Wildfire issues and insuring to value

California was beset by historic wildfires in 2017, and the trend is continuing into 2018. There are many issues involved. One is climate change, as the wildfire season has started earlier than normal and is expected to last longer. Another issue involves people moving into wildland urban interface areas, which are the transition spaces between developed and wild areas. This puts homes closer to wild areas, making them more susceptible to wildfires.

Creating defensible space

When people move into these areas, there are ways to help protect the home. The creation of defensible space is one of the first provisions to undertake. Defensible space is a buffer between the dwelling and the wildland area; the proper spacing of trees, grass and shrubs can make a tremendous difference in the dwelling’s susceptibility to a wildfire. The existence of this space helps slow or even stop the wildfire and preserve the dwelling.

Defensible space has two zones; the first zone extends 30 feet from the building, including other structures and decks. The second zone extends 100 feet of space out from the dwelling, buildings and decks. These zones require removal of dead plants and pine needles, relocation of woodpiles away from the dwelling, and sufficient horizontal and vertical clearance between trees and the ground, as well as from each other and other flammable objects or vegetation.

Covering wildfire damage

However, even with the best defensible space, it is not a guarantee that the dwelling will not burn during a severe wildfire. The Mendocino complex fire is the largest in California’s history, having burned through 459,102 acres so far. Each year more acreage burns. This is where insurance comes into play.

Homeowners’ insurance is normally straightforward; the replacement cost value of the premises is determined and used to define the premium of the policy. Unfortunately, there have been serious issues with the California wildfires over the past year regarding sufficient levels of insurance.

Many homeowners do not understand the difference between market value of their home and replacement cost. It is one thing to buy another home, but something else again to rebuild a home that has been destroyed. Debris must be removed, remaining parts of the property may need to be demolished in order for reconstruction to take place, and a whole host of other issues are involved.

Many California insureds have discovered they are not insured to value, and now have insufficient coverage to replace their dwelling. There are a number of reasons for this. Some are that the insureds did not notify the carrier of upgrades to the property that changed the property value. Some insureds say the carriers did not advise them they were underinsured or that their coverage did not match the actual value of the residence, even when they used the carriers’ online estimators. This led to large numbers of insureds having insufficient coverage for the wildfire damage they suffered.

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Additional coverage options

At one time, many carriers offered guaranteed replacement cost endorsements, which provided coverage above the listed limit on the policy for an additional premium. With this endorsement, even if the insured amount was below the replacement cost, the carrier would pay to replace the property whatever the cost. These endorsements fell out of favor in part because of large differences between insured amounts and actual replacement amounts. However, there is still an endorsement that provides additional coverage above the Coverage A limit on the policy. This is endorsement HO 04 20, Specified Additional Amount of Insurance for Coverage A—Dwelling.

The HO 04 20 allows the insured to schedule a percentage amount of additional insurance. A few things are required, however. The insured must allow the carrier to make inflation adjustments to the coverage A limit as well as adjustments based on its evaluations of the property. The insured must also have notified the carrier within 30 days of completion of any additions or alterations to the property that increase the replacement cost by 5% or more.

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For example, the property is insured for $300,000 based on the latest carrier evaluation, and this endorsement is present with 15% listed as the scheduled amount. The property sustains a total loss and the replacement cost is determined to be $330,000. Since this endorsement is present, and 15% of the insured amount is $45,000, the $330,000 will be paid even though that exceeds the coverage A amount.

With the requirements built into this endorsement, underinsurance is not an issue since the insured is required to allow changes to the insured amount to keep it properly insured. The percentage also keeps settlements from getting out of hand; if the replacement cost had turned out to be $375,000, the insured would only have gotten $345,000, the insured amount plus 15% of that amount.

Forty-three states allow this endorsement, but California does not. Even so, the issue boils down to ensuring that the property is insured for the correct amount, and that proper measures have been taken to prevent or mitigate damage from wildfires. While the wildland areas are beautiful, they carry their own risks as people are discovering. Bottom line, people need to be aware of the natural hazards of any area they move into, and understand how insurance works and how best to protect their property.

Christine G. Barlow, CPCU, (cbarlow@alm.com) is an editor with FC&S Online, the authority on insurance coverage interpretation and analysis for the P&C industry. It is the resource agents, brokers, risk managers, underwriters and adjusters rely on to research commercial and personal lines coverage issues.