What Happens Now?
As homeowners are starting to rebuild, many Malibuites are either running into an increase in fire insurance premiums or finding it hard to obtain insurance at all.
Written by Barbara Burke
Ricardo Lara, California’s insurance commissioner, estimated that insurance costs for the 2018 wildfires, which devastated parts of Malibu and nearby communities as well as towns in Northern California, rose by $2.3 billion to a record $11.4 billion — a 25 percent increase. Of course, not all losses were covered by insurance — the total losses from California’s more than 8,000 wildfires exceeded $18 billion last year, according to Lara, and, even as fire victims go through the long, arduous rebuilding process, some are experiencing difficulties with insurance claims. The economic fallout includes not only the costs to rebuild but also higher insurance premiums for homeowners, especially for those who own the 3.5 million homes at risk in future fires, including many in Malibu. Now, many Malibuites are having difficulty obtaining reasonably priced fire insurance, a reality that was foreshadowed by Dave Jones, the former California Insurance Commissioner who warned of the “growing problem” of fire insurance unavailability.
California homeowners are experiencing rate increases in high fire risk areas, according to Janet Ruiz of the Insurance Information Institute, which represents property insurers nationwide. According to area insurance professionals, the increased costs involved in rebuilding, including those attributable to making structures compliant with current building codes, higher costs of permitting and architectural services, and heightened labor costs for qualified contractors due to the basic market forces of supply and demand after a catastrophe are all contributing to homeowners’ premium increases.
Malibu Magazine sat down with Bart Baker, owner of a Farmers Insurance agency in Malibu who is knowledgeable about the local market and Ted Silverberg, President of Malibu Insurance Group, an independent insurance consultant and broker who specializes in Malibu and offers homeowners insurance from a variety of companies, to get a pulse on the current insurance situation and the costs and obstacles that some homeowners are facing in obtaining coverage after the fire.
“The homeowner’s insurance marketplace has changed dramatically since the fire,” Baker said. “Quite a few carriers have imposed moratoriums and are not issuing new homeowners policies. We are in an unusual time as far as ability to obtain coverage and the availability of coverage – the calculus comes down to what type of coverage a person can get.”
Baker stated that factors affecting whether insurers will issue fire insurance for homeowners include a parcel’s slope and available water supply, and brush clearance. See Related article at page 44 addressing laws mandating brush clearance to make defensible spaces near structures.
“Insurers are also using tools such as fire line to obtain a property’s score and the lower the score, the better.” Baker said. Silverberg elaborated, by explaining “The fire score is based on numerous factors, such as the proximity of a home to brush and the ability of fire engines to access water and a property so that they can respond in a safe, quick and timely manner as well the number of homes in the area, among other factors such as the roof on a home.”
The Realities of the Insurance Market After the Woolsey Fire
Silverberg discussed the current realities in the homeowner’s insurance market. “The number of companies that will write homeowners insurance has been reduced since the Malibu fire,” He said. “After the fire catastrophe, some companies may have a moratorium on taking on new business and sometimes, on writing renewal business because they want to see how an area rebuilds and then determine whether to take the risk.” Silverberg added that insurance companies annually make decisions regarding whether to write homeowners’ insurance in a particular area from an actuarial standpoint.
“After the catastrophe in Malibu, a neighborhood can be viewed differently by insurance companies. For example, if before the fire, everyone was a full-time resident in the neighborhood and kept a watch on things, but after the fire, the neighborhood is sparsely populated and there is a lack of loving, caring homeowners to oversee daily happenings, that can potentially increase the risks of thefts and liability issues,” Silverberg said. “Such a change in a neighborhood’s character can be viewed by an insurance company as causing increased risks of property and liability losses, especially because there may be a lot of people working in the area during the rebuilding process.” Importantly, insurance needs change over time and therefore, it is imperative for homeowners to review their insurance options at least annually.
“By all means, check out every insurance provider out there,” Baker said. “There have been moratoriums in the past after major disasters in Malibu, but they have been short-lived and often, insurers would re-emerge in the market relatively quickly.” The availability of homeowner’s insurance options in Malibu presents a dynamic and fluid situation.
“The fact that a person’s current homeowner’s insurance company may not be writing new policies at this time does not mean it will not be writing new homeowner’s policies relatively soon,” Silverberg said. “The logistics of insurance is that each company evaluates how much risk it has taken on in a particular area and it wants to ensure that it can get adequate premiums to cover the risk in a particular area. After a catastrophe in an area, the insurers’ views of the risk in that area can change at any time and at any point along that continuum, they can decide to re-enter the market in that area.” Further addressing the realities of the insurance marketplace, Silverberg added, “Insureds should know that there are two types of homeowner’s insurance sales people - there are captive agents and there are brokers. A broker can offer a vast array of choices. If your agent and his company cannot provide coverage, contact a broker, because, unlike agents affiliated with a particular insurer, brokers look out for the best interests of the homeowner.”
The California FAIR Plan
Baker noted that he has been filling out applications for homeowners, only to have many declined. “When there is no other available source of insurance, citizens can go to the carrier of last resort, the California FAIR Plan, which stands for The California Fair Access to Insurance Requirements,” Baker said. “However, it provides limited coverage of only $1.5 million in the aggregate, which initially sounds like a decent amount, but that includes the loss of the home, any separate structures, personal property which can amount to a lot, loss of use and rebuilding and it doesn’t cover theft or liability.”
The FAIR Plan is not a state agency and is not publically funded. Rather, it is an insurance pool association funded by all insurers authorized to transact basic property insurance in California, Silverberg explained. The FAIR Plan’s website states that this form of insurance should only be used after a homeowner makes a diligent effort to obtain coverage in the voluntary market. Further, importantly, the FAIR plan does not estimate the fair market value of property or rebuilding costs, nor does the program determine the appropriate level of coverage. Rather, that task is left to the homeowner. Silverberg noted that as a consultant, he specializes in assisting homeowners make these risk assessments, taking into account the value of their home and structures and the personal property in those structures, including any high-valued collections, assets or valuables.
