of Californians at risk of losing their homeowner's insurance — underscoring fears that climate change could soon make parts of the country uninhabitable for financial reasons.
That could lead to devastating effects for communities across the state.
“In California, insurers are saying ‘Sorry, we don’t insure your area anymore,’ ” said Carmen Balber, executive director of Consumer Watchdog, a California-based advocacy group.
To help guard against insurers letting policies expire through nonrenewals, California passed a bill in 2018 banning insurance companies from dropping consumers in fire zones from policies for one year after wildfires. The statute protected about 2.4 million policy holders last year, according to the California Department of Insurance.
The move was prompted by the tens of thousands of nonrenewals that followed the devastating 2018 fire season. According to a 2020 report by the California Department of Insurance, nonrenewals were up 31 percent statewide in 2019 from the previous year.
The numbers were particularly acute in ZIP codes with "moderate to very high" fire risk, at 61 percent, and 203 percent in the 10 highest-risk counties.
But critics say the state’s moratorium on dropping insurance policies is just a stopgap — “like trying to stop a tsunami with a fence,” said Yevgeny Shrago, policy counsel at the left-leaning group Public Citizen based in Washington, D.C.
If entire towns and regions begin to lose insurance, Shrago said, economic “death zones” could pop up long before climate change makes an area uninhabitable.
Most mortgages require property holders to have insurance. That means banks could decide homeowners are in default if an insurance company excludes a property from fire coverage.
From there, the effects could spread to local businesses and communities as a whole, Shrago said. If a home in a fire-prone area doesn’t qualify for fire insurance, a bank may not offer a mortgage to a potential seller — effectively trapping homeowners in place and cutting off the very resources needed to adapt.
The increased fire risk, particularly as a lack of insurance undercuts mortgages, could in turn drive up the cost of loans — often written against potentially uninsurable physical infrastructure — and cut off or drastically raise the price of credit.
“Now it’s harder for my community to get credit,” Shrago said, “and people are less likely to open a business. So property values start falling.”
In California, where home sales are a primary source of income for local governments, that means far less money for the sorts of climate adaptation and resilience that towns would need to manage their risk from climate change.
Challenges accessing capital or insurance are more likely to hit lower-income communities and communities of color, which already suffer disproportionately from a lack of investment.
For now, California homeowners who have lost coverage as a result of fire or through no fault of their own can access coverage under the Fair Access to Insurance Requirements (FAIR) program.
A California Superior Court judge on July 20 ruled that the state’s insurance commissioner could order FAIR to offer comprehensive plans with property and casualty insurance — as opposed to costly supplemental ones — allowing the program to serve as a one-stop shop for those cut off from fire insurance, according to The Associated Press.
But that only mitigates the problem, said Balber of Consumer Watchdog, who noted that FAIR plans can be “hundreds of times more expensive” than conventional policies.
FAIR is available in California, Oregon and Washington. Other Western states at risk from wildfire — Arizona, Colorado, Idaho, Montana and Utah — have no such program.
For Balber, this points at a larger problem: The state of California, and the West as a whole, is delegating to insurance companies the question of where people should live.
“Insurance companies are asking: ‘Are people building places that are going to burn, and should we let them anymore?’ ” she said. “We say: ‘That’s a good policy question — for state and local lawmakers.’ It’s not a question we should leave to a private for-profit insurance company.”
And baseline prices could be set to increase without much explanation to customers as to why. The state of California’s Climate Insurance Working Group released a draft report in June recommending that the state study whether California insurers be allowed to raise rates based on proprietary “catastrophic modeling.”
But these models are “a black box,” Balber said, leaving purchasers little insight into why their rates have gone up.
In June, Balber accused the insurance industry of using the crisis to slip in deregulation long opposed by California’s insurance commission — and of hiding the roles the insurance industry plays in worsening the climate crisis by means of its underwriting the very fossil fuel development that is helping make fires worse.
The insurance industry’s emphasis on individual policies is also poorly suited to the emerging crisis, said George Bradner, head of Connecticut’s Property and Casualty Division, one of six state regulatory bodies struggling to set insurance standards for the era of climate change.
“There’s a great photo from Galveston after one of the hurricanes,” Bradner said, referring to the coastal Texas city. “One homeowner built his house to a higher building code.” That saved his house — leaving it alone in a row of devastated properties.
“So what’s the value of that house? The whole area is completely depreciated. You need a community sense when it comes to resiliency and catastrophic loss,” he said.
The insurance industry needs to “step up” and incentivize such community efforts for fires as well as storms, Bradner said. “It does no good for one owner to mitigate or build their house to a higher standard if every other homeowner isn’t doing that. If three houses burn around them, the likelihood of damage to their house is higher.”
Community flood policies offer a possible model, Bradner said, where “the town collects the premium, and pays for flood insurance,” providing it to areas that are underserved. “Then those residents recover more quickly and get back to their standard of living — versus being pushed out of where they lived.”
Bradner called on the federal government to “reward states and communities for being proactive in mitigation,” and said that a “paradigm shift” was needed in which insurance companies did the same.
But so far, Balber of Consumer Watchdog said, there’s been little consistent action. Less than 20 percent of the insurance market “gives people discounts for hardening their homes against fire,” she said.
“Homeowners spend tens of thousands to put in a fire replacement roof, replace sprinklers, clear trees — and they don’t see a dime in savings,” she said.