For beleaguered homeowners and their insurers, the fire next time could be a flood

Rebuilding Paradise A home under reconstruction in Paradise, California. The city of 26,000 was all but leveled by the Camp Fire in 2021. Insurance payouts from the fire fell short of homeowner losses by billions of dollars. Felicity Barringer

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We explore the issues, personalities, and trends that people are talking about around the West.

By Felicity Barringer

The West’s fires and floods of recent years share two common features beyond their immediate harms: they are disasters exacerbated by climate change, and they have wrought havoc with the insurance industry’s barriers against homeowner losses — barriers that in some cases weren’t so strong to begin with.

Industry research papers and officials’ testimony before Congress make it clear that the data-driven insurance business is in trouble. Its actuarial models are based on the disasters of the past, which may not be dependable models when budgeting for those of the future, nor for keeping the companies solvent. 

Financial and property losses will grow, perhaps more for some than others

It’s not just that the insurers and the insured are looking at bigger losses. It’s also that in the new disaster regime the losses aren’t shared equally. For example, higher-income people typically own homes in areas most likely to burn – usually at the intersection of wildland areas and growing towns. But according to a study published earlier this year in PLOS Climate, researchers at Stanford University and the University of North Carolina found that homes most likely to burn belong to lower-income families.

“We need to take a hard look at fire management policy, to make sure it is not biased against lower income folks.”

Chris Field, Stanford Woods Institute for the Environment

The study did not conclude that the reason was better fire defenses in high-income areas, but it didn’t rule that out, either. “The connections between experience with fires, especially multiple fires, and income and real estate point to a troubling pattern,” said Chris Field, the director of Stanford’s Woods Institute for the Environment and one of the study’s authors, “We need to take a hard look at fire management policy, to make sure it is not biased against lower income folks.”

A related question is whether insurance underwriting is biased against lower income and minority communities. When it comes to home insurance appraisals, there is clear evidence of discrimination. Less obvious is whether discrimination has played a role in rebuilding priorities. Still, one study that focused on this question, a 2019 report from the National Academies of Sciences, Engineering and Medicine, concluded that, “Poorer areas also have less political clout to remedy the many gaps in the way cities, states and the federal government deal with rising seas and more record rainfall caused by climate change.” 

Catastrophic fires hit the West, with many afflicted finding themselves without coverage

For the past five years, the West’s transformed climate has seen drought and heat stories turn into disaster stories: in 2018 $16.5 billion in property was lost to a single California fire, the Camp Fire, which largely destroyed 18,800 structures, including most of the city of Paradise on the western slopes of the Sierra. 

Of that total, $12 billion was insured — half of the total insured losses of $24 billion from 15 wildfires that swept through California that year. But another $11 billion was not insured, according to California’s state insurance commissioner Richard Lara. 

Aside from insurance payouts, many fire victims have received payments from The Fire Victim Trust, which was established in 2020 as an element of PG&E’s bankruptcy; the utility has been blamed for many, though not all, of the blazes. The trust pays claims for victims of the 2015 Butte Fire, the 2017 Tubbs and Nuns Fires in Sonoma County, California, and Paradise’s 2018 Camp Fire. PG&E’s payments of $13.5 billion to this fund, both in cash and stock, are underwriting some of the $16.83 billion in the trust’s awards to victims. A total of $9.23 billion has already been paid, as of mid-May, but it’s not clear how any shortfall between the unpaid awards and the trust’s assets will be handled.

The Tubbs fire killed 22 people and, the real estate intelligence firm Core Logic reported, destroyed property worth $5 to $7 billion. The report noted “the latest city data states that of the 3,043 residential units destroyed, 288 are in the permit review process, 440 are in construction and 2,176 of the structures have been completed.” But it gave no breakdown of the economic status of the homeowners affected.

Colorado’s Marshall fire, striking at the end of December, 2021, cost $2 billion; insurance didn’t cover $275 million of homeowner rebuilding costs. Investopedia reported that insurers and policy advocates estimate two-thirds of all homes are underinsured and won’t get the funds they need to rebuild after a total loss.

As the California Council on Science and Technology noted in a 2020 report, 

It is also important to recognize that due to differences in social vulnerability, the dollar value of property losses does not in and of itself convey the economic burden felt by the individual households. For example, low income households are more likely to lose all of their assets in a wildfire and less likely to have adequate insurance to cover the cost of losses as compared to higher income households.

As drought gives way to abundant rainfall, communities are ill prepared for floods 

When it comes to homes threatened by floods in the West, the word “underinsured” is hopelessly inadequate. As a January release from the American Property Casualty Association said that typical homeowners’ policies don’t cover flooding “over normally dry … areas;” the Federal Flood Insurance program is usually the best option. 

In California, 2023 began with a parade of atmospheric rivers dumping 32 trillion gallons on California, and piling up snow to memorable heights in the Sierra. In January, CoreLogic reported flash flooding throughout low-lying neighborhoods in the cities of Sacramento, San Francisco and San Jose. 

Flooding from the rains of 2023’s first three months and the snowmelt that began in late April may cost far more, particularly in low-lying Central Valley communities.

Unless damage from a flood or mudslide is related to an earlier wildfire, homeowners’ policies in California won’t cover it.

As KQED reported, “four major rivers empty into the landlocked southern end of the Central Valley,” where portions of the once-dry historic Tulare Lake have reappeared. “All start in the snow-packed Sierra Nevada mountains and end, eventually, in the fast-growing expanse of Tulare Lake.”

But unless damage from a flood or mudslide is related to an earlier wildfire, homeowners’ policies in California won’t cover it. For that, federal flood insurance is required, and less than two percent of state homeowners carry it. 

Underwriters confront a harsh new insurance math

Catastrophic losses are something that insurance companies have long planned and budgeted for. But not this many. In California, there have been 10 billion-dollar disasters in the last five years. SPC Global reported in 2021 that in 2017, 2018, and 2020 economic losses outstripped insured losses by 35 to 50 percent.  

It wasn’t just underinsured homeowners who were economically challenged. In 2020, the insurance industry took a loss exceeding $8 billion from western wildfires.

In 2020, the insurance industry took a loss exceeding $8 billion from western wildfires.

To protect themselves, insurance companies raised premiums and moved to deny renewals to homeowners in fire-prone areas of California. As a backstop, the state’s FAIR plan provides government-subsidized insurance of pricey last resort, but the coverage is more limited than private coverage. More than 240,000 homes are covered by FAIR plans. 

A 2022 Resources for the Future report showed that the wildfires of 2017 and 2018 saw insurers decline to renew between 20 and 30 percent of private policies in the fire-prone areas on western Sierra slopes. As the report said, “we find a sizable surge in insurer-initiated nonrenewals in 2019 and a longer-run trend” of homeowners turning to the state’s FAIR plan since 2010. Why? “…The availability and affordability of homeowners insurance have been on the decline in the past decade,” but worsened after 2018’s catastrophic wildfires. 

The wildfires of 2017 and 2018 saw insurers decline to renew between 20 and 30 percent of private policies.

California homeowners saw a 10 percent increase in insurance premium costs between May, 2021 and May, 2022. But as Bob Hartwig, who directs the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business, explained, “The insurer’s objective is to not make the cost of the premium unfeasible. The insurer’s objective is to offer a policy that represents the true risks the insurer is assuming.” Crucial, he said, is ensuring “ that the insurer can remain financially solvent.” 

He added, “Policyholders are not done a service by systematically underpricing policies in a way that could lead to insolvency.”