Fire is virtually always a covered peril, and it's used as the standard covered peril example. So it comes with some surprise that with the significant wildfires this season the California Department of Insurance is concerned that the extent of damage could discourage carriers from writing new policies in these areas.

Residential property losses in Sonoma County alone exceed $2.6 billion. Napa County sustained commercial losses of more than $3.2 million and residential losses of more than $266 million. Residential losses from all fires are more than $3.1 billion, with commercial losses at $137 million.

Already insurers have refused to renew more than 10,000 policies in the counties most vulnerable to wildfires. This is an increase of 15% from last year. There are 1.3 million homes determined to be at high or very high risk of fire.

Random house fires caused by Christmas trees, cooking accidents, open flames and other situations result in a large number of fires, but they're in varied areas at varied times. With wildfires, a large portion of a carrier's insured properties are exposed to catastrophic losses all at once. This is driving the concerns of carriers, as well as the fact that more development has occurred in areas closer to wildfire zones. Unless the homes are underinsured though, the policyholders are covered for their losses. The aftermath, however, is a different story.

Burn scars more than landscape

When wildfires destroy an area, the result is known as a burn scar. This is an area of ground that's now charred, barren and devoid of vegetation. The trees, plants and vegetation perform a vital purpose and hold the soil in place to absorb rainfall. When the trees, plants and vegetation are gone, the chance of mudslides and rockslides from rain is greatly increased.

Related: 10 things your clients need to know about wildfires

California's wet season begins in October, runs through March, and produces most of California's annual rainfall. The scorched areas can be as water-repellant as pavement, so water can run off extremely quickly causing flash floods and debris flows.

As rainstorms hit California recently, several flash floods, mudflows and landslides occurred, causing more property damage as well as taking lives. Without the vegetation, the rain easily saturated the earth, which rapidly became fast-moving sheets of mud and debris headed downhill. People were again evacuated, but this time for a different reason. Houses that avoided the fires were carried off their foundations by mudflows. One freeway was closed for 30 miles and parts of the road were completely submerged.

Exclusions for earth movement

Landslides, mudslides and mudflows are all considered earth movement under the standard homeowners policy, and are excluded. The exclusion falls under "anticoncurrent causation" language, so even though the wildfires may have contributed in some way to the loss, the damages are excluded.

But what if an insured had already been evacuated due to the wildfires or was receiving additional living expenses due to damage from the fire, and the mudslides caused more damage, increasing the time the insured's residence is uninhabitable?

Related: Wildfire claims and coverage questions

Unfortunately, for the insured, the additional living expenses are available only if the loss is covered under Section I of the policy. Even under civil authority, the damage to a neighboring premises must be by a peril insured against.

Therefore, in order for insureds to have coverage for the mudslides, landslides and mudflows, the insureds may look to a flood policy if they have one. The National Flood Insurance Program (NFIP) policy includes mudflow and the unusual and rapid accumulation or runoff of surface waters from any source in the definition of flood.

In order for the coverage to apply there must be an inundation of two or more acres of normally dry land or two or more properties, one of which is the insured's. The policy makes a distinction between mudflow and landslides, and it states that landslides, slope failure or a saturated soil mass moving by liquidity down a slope are not mudflows. Mudflows are rivers of liquid and flowing mud on the surface of normally dry areas.

Coverage for mudflows

Therefore, in relation to the current situation in California, the flood policy only covers mudflows. Although damage from the mudflow is covered, the NFIP policy provides no coverage for additional living expenses while the building is uninhabitable and under repair.

Looking for coverage elsewhere, there is an earthquake endorsement available through ISO HO 04 54 Earthquake and in California HO 22 33 Earthquake — California. Unfortunately, the coverage provided in these endorsements is for earthquake, including land shock waves or tremors. There is no coverage for landslide outside of an earthquake, and the form excludes flood as well, even if it was caused by, resulted from, contributed to or was aggravated by an earthquake.

Tricky coverage questions

The current situation in California after the wildfires and mudslides is extremely difficult for insureds. The homeowners form and a flood policy cover parts of these losses; the homeowners policy covers the fire damage, and if the insured has a flood policy, that will cover the mudflows. Damages from landslides outside of the mudflows, if a carrier determines that a landslide and not a flood or mudflow is the cause of damage, are not covered under either policy.

Related: Why flood insurance isn't like a homeowners' policy

An insured may have additional living expenses after the fire, but the insured won't have such coverage after a mudflow. However differentiating the losses between the two is tricky.

• If reconstruction or repair after the fire is not affected by the mudflow, then the insured will have additional living expenses from the homeowners form through reconstruction.
• If the fire burned down part of the building leaving a hole that the mud flowed into, will the costs of removing the mud be included in the repair of the fire damage?

The mud must be removed before the repair can begin, but mudslide is not a covered peril. Technically the carrier could make a case that the removal of the mud is not covered as it is not direct damage from the fire and that the insured must pay those expenses separately.

How carriers will handle it remains to be seen.

Related: Snow, landslides & avalanches

Christine G. Barlow, CPCU, is managing editor with FC&S, the premier resource for insurance coverage analysis. She has an extensive background in insurance underwriting. She may be reached at [email protected]. Additional information about FC&S Online is available at www.NationalUnderwriter.com.