California Wildfires Fuel Insurance Crisis
Pacific Palisades, a Los Angeles neighborhood ravaged by the recent Palisades Fire, is a stark illustration of the insurance challenges now confronting homeowners in regions susceptible to climate-related disasters. According to Michael Soller, a California Department of Insurance spokesman, State Farm dropped about 1,600 policies in Pacific Palisades in July of this year. Beyond this, an analysis of insurance data by CBS News San Francisco last year revealed that State Farm also ceased coverage for over 2,000 policies in two other Los Angeles ZIP codes, which include affluent neighborhoods like Brentwood, Calabasas, Hidden Hills, and Monte Nido.
In a statement to CBS MoneyWatch, State Farm emphasized its commitment, stating that their “Number 1 priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy.”
State Farm’s decision reflects a broader trend. Several private insurers, including Allstate and Farmers Insurance, are either canceling California policies or suspending underwriting. This leaves homeowners with few options: either secure coverage through the California FAIR Plan (Fair Access to Insurance Requirements Plan), the insurer of last resort, or forgo insurance entirely.
The FAIR Plan and Rising Reliance
The FAIR Plan offers basic fire insurance coverage for properties in high-risk areas, where traditional insurance companies are unwilling to provide it. Consequently, homeowners in Pacific Palisades have increasingly turned to the FAIR Plan. Roughly 1,400 of the town’s 9,000 homes were covered by the plan in 2024, more than quadrupling the number from 2020. This means that, before the disaster, approximately one in seven homeowners were reliant on the FAIR Plan.
Potential for Economic Devastation
Daniel Swain, a University of California Los Angeles climatologist, said during a Wednesday webcast that the Palisades Fire could become the most expensive wildfire in history due to the number of buildings destroyed. The median home value in the neighborhood’s 9,000 residential units is about $3.1 million, according to real estate data firm ATTOM Data. These losses could result in substantial personal and financial hardship for homeowners.
Broader Impact and Political Response
The Los Angeles fires, including the Eaton Fire and other wildfires, are expected to place significant strain on the state’s already fragile insurance market, according to experts and lawmakers. The issue’s reach extends beyond California, affecting homeowners in Florida, Louisiana, and elsewhere.
Senator Sheldon Whitehouse, Democrat from Rhode Island and member of the Senate Budget Committee, expressed concern via a post on X (formerly Twitter), anticipating a potential acceleration of the collapse in the home insurance market following the wildfires. His committee recently released a report analyzing climate change’s impact on this market.
Rep. Maxine Waters, a California Democrat whose district includes parts of Los Angeles, plans to reintroduce the Wildfire Insurance Coverage Study Act, which would task the Government Accountability Office with analyzing the dangers wildfires pose to communities and how insurance companies are responding. Waters emphasized that the higher risks were “leaving homeowners and business owners and families without insurance coverage because some of the insurance companies are canceling; they are aren’t writing any new insurance. People continue to pay higher prices for even less coverage.”
Soaring Costs and Economic Losses
As fires continue to rage across the Los Angeles area, the estimated cost of the disaster is climbing. AccuWeather estimates that the potential property damage and economic losses could reach as high as $150 billion, making these wildfires potentially the most destructive in U.S. history.
In California, State Farm announced last year that it was discontinuing coverage for 72,000 houses and apartments across the state. Since 2019, over 100,000 Californians have lost their insurance, according to a San Francisco Chronicle analysis of insurance data.
Industry Challenges and Climate Change
Facing rising costs and risks amid increasing climate disasters, the insurance industry is reevaluating its approach. Some insurers have decided not to renew policies in counties at high risk from climate hazards. This is not limited to California and other areas traditionally known for these risks. The Senate report determined that climate change is the primary driver of increasing non-renewal rates.
Regions facing increases in non-renewal rates also include Southern New England, the Carolinas, New Mexico, Oklahoma, counties in the Northern Rockies, and Hawaii. The report warns that this could lead to plunging property values in communities where insurance becomes unavailable or unaffordable, potentially triggering a financial crisis similar to the 2008 crisis.
Senator Whitehouse summed up the situation with a Twitter post: “Here’s how it works: Climate change makes risk unpredictable; risk makes insurance unaffordable or unavailable; no insurance makes mortgages unavailable; without mortgages property values crash; cascading like 2008 into general economy,”
Potential Relief and New Regulations
Some near-term relief may be on the horizon. California homeowners could benefit from a new state regulation, implemented Monday, that will compel insurers to offer coverage in wildfire-prone areas. The intention of these new regulations is to encourage homeowners to transition away from the FAIR Plan, according to the California Insurance Commissioner Ricardo Lara’s office.
The average cost of insurance through the FAIR Plan is about $3,200, more than double the average cost for homeowners in California, according to Bankrate.
The new rule will oblige home insurers to offer coverage in high-risk areas. Insurers must increase their coverage by 5% every two years until they achieve the equivalent of 85% of their market share. In exchange, the state will allow insurance companies to pass the costs of reinsurance to California consumers. California is unique in that it does not already allow policyholders to bear the cost of reinsurance, according to Lara’s office.
Critics of the new rule suggest that premiums could increase by as much as 40% and that the pace of acquiring new policies is not fast enough. Lara stated that Californians deserve “a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change.”