Baker elaborated, discussing the limitations of the FAIR policy program. “In this difficult market, some people may only be able to get the FAIR plan policy which insures against fire and vandalism and if that is true, they can explore getting a wrap-around policy which covers things that the FAIR plan policy does not cover for homeowners, including liability, theft and water damage,” He said. “A wrap around policy is designed to get you as close to a traditional home policy as possible, but any type of loss having to do with fire or smoke will only be covered by the FAIR Plan policy.” Baker noted that coverage for smoke damage can cost a lot as it will pay to clean carpets, walls and textiles and, if those cannot be cleaned, it will, in appropriate cases, pay to replace items.
Insurance Rate Increases Are On the Horizon
Discussing potential increases in fire insurance policy premiums, Baker said, “We expect to have rates increase given the fact that insurance companies have paid many billions of dollars in insurance claims and rate increases will be considered by the Department of Insurance which takes some time.”
Baker and Silverberg note that it is pivotal for homeowners to keep premiums paid and to review policies to ensure that there is adequate coverage. Silverberg agreed and stated that now is an excellent time to do a review of one’s insurance coverage, both in terms of what a policy covers and whether the amount of insurance will adequately cover losses. “Find out the fair market value of your home and of the property itself and figure out how much it would cost to rebuild by getting estimates from contractors.” Baker said.
Rebuilding and Insurance
Turning to a discussion of the insurance aspects of rebuilding, Baker noted that a homeowner will need to obtain a course of construction policy prior to rebuilding to cover potential losses during the rebuilding process.
“It is important to get coverage that includes the cost of all building materials and theft and fire as well,” He said. “In Malibu, there will between five and six hundred homes under construction in the next couple of years, and unfortunately, thieves will be attracted to construction sites [which] will be Candyland for thefts because of all the building materials on the sites.”
“It is important to review what insurance is needed while rebuilding,” Silverberg said. “A person’s needs may include a course of construction policy and/or a renter’s policy and if he has stored items, he should contact his broker and verify that anything in storage is covered under existing policies.”
Insurance Considerations for Renters
Malibu and its surrounding communities have a high population of renters, and Malibu Magazine inquired about whether there have been changes in the cost or availability of renter’s insurance. “I have not seen premium increases for renter’s insurance yet,” Baker said. “It is important for renters to ensure that they, like homeowners, are adequately covered for contents, for loss of use of the property and as well as for mudslides, floods and earthquakes.”
Insurance for Floods, Earthquakes, Mudslides and Landslides
Because many consumers are unclear about how insurance claims are handled for floods, earthquakes, mudslides and landslides, Malibu Magazine asked Baker to explain. “Homeowners insurance policies and traditional renters’ policies do not provide coverage for floods or earthquake losses,” He said. “Flood insurance policies are mandated by most lenders if a property is in a flood zone and having private carriers in the business of offering flood insurance is relatively new and has been mandated by the federal government.”
Homeowners and renters should strongly consider adding coverage for earthquakes and floods, Baker advises, noting that after the Northridge Earthquake, the State of California created the California Earthquake Authority and state law mandates that if an insurer offers homeowners insurance, it must also offer earthquake coverage.
Mudslides are responsible for between $1 billion and $2 billion worth of damage in the United States each year, according to Zack’s Investment Research.
“The Department of Insurance has mandated that if mudflow is proximal to a fire and is attributable to brush and trees being burned, then there is coverage under a fire policy,” Baker said. “Whether flood insurance will cover a mudslide depends on how the mud travels into a structure. If the mud is carried by a river or stream, it is known as a mudflow and will be a covered event. Whereas, mudslides that occur from earth movement, such as saturated hillsides, fall into the landslide category and are not usually covered by a traditional flood insurance policy - of course, a person will need to file a claim and have it examined to determine coverage.”
To be fully protected against mudslides and landslides, a person needs landslide insurance, Baker advises. However, predictably, that discussion leads one back to where this article started – insurers may not offer landslide policies in areas at risk.
Most importantly, Silverberg and Baker emphasized, owners and renters should take the time to evaluate their insurance profiles and, as a final matter, they should not overlook the importance of having adequate loss of use coverage. “When you think about it, if a person has to rebuild, he may be out of his home for up to three to four years and renters who have loss of use coverage will be provided equivalent housing to what they are accustomed to while they are displaced.” Baker said.
Some Homeowners Are Experiencing Difficulties with Their Insurance Claims
Silverberg also noted that insureds should be mindful, diligent and well-educated before agreeing to a final settlement with an insurance company. Malibu Magazine spoke with Brian Strange, a partner at Strange & Butler, about the insurance ramifications of the Woolsey Fire. Strange’s firm specializes in insurance bad faith claims and some of his clients are consulting him about problems they are encountering with their insurers.
“A lot of Malibu residents were underinsured and a lot of insurance companies were accepting premiums over the years, but never analyzing whether an insured’s house increased in value,” Strange said. “Over time, as the houses increased in value, insurance companies, through their brokers, had an obligation to at least annually review whether insureds were protected in case of loss.” That’s not the only area where the firm’s clients are experiencing problems.
“Some insurance carriers are stepping up and doing the right thing,” Strange said. “However, we are finding some insureds are experiencing intentional delays in payment and underpayment by the carriers and that some insurance companies are trying to obtain releases from the insureds without paying what they’re entitled to. Therefore, we are seeing insureds who possibly having claims against insurers.” MM