Assessing Wildfire Risks Difficult As Coverage Woes Persist

Growing Challenges in Wildfire Risk Assessment

Assessing wildfire risks has grown increasingly difficult for insurers, experts say, but a new report accusing California insurance companies of improperly restricting coverage has raised concerns that carriers are shirking their responsibilities as wildfires grow more destructive.

While insurers emphasize the need for stronger wildfire risk assessment to offer policies at proper rates, homeowners continue grappling with underinsurance after major wildfires like the Marshall Fire in Colorado. Regulators have pushed for lower rates for policyholders who implement wildfire mitigation measures, but consumer advocates argue that more oversight is needed to ensure expanded coverage.

Major wildfires in California have left homeowners facing underinsurance, driving the need for stronger insurance protections.

Allegations of Insurance Violations: Consumer Watchdog Report

A July report by Consumer Watchdog, an advocacy group, argued that California insurance companies have routinely sold policies with illegal provisions. Insurers often classify smoke damage separately from fire damage to limit coverage responsibilities, the report said. These provisions were reportedly included even in policies issued by the California FAIR Plan, the state's insurer of last resort.

"The only way to police the marketplace is to punish companies that use these provisions and ensure they reimburse policyholders," said Harvey Rosenfield, founder of Consumer Watchdog.

California Department of Insurance Pushes Back

The California Department of Insurance (CDI) has strongly disputed many of the report’s findings. Michael Soller, a CDI spokesperson, said more than half of the cases referenced were inaccurate, highlighting eight filings, including one from First American Property & Casualty Co., that was later withdrawn after regulatory intervention.

Soller noted, "The investigatory hearing is a critical step in our ongoing oversight of the FAIR Plan to protect consumers."

Insurance Companies Respond to Oversight Efforts

Travelers Insurance was also named in the report, though the company disputes the findings. A Travelers spokesperson confirmed there are no specific policy sublimits for smoke damage in their coverage.

Meanwhile, wildfire claims attorneys like Dylan Schaffer have criticized the FAIR Plan for imposing unreasonably high standards, such as requiring "permanent physical damage" before paying claims.

A recent market conduct audit of the FAIR Plan found that it failed to pursue adequate investigations into wildfire damage claims.

FAIR Plan representatives insisted: "The FAIR Plan will pay to remediate direct physical loss caused by a covered peril."

Rising Wildfire Insurance Risks in California

About 3% of California homeowners' policies are issued through the FAIR Plan.

Eric C. Scheiner, an insurance attorney specializing in wildfire claims, noted that some insurers now exclude wildfire coverage or offer it under separate sublimits due to escalating risk.

He added that wildfire reinsurance rates and limited catastrophe coverage directly influence policy terms.

The Role of Artificial Intelligence in Wildfire Risk Assessment

Emerging artificial intelligence (AI) wildfire risk tools from companies like Zesty.ai are helping carriers better assess property risks. David Evans from the American Academy of Actuaries said AI models could supplement traditional catastrophe modeling to predict wildfire losses at the location level.

However, Evans warned about the risks of "overfitting" past events, suggesting that scientific modeling still plays an essential role.

Wildfires Are Increasing: Data and Future Outlook

According to the Insurance Information Institute, five of the ten most destructive wildfires in California history occurred in the past five years, underscoring how climate change is intensifying fire seasons.

Eric M. Nelson from Travelers Insurance explained that embers are primarily responsible for structure loss, and changing weather patterns mean embers can travel farther during droughts and windstorms.

Travelers recently reported a 29% drop in core income year-over-year due to catastrophic wildfire losses and decreased investment income.

Climate Change and Population Growth Exacerbate Wildfire Risks

According to the National Oceanic and Atmospheric Administration (NOAA), wildfire damages in 2021 exceeded $11 billion, fueled by record drought conditions across the West.

Experts note that population growth in wildfire-prone areas and outdated forest management practices contribute significantly to increasing wildfire losses.

Notably, Europe's 2022 wildfires, driven by extreme heat, reveal that even historically lower-risk regions are becoming vulnerable.

Ellie Mulholland, from the Commonwealth Climate and Law Initiative, emphasized that boardrooms must rethink their climate risk strategies as future projections of fire risk are becoming today’s realities.