California’s Fire Insurance Crisis: Why it Happened and What Can Be Done To Fix It

As the summer of 2021 turned to autumn, no fewer than 17 major wildfires burned in California, leaving more than 2.3 million acres scorched and destroying 3,289 homes and other buildings. As the victims of the state’s previous fires did, the owners of those homes would soon face a second crisis—how to rebuild their houses and their lives when faced with the combined obstacles of strict insurance company rules and local government red tape.

Those obstacles set off anger among Santa Cruz County homeowners who lost their houses in the 2020 CZU Lightning Complex Fire. Between Santa Cruz and San Mateo counties, that fire burned down 1,490 residential, commercial and other buildings, according to Cal Fire, damaging 140 others. At a Sept. 14 meeting of the Santa Cruz County Board of Supervisors, the property owners saw the board vote to remove one significant roadblock to rebuilding, only to replace it with what they saw as another.

A Fire Insurance Catch-22

Because insurance companies typically determine how much they will pay based on a homeowner’s costs incurred in rebuilding—costs that can be extremely difficult to determine—and they also impose deadlines for filing claims, wildfire victims are allowed only tight time limits on how long it takes them to rebuild. 

At the same time, Santa Cruz County requires homeowners to go through the same process as if they were building a new home from scratch. That includes contracting for costly and time-consuming “geologic evaluations,” that is, expert assessments of a property’s vulnerability to a wide range of natural calamities—not only wildfires.

But why should they, the Santa Cruz County homeowners wanted to know, be required to get a whole new set of evaluations for hazards that have nothing to do with wildfires? In August, the supervisors said that they would consider that question, and at the September meeting they agreed to waive the non-fire geologic requirements. On one condition.

Homeowners, the supervisors decided, must also sign an official document attesting that the non-fire-related geologic surveys were not done—even though those surveys in most cases were completed when the original homes were built. So the homeowners were allowed to skip the geologic studies, but required to sabotage the value of their own property to do it.

The convoluted Catch-22 now imposed on those Santa Cruz County homeowners appears emblematic of the traumas inflicted on wildfire survivors, and other Californians who happen to live in vulnerable areas, by insurance companies. In a rising number of cases, homeowners are simply denied insurance altogether. In the year 2019, insurers dumped the policies of approximately 230,000 homeowners. That was a 31 percent rise in policy cancellations from 2018, the industry’s response to absorbing $25 billion in losses from fire claims in 2018 and 2017. The fire-plagued Sierra Nevada region was hit particularly hard by policy cancellations, suffering 37,287 there in 2019. 

State Bans Policy Cancellations, But For How Long?

With the massive Dixie Fire leading the pack, having burned for 70 days and nearing 1 million acres, on Sept. 20 the state’s insurance commissioner, Ricardo Lara, slapped insurance companies with a one-year moratorium on cancelled fire policies. The ban applied to portions of 22 Northern California counties in areas affected by the Dixie and Caldor Fires as well as numerous other, smaller wildfires. 

Just one month earlier, Lara banned policy cancellations in areas of Plumas, Lassen and Siskiyou counties that had been hit by wildfire. The two bans combined to save about 350,000 homeowners from potentially losing their wildfire insurance for at least until 2022. Just a year earlier, Lara laid down moratoriums granting temporary protection to 2.4 million homeowners in fire-affected regions.

The moratoriums all have expiration dates. After they run out, all of those homeowners are back to square one with their insurance companies. Lara’s edicts do not address the skyrocketing cost of wildfire insurance. The state must approve insurance rates, and in 2017 and 2018 insurance regulators gave the green light to more than a billion dollars’ worth of rate hikes.

A 2017 report by the state’s Department of Insurance said that some policyholders saw annual rates jump from $800 to as much as $5,000 from one year to the next. They were hit with the devastating price increases despite, in some cases, going to the trouble and expense of upgrading the fire-resistance of their homes, a process known as “fire hardening.”

Tough 2008 Building Code Proves Effective Against Fire Damage

The state itself requires that newly constructed homes live up to high levels of fire protection. In 2008, California adopted a new, tough building code, known as code 7A, that requires all new homes in Wildland-Urban Interface (WUI) zones—that is, areas where residential housing comes right up against forests and other highly flammable types of vegetation—include fire-resistant roofs, interior sprinklers, non-flammable materials in decks and other attached structures, heat-resistant windows and other measures designed at minimizing fire vulnerability. 

The new code worked. After the deadly 2018 Camp Fire swept through Paradise, Calif., an analysis by the McClatchy news organization found that of the affected homes built after 2008—homes required to meet the new code requirements—51 percent survived the blaze. Only 18 percent of the pre-2008 homes made it through the fire, which was California’s most destructive, taking out more than 18,000 structures.

So the 2008 regulations proved effective. Of course, the problem is, there just aren’t that many houses that have been built since 2008, compared to the number that predate the new code. The McClatchy study found just 350 homes in Paradise built under the 2008 code, and 12,100 from the pre-2008 era. And 2008 was also the year that the national and global economy nearly collapsed, leading to a prolonged recession and pronounced slowdown in the construction of new homes. 

The result? The vast majority of California homes in wildfire-prone areas remain defenseless. That means, once the state’s moratoriums expire, many will also be without insurance—a double crisis for homeowners.

Solutions to Fire Insurance Crisis Hard To Come By

In November of 2020, the “free market environmentalist” Property and Environment Research Center published a paper calling on California to deregulate the fire insurance industry, blaming the “unintended consequences” of the state’s control over insurance rates for the industry’s heavy losses after recent wildfires—leading the companies to boot thousands of homeowners off their client rosters. The resulting higher rates will give homebuilders “an incentive to invest in home-hardening efforts and develop in less risky areas,” the paper’s authors argued.

But that argument assumes that companies would actually offer lower rates for “hardened” homes. Current evidence suggests that might not be the case.

To make at least some headway in bringing the crisis under control, the Department of Insurance, Cal Fire and several other state agencies said in February 2021 that they were developing a single set of standards for home fire hardening in an attempt to cajole insurance companies into selling policies in areas most open to fire damage. 

While insurers have blamed the lack of hardening standards for their reluctance to reinstate policies for homeowners who take the often-expensive fire-resistance measures, they have also said that even when homeowners take the necessary steps, they still can’t insure them. Why? 

They say that they simply do not know how much the hardening process is worth, in dollars and cents. No expert doubts that home hardening reduces the risk of fire damage. But by how much? The research is not yet there to say with any certainty. That makes it tough for insurers to adjust their rates accordingly. At least, that’s what the insurance industry has said.

What solutions remain? The most obvious is also perhaps the least desirable—stop building houses in fire-prone areas. A 2014 study published in the academic journal Land Use Policy estimated that by the year 2050, 650,000 new homes will go up in “areas currently designated as ‘very high’ wildfire severity zones.”