The other possibility is that these claims will cause insurers to re-evaluate the extent of their overall exposures in this area. As many insurers did with Hurricane Katrina losses, the insurers may decide that they are simply overexposed to possible fire losses in Southern California. If that decision is made, then you will see homeowners scrambling for coverage when the impact of that decision is felt — when homeowners are notified at the time of the next renewal that they need to find a new insurance company.

How can insurers insulate themselves from bad-faith accusations?

The easy answer is to follow the best practices for claim handling, communicate clearly and promptly, and avoid delay. Most claim professionals, however, already follow sound claim-handling practices.

The more practical answer is this: Recognize that most bad-faith accusations are made simply to gain leverage on a contractual issue. The most feasible way to avoid bad-faith allegations is to seek prompt resolution of the contract claim. In addition to sound claim-handling practices, insurance companies need to pay what they determine they owe as soon as possible, regardless of whether there is still an amount in dispute with the insured. If an insurer has a dispute with an insured over how much they owe, they should at least consider paying that amount immediately. That way, if there are bad-faith allegations down the road, at least the insurer has lived up to its side of the bargain.

Are there any reasons why insurance companies would refuse to pay?

Unlike the Hurricane Katrina claims, there will be very few reasons why an insurance company would simply refuse to pay a wildfire claim. Hurricane Katrina presented very difficult and still on-going causation conundrums as to what caused the damage — was it the wind, or the storm surge? Here, the damages are all from the same cause: fire.

As with any homeowner's claim, however, there is an emotional content, and insureds can expect to have sincere disagreements as to the value of the destroyed property, particularly personal property. They can also expect some disputes when homeowners learn that they might not have had enough coverage, or that their coverage was undervalued because of the rapidly rising home prices over the last several years.