California wildfires spark state insurance legislation

September 27, 2018 / 5 min read

Carr_fire_2_after_Post-CAT copy (002) — Post-Carr Fire aerial photography by Geomni.

Recent record-breaking, destructive California wildfire seasons highlighted insurance issues that drove the introduction of over 17 bills during the 2017–2018 state legislative session.

Rebuilding costs and the availability of coverage in wildfire-prone areas were among the concerns lawmakers targeted in the wake of fires that destroyed property across hundreds of thousands of acres in the state.

Focus on changing replacement costs

As can happen with any catastrophe, the wildfires drove a surge in the demand of costs of labor and materials to repair or rebuild affected structures. That was among the issues the recent legislation addressed to ensure that insurers keep policyholders informed on changing replacement costs.

Those rising costs after the fires, coupled with large numbers of buildings that were total losses, underscored the importance of insurers having effective tools to maintain correct estimated replacement costs on insured properties — ideally by re-running valuations at renewal rather than simply applying a factor or percentage increase to an existing policy to update the replacement costs.

When demand for contractors and materials outstrips supply after a catastrophe, property owners also may find the wait for repairs or reconstruction exceeds their coverage for additional living expenses for temporary quarters. Legislators sought to mitigate this concern in one of the bills sent to the governor.

Amid news and anecdotal accounts of increased nonrenewals and tightening availability of coverage in fire-prone areas, some legislators proposed restrictions on risk-scoring tools that insurers use to gauge fire protection and wildfire exposure, but such measures weren’t enacted. State and national insurance industry representatives provided input toward compromises in those bills that ultimately passed.

Most impactful bills

Below we have highlighted what we believe are the most crucial aspects of the most impactful bills recently signed into law by Governor Jerry Brown:

Assembly Bill 1799, signed July 9, 2018: Allows the required delivery of fire policies after a state of emergency to be done electronically, regardless of whether the insured had previously consented to electronic delivery.

Assembly Bill 2229, signed July 9, 2018: Requires any fire safety related discounts offered by an insurer be included in the mandatory Residential Property Insurance Disclosure (RPID).

Assembly Bill 1797, signed August 27, 2018: Requires a property insurer that provides residential replacement cost coverage to give the policyholder a replacement cost estimate every other year at renewal.

Assembly Bill 1772, signed September 21, 2018:

extends the time limit to collect full replacement costs
provides extensions if there are delays in approval or reconstruction
prohibits limiting or denying (if an insured rebuilds or buys in a new location) payment of the building code upgrade cost or replacement cost
limits indemnity to the replacement cost
provides for an extension of additional living expenses

Assembly Bill 1800, signed September 21, 2018: Has similar provisions as AB 1772.

Assembly Bill 2594, signed September 21, 2018: Extends current statute of limitations for a homeowner to sue their insurer from 12 (current) to 24 months if the loss is related to a declared state of emergency.

Senate Bill 824, signed September 21, 2018: Prohibits cancellation or nonrenewal of homeowners policies within one year of a declared state of emergency, based solely on a structure being in an area in where wildfire occurred within or adjacent to a fire perimeter. Requires insurers with premiums totaling $10 million or more to report fire or wildfire-incurred losses accompanied by the Public Protection Classification (PPC^®) and fire risk scores on an individual policy basis. All data reported can be protected under California’s confidentiality laws.

Senate Bill 894, signed September 21, 2018: Requires insurers to offer to renew property insurance policies after a disaster for at least the next two renewal periods. Allows insureds to combine policy limits for primary dwelling and other structures after a loss due to a declared state of emergency. Also, provides for an extension of additional living expenses.

Senate Bill 901, signed September 21, 2018: Allows utility companies to shift a portion of the cost of wildfire-related damage liability from utility company shareholders to ratepayers and consumers. This was among the most contentious bills of the legislative session because alleged lack of oversight and negligence by utility companies was cited in many of the recent wildfires. It will effectively shield utilities against subrogation claims from insurers seeking to recoup a portion of wildfire losses that may be related to inadequate mitigation efforts by those companies.

Senate Bill 917, signed September 21, 2018: Provides that if a loss or damage results from a combination of perils—one of which is a landslide, mudslide, mudflow, or debris flow—the loss is covered if the primary event, or “efficient proximate cause,” is an insured peril that would otherwise be covered. That coverage must be provided under the same terms and conditions that would apply to the insured peril. The legislative summary states that “this act does not constitute a change in, but is declaratory of, existing law.”

Senate Bill 1875, signed September 21, 2018: Requires residential property insurers to disclose to policyholders the availability of policies offering extended replacement cost coverage and to annually report to the Department of Insurance the amount of extended replacement cost coverage offered.

But that's not all. California has created two study committees to (1) examine issues related to catastrophic wildfires associated with the utility infrastructure and (2) identify, assess, and recommend risk transfer market mechanisms that promote investment in natural infrastructure to reduce the risks of climate change related to catastrophic events, among other things. Insurers, consumers, and other stakeholders should stay tuned as action on wildfire issues is anticipated to continue into the next legislative session.