State Bans Insurers From Dropping Homeowner Policies in Areas Hit by Wildfires

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California is blocking the fire exits for home insurers.

Insurance Commissioner Ricardo Lara on Thursday announced a mandatory one-year rule barring insurers from cancelling or not renewing policies for homeowners who live in areas of the state that have been recently ravaged by wildfires.

"I'm hearing the same story again and again," said Lara, who made the announcement in Oakland, at a home whose owners have struggled to find insurance. "People have been dropped by their insurance companies after decades of premium payment and loyalty."

The mandatory one-year moratorium covers more than 800,000 residential policies in or around parts of the state declared wildfire disaster areas in 2019. Lara said his office is also asking insurers to voluntarily stop dropping any customers in California due to fire risk.

"If you live near one of the devastating fires, you now have an automatic year of protection if your home survived, and more importantly, if you suffered a total loss," Lara said. "This gives consumers temporary breathing room while we work on lasting solutions."

The state has the authority to impose such bans under Senate Bill 824, authored last year by Lara, then a state senator. This is the first time the department has invoked the law, which went into effect in January.

The action comes amid findings that insurance companies have increasingly dropped home coverage plans in areas across the state with high wildfire risk, and as blazes become more frequent and destructive.

The number of homeowners in high-risk fire areas who complained about getting dropped by their plans more than tripled between 2010 and 2016, while complaints about increased premiums rose by more than 200%, according to a state Department of Insurance report released last year.

And in August, the department released data showing that the number of nonrenewals rose by more than 10% last year in seven of the counties hardest hit by wildfires.

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"As communities across California continue to recover from wildfires and natural disasters, insurance companies are critical partners in helping our communities rise up," said Sonoma County Supervisor James Gore in a statement. "The inability to obtain insurance after disaster strikes impacts home values and tax revenues for emergency services that help ensure the integrity of California communities."

Roughly 5 million California houses are located in the wildland-urban interface where wildfires are most likely to occur, according to the U.S. Forest Service.

Lara also noted that the number of households covered by California's FAIR Plan — an insurer of last resort that provides limited coverage for wildfires exclusively — has surged in areas with high wildfire risk. That plan, he added, will offer expanded coverage before next summer, with full homeowners' policies, higher policy limits and monthly payment plans.

"Many people mistakenly believe this is a rural community issue," he said. "I'm here to tell you that that is not true. This is a statewide issue that is affecting both rural and urban areas across the entire state of California."

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For Rex Frazier, president of the Personal Insurance Federation of California, the new rule comes as little surprise.

"This is a straightforward implementation of SB 824," he said, noting that state insurers participated in negotiations over the legislation and ultimately supported it.

But he challenges Lara's assertion of it being a statewide problem.

“This isn’t really a statewide issue so far. It's really confined to at most 10 counties,” Frazier said.

No models or mapping predicted the catastrophic wildfires of the last two years, he said. As a result, the state's insurers have taken on an enormous level of risk without being able to raise rates accordingly.

"It’s a policy choice the state has made," he said. "They wanted to protect consumers and hold rates down. Holding rates down worked as long as risk was low."

But now, he said, in order to smooth things out for residents in higher-risk areas, statewide average rates need to increase so the burden can be more evenly shared.

"The question is: How do we have an insurance system that has enough money coming through it to pay for these losses?"