Assessing Wildfire Risks Difficult As Coverage Woes Persist

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 the blazes grow more destructive.

While insurers say that finding stronger ways to assess risk is critical to offering insurance at proper rates, homeowners are still grappling with underinsurance in the wake of major wildfires like the Marshall Fire in Colorado. And although regulators have pushed for lower rates for policyholders who take steps to protect their homes from wildfires, consumer advocates say more oversight is needed to expand coverage.

A firefighter works to extinguish flames from a wildfire in Laguna Niguel, California, on May 11. Major wildfires have left homeowners grappling with underinsurance, and consumer advocates say more oversight is needed to expand coverage. (AP Photo/Marcio Jose Sanchez)

A July report by Consumer Watchdog, an advocacy group, argued that insurance companies operating in California have routinely sold policies with provisions in violation of state law. Insurers will often classify smoke damage as separate from fire damage in order to limit coverage responsibilities, Consumer Watchdog said.

Those provisions were also included in policies issued by California's insurer of last resort, the FAIR Plan, Consumer Watchdog said. The FAIR Plan is an insurance pool composed of all the carriers licensed to sell insurance in California.

"Once the regulators allow the FAIR Plan to get away with something, then some of the companies try to do the same," Consumer Watchdog founder Harvey Rosenfield told Law360 in an interview. "The only way to police the marketplace here is to punish companies that use these provisions and make sure they reimburse policyholders whose claims were denied or restricted improperly."

The California Department of Insurance has strongly disputed many of the report's findings, calling some "demonstrably false" and insisting that the department doesn't approve any part of an insurer's rate filings that violate the law.

Michael Soller, a CDI spokesperson, told Law360 that the department's staff has identified that "more than half" of the cases referenced in the report are false. Asked for examples, he pointed to eight filings mentioned in the report, including one "wildfire smoke, soot, and ash limitation" filing from First American Property & Casualty Co. that he said the department flagged, leading the insurer to withdraw the form.

"The department launched our examination of the FAIR Plan's handling of smoke damage claims in order to gather the facts, and the investigatory hearing [earlier in July] is a critical step in our ongoing oversight of the FAIR Plan to protect consumers," Soller said.

Travelers was also named in the Consumer Watchdog report as including smoke damage language in its policies, but the report didn't include specific policy language for that carrier. Travelers disputed Consumer Watchdog's findings as well. A spokesperson for the insurer told Law360 on Friday that Travelers has no policy sublimits for smoke damage, referring to the policy provisions that limit coverage for specific types of loss.

Dylan Schaffer, a Kerley Schaffer LLP partner who has represented FAIR Plan policyholders, told Law360 that the insurance pool has made a habit of denying claims under what he described as an unreasonably high "permanent physical damage" requirement. He said the association duped the CDI into approving that requirement.

"The problem is that when they approved it, FAIR Plan lied about what it meant," Schaffer said. "Of course, the reason they did that is because if they had said it's going to reduce our liability, the [department] would have asked them to reduce rates."

The FAIR Plan has been the subject of oversight from the CDI. A market conduct audit overseen by the CDI and issued in May found that the FAIR Plan failed to pursue adequate investigations into homeowners' claims and issue policies equivalent to or better than California's own standards.

Asked about the Consumer Watchdog report, a FAIR Plan representative told Law360 on Friday that the association takes seriously its commitment to ensure all California homeowners have access to basic property coverage.

"The FAIR Plan will pay to remediate direct physical loss caused by a covered peril at properties it covers," said the statement, which was provided on behalf of the FAIR Plan by a public relations firm. "Our policy language in this matter was negotiated with and approved by the California Department of Insurance."

Previously, CDI officials had warned the FAIR Plan of potential policy violations.

