Will insurance cover damage from wildfires in the U.S.

Insurance company payments due to wildfires in Los Angeles may exceed $20 billion. But why experts are sounding the alarm about the impending crisis in the insurance industry, Kazinform News Agency's own correspondent investigated.

Will insurance cover damage from wildfires in the US
Photo credit: LACoFD / Х

Billion-Dollar Losses

Preliminary estimates put insured losses from the Pacific Palisades fire at around $10 billion. Total losses for Los Angeles are projected to be between $20 billion and $150 billion.

Will insurance cover damage from wildfires in the US
Photo credit: Christiaan Triebert / Х

JPMorgan analysts have doubled their insured loss forecast to more than $20 billion, while Wells Fargo expects the total economic damage from the disaster to be well over $60 billion. According to preliminary estimates from AccuWeather, the fires have caused total damages of between $135 billion and $150 billion, and this figure could increase significantly as the fires spread, Investopedia reports.

Insurance stocks fell on Friday, January 10, due to billions of dollars in pending compensation payments: Mercury General (MCY) fell 22%, Travelers Companies (TRV) - 4%, Allstate (ALL) - 7%, Chubb Limited (CB) - 4%, SPDR S&P Insurance ETF (KIA) - 2.5% and AIG (AIG) - 1.3%.

Insurance crisis

Experts note that long before the tragic events in California, seven of the 12 largest insurance companies in the state completely ceased operations or suspended issuing new insurance policies.

Will insurance cover damage from wildfires in the US
Photo credit: Caroline Brehman

In particular, the largest insurance company in California, State Farm, stopped accepting new applications for insurance against wildfires in California in May 2023, in part due to the risk of catastrophic events. Then, in March 2024, the company said it would not renew 72,000 policies in the state, citing inflation, more frequent natural disasters, and a high-risk insurance market.

California’s sixth-largest home insurer, Allstate, also said in 2023 that it would suspend issuing new policies in the state. However, this trend has been going on in the insurance industry for years. Residents of states like California, Texas, Louisiana, and Florida are finding it harder to get insurance, with companies either cutting coverage or leaving the states altogether.

According to the Consumer Federation of America, 12% of Louisiana homeowners were uninsured in 2022, as the average cost of a policy rose to $2,240 per year, 15% higher than the national average of $1,915.

Will insurance cover damage from wildfires in the US
Photo credit: Chris Pizzello

In Florida, home insurance costs have increased 102% over the past three years, according to the Insurance Information Institute.

More than 100,000 Californians have been dropped from insurance companies since 2019 as wildfires have become more common in the region, according to a San Francisco Chronicle analysis. The remaining insurers have raised rates and have begun canceling or not renewing policies in California.

As of 2024, a California home insurance policy ($1 million coverage) costs between $2,586 (Allstate) and $5,718 (Farmers) per year, according to the Insurance website. Property owners in the state are not required by law to have insurance, but those with mortgages are required to have it.

Will insurance cover damage from wildfires in the US
Photo credit: Etienne Laurent

However, typical home insurance policies generally do not cover damage from disasters such as earthquakes, floods, and mudslides, which require separate policies that can cost up to $40,000 per year.

High-Risk Areas

Joan Fitzgerald, a professor of public policy and urban affairs at Northeastern University, says you shouldn’t live in high-risk areas.

“It shouldn’t have surprised anyone that this happened. The fact is that we’re building in places where we shouldn’t have built in the first place,” says Joan Fitzgerald.

Mark Friedlander, a representative of the Insurance Information Institute, notes that people living in high-risk areas in California should be prepared to pay higher insurance premiums and be prepared for catastrophic losses.

“If you’re willing to live on the ocean in South Florida, you need to understand that you’re at high risk of loss, and you need to be prepared to pay for insurance. If you live in a high-risk area in California that’s prone to wildfires, be prepared to pay higher-than-average insurance premiums and be prepared for potential catastrophic losses,” says Mark Friedlander.

“Insurer of Last Resort”

Given the dire state of the insurance sector, California officials last year moved to revamp the government’s Fair Access to Insurance Requirements Plan, often referred to as the state’s “insurer of last resort.”

Created after a series of wildfires in the 1960s, the FAIR plan charges higher rates than insurance companies and offers policies that cover up to $3 million for individuals and $20 million for businesses.

There are now more than 408,400 FAIR policies in effect in the state, more than double the 154,500 policies in September 2019. According to the Los Angeles Times, the program is “dangerously overstretched” and can only cover $200 million to $300 million.

Building Materials Prices Will Rise

If fire losses exceed FAIR’s reserves, those private insurers still operating in the state will step in to cover the $1 billion shortfall, Northeastern Global News reports.

However, Daniel Aldrich, a professor at Northeastern University and director of the Resilience Studies Program, notes that even if FAIR can reimburse its clients, homeowners will face an uphill battle to rebuild.

“We have 10,000 homes that have burned in the Palisades right now, with payouts of only $3 million per home. Let’s say California FAIR actually manages to pay out those policies. The cost of rebuilding will be much higher than that $2.5 million to $3 million,” Aldrich says.

The expert explains that many homeowners will want to rebuild their homes in the next few years, and all construction contractors will be involved, which will lead to an increase in prices for labor and building materials, as was the case in the city of New Orleans, Louisiana, after Hurricane Katrina in August 2005 ($125 billion was the cost of rebuilding the city, which was 80% underwater - ed.). In addition, this disaster led to the bankruptcy of hundreds of insurance companies across Louisiana, which were not ready to cover payments for damages.

Will insurance cover damage from wildfires in the US
Photo credit: Carlos Barria

“I think we are on the verge of a major financial crisis for the insurance industry,” says Daniel Aldrich.

It is noted that in 2024, there were 27 separate weather and climate disasters in the United States, which together caused damages of at least $1 billion.

U.S. President Joe Biden approved a Major Disaster Declaration in California, allowing victims to access funds and resources for recovery. Additionally, the Federal Emergency Management Agency has approved fire assistance grants to reimburse California for 75% of their firefighting costs.

Latest updates

As firefighters continue to battle the Palisades fire near Los Angeles, authorities have reported tragic news of two civilian fatalities amidst the ongoing efforts. The fire, which has ravaged an area spanning 23,654 acres as of January 12 03:31 PM PST (January 13, 2025, 07:31 AM Astana time), has seen only 11% containment despite the efforts of 3,712 personnel, 24 helicopters, and a massive deployment of 463 engines.

The blaze has also led to injuries and fatalities among both fire personnel and civilians, as well as billions in property damages.

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