BUSINESSES AND homes located in areas that have been hit by wildfires have another risk they face after the fires subside: flooding, landslides, debris and mudflows. These events are not covered by a standard business property or homeowner’s insurance policy. Areas affected by wildfires have a significantly increased risk of landslides, mudslides and mudflows due to the destruction of vegetation, which leaves the soil susceptible to erosion during times of heavy rainfall.

Even a moderate amount of rain can trigger them in recently burned areas, particularly on steep slopes. Business owners and homeowners whose properties survived the recent L.A. fires need to reassess their insurance coverage as their property policies won’t cover damage from these events. If they don’t, they would have to pay for repairs or rebuilding out of pocket should a landslide or mudflow occur.

The rationale for non-coverage

A landslide covers a wide range of ground movements, such as rock falls, deep failure of slopes and shallow debris flows. Typically, these movements are triggered by factors like heavy rainfall, earthquake or changes in groundwater which destabilize the slope integrity. A landslide is considered an “earth movement” event so, like an earthquake, coverage is excluded from standard homeowner’s and business property policies. There are also mudflows, or mudslides, which are like a river of liquid mud flowing down a hillside, usually because of a loss of brush cover (typically from a fire) and subsequent heavy rains. These events are considered as floods, which commercial property or homeowner’s policies won’t cover.

The takeaway

If you are concerned that your property could be in danger of these events, call us to review your insurance options. Think about:

Conducting a risk assessment: Evaluate your property’s vulnerability to mudslides, landslides or mudflows, particularly if it is located near slopes or areas with loose, wet soil and is
prone to heavy rains.
Taking preventive measures: You can mitigate the risk of these events by implementing landscaping and architectural designs that help stabilize the ground and manage excess water.
Reviewing your coverage options: Call us to review your current homeowner’s insurance or business property policy to assess your coverage. That, combined with your risk assessment, can help us determine if you may need either a differences in conditions policy or flood insurance.

EVEN IF you have a business or a home that was not affected by the recent wildfires in Los Angeles, you will likely see a surcharge to help pay for them on your next property insurance policy renewal.

The state-run California FAIR Plan, which is the market of last resort when policyholders are unable to find coverage from private carriers, expects its total loss from the Palisades and Eaton fires to come in at $4 billion.

Under its charter and state law, if it exhausts its funds, the plan can surcharge all commercial property and homeowner’s insurers in the state after approval from the state insurance commissioner.

Commissioner Ricardo Lara approved the FAIR Plan’s request in early February to surcharge insurers a total of $1 billion, which will be assessed depending on each insurer’s market share. Under state law, those carriers are allowed to pass half of their assessment on to their policyholders in the state. It’s unclear how much each policy will be surcharged, but the fee will partly be
based on the size of each policyholder’s annual premium.

Without the assessment, the FAIR Plan would have run out of funds by the end of March and be unable to pay all of the claims from the fires, as well as claims from unrelated or future events and operating expenses, including the cost of increasing staff to respond to the disaster.

The state of play

The L.A. fires are one of the costliest natural disasters in the history of the country. Consulting firm Milliman estimates that the wildfires will cost $23 billion to $39 billion in insured losses. As of Feb. 11, the FAIR Plan had paid out about $800 million in claims, leaving it with about $1.2 billion in cash on hand. It has also tapped reinsurance, which is basically insurance for insurance companies. It has multiple layers of reinsurance, but it cannot access all of them until it spends more of its funds on claims. It now has access to the first tranche of coverage worth $350 million after it met its $900 million deductible.

The FAIR Plan can access additional layers of reinsurance based on the claims incurred and outstanding reserves, up to a $5.78 billion limit. To access all layers of available reinsurance, the plan would have to pay out about $3.5 billion, including the $900 million deductible, and copays. That’s more than its cash on hand. After accounting for its reinsurance package, the FAIR Plan expects to pay out $2.3 billion of the remaining $3.1 billion reserved for unpaid losses from the fires.

How it will affect your policy

To help the plan pay for the $1 billion shortfall, it will surcharge each property insurer in the state based on their market share two years prior to the assessment. The surcharge will likely be added during your next policy renewal.

WITH THE California commercial property market increasingly stressed with fewer and fewer insurers willing to write policies in the Golden State, the state insurance commissioner has floated a plan aimed at easing the crisis.
The main thrust of the new proposal is to make it easier for insurers to get their rate-hike requests approved, efforts that have been stifled due to laws that have been on the books since the early 1990s from a law known as Prop. 103. As well, insurers are limited in the types of data they can use to justify rate increases, which has constrained them from being able to ask for hikes that are adequate to cover their potential liabilities.
The proposed rule changes, along with others that are coming this year, are aimed at luring insurers back into the marketplace after one carrier after another has either stopped writing commercial property in the state altogether, or restricted how many policies they will write in California, and where.
While insurers are still writing policies in California, their numbers are shrinking, making renewals a difficult process for many businesses. Insurers have also gotten pickier about properties they are willing to cover, with some setting limits on the age of a building and taking into consideration whether the property owner has filed any claims in the last three years.

The commissioner’s plan

Insurance Commissioner Ricardo Lara’s proposed regulations, one of those prongs, would allow insurers to use catastrophe models to better predict insurance rates for wildfire, terrorism and flooding. Currently, they are only allowed to use historical claims data, which is backward-looking and does not account for the surge in risk and costs that’s occurred during the last five to 10 years.

As well, they are not allowed to consider the growing risk caused by climate change, or wildfire risk mitigation measures taken by communities or regionally as a result of local, state and federal investments.
Mark Sektnan, vice president for state government relations for the American Property Casualty Insurance Association, said this change would go a long way towards addressing the insurance crisis in the state.
“As Californians grapple with record inflation and become increasingly vulnerable to climate-driven extreme weather, including catastrophic wildfires, this is a critically needed tool to help identify future risks more accurately and set rates that reflect our new reality,” he said. “More accurate ratemaking will help restore balance to the insurance market and ensure all Californians have access to the coverage they need.”
The trade-off for consumers will be the likelihood of more insurers coming back into the market to write commercial property and homeowner’s insurance in exchange for them asking for large rate hikes.
The latest proposed regulation follows another that was introduced in late February that would speed up approvals of rate-increase requests. These can sometimes take years if the Department
of Insurance asks for more supporting documentation, which can reset the rate approval process, delaying final approval.
Some insurers have waited more than two years to get their rate hikes even considered.
Current rules “lack clarity and fail to specify the exact materials and information required in a complete rate filing application given the change in times and increased complexity of filing,” according to the Department.
This proposed rule codifies clearer instructions for what supporting documentation insurers must submit when filing for rate increases.

The takeaway

A public hearing on the proposed catastrophe-modeling regulations will be held on April 23 and it’s the department’s plan to get these new rules implemented by the end of 2024, along with the rules on speeding up rate-increase requests.
In the coming months, the department plans to propose additional regulations as well as legislation in order to get insurers to write business in the state again.
If enacted, it’s hoped that the various planned changes will provide some relief to homeowners and businesses in the state.
We’ll keep you posted as this develops.