"FAIR Plan specifically represented to the department that its proposed revisions to the dwelling fire policy, including its new definition of 'direct physical loss,' would not reduce or eliminate any existing coverages," Kenneth B. Schnoll, general counsel to the CDI, wrote in a letter last year to the FAIR Plan's then-president, Anneliese Jivan. "The Department has since become aware of pending policyholder litigation regarding FAIR Plan's alleged improper denial of fire and/or smoke damage claims."

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

Eric C. Scheiner, a Kennedys partner who has represented insurers and handled wildfire claims, said underwriters were well aware of the recent claims history in states like California. But risk assessment might be hampered going forward because of a lack of data on larger geographic areas, or new areas at risk of wildfires or drought conditions.

"Some carriers will either exclude wildfire exposure or have a separate wildfire tower for a given insured," Scheiner told Law360. "Or you'll have a sublimit for wildfires, or they'll only allow, for example, one aggregate limit to apply to a wildfire in a given year."

Scheiner said insurers will also consider the prices reinsurance companies offer in deciding on policy provisions or restrictions. The growing size and strength of wildfires directly affects the kind of policy limits insurers will include in their policies, he said.

One new development in the wildfire risk assessment landscape has been the emergence of artificial intelligence tools. Zesty.ai, based in Oakland, California, has worked with carriers including the Cincinnati Insurance Companies, Travelers and Farmers Insurance.

David Evans, a member of a property and casualty committee for the American Academy of Actuaries, told Law360 that artificial intelligence tools could offer similar value to insurers as the catastrophe models used for individual risk pricing.

"When done well, either a catastrophe model or AI model will be a powerful tool for underwriting and pricing location-level risk," he said. "Caution needs to be exercised on the AI side to avoid overfitting to past events and overly volatile local estimates, which can be mitigated in a catastrophe model environment that bases risk estimates on scientific principles instead of statistical data from events that have already occurred."

Five of the 10 most destructive wildfires in California history have occurred in the last five years, according to data published by the Insurance Information Institute, an industry trade group. And seven of the 10 largest California fires by area have occurred in the last five years, the institute said. Experts have also warned that hot conditions and strong winds that persist beyond the normal fire season will continue to drive losses.

Eric M. Nelson, Travelers' senior vice president of enterprise catastrophe risk management, told a panel of risk management and catastrophe modeling experts on Wednesday that embers were responsible for destroying most structures, and changing weather patterns could cause embers to fly farther.

"Weather patterns and drought conditions expanding into the fall really create a tough environment for us to fight these fires," Nelson told the panel, which was hosted by Travelers.

On Thursday, Travelers Companies Inc. reported a 29% drop in core income in the second quarter compared to the same quarter last year, blaming the decrease on higher losses from catastrophes and lower investment income. The insurer's report, made with the U.S. Securities and Exchange Commission, noted that catastrophic losses were lower in the second quarter of last year and investment income was higher.

Western drought conditions and heat in 2021 caused an estimated $9.4 billion in damages, the National Oceanic and Atmospheric Administration reported last year. It said wildfires in the West, including the Dixie Fire, California's second-largest ever, and the Marshall Fire in Colorado, caused an estimated $11.2 billion in damages.

Other than climate change, experts have pointed to population growth in high-risk regions as helping to drive wildfire losses. Also of concern are wildfire suppression and forest management techniques. In April, the largest wildfire to hit New Mexico was discovered to have started as a result of a U.S. Forest Service prescribed burn.

Fires set against the record-breaking heat in Europe and the U.K. have also underscored that places traditionally spared from extreme fire perils are newly at risk as the climate continues to warm.

Ellie Mulholland, the London-based director of the Commonwealth Climate and Law Initiative, said that 40 degrees Celsius temperatures in England and wildfires on the edge of London had been unthinkable for most people.

"We increasingly see an updating of time horizons and perception of risk after a big signal like this, particularly among those sitting on boards or in senior management," Mulholland told Law360. "When extreme weather events forecast to happen in the future materialize today, it's a signal to update our thinking."

--Editing by Jill Coffey.