California wildfires have so far burned over 40,000 acres in a total of five different fires, following years of significant drought. The winds are still an issue, meaning that the fires will continue to burn. Currently, the fires are only partially contained. Property loss estimates continue to change but current estimates are that damages will amount to $45 billion or more insured costs, and economic losses between $150 to $275 billion, especially since the fires are still ongoing. Most of the losses are expected to be homeowner losses. Aside from the fire damage itself and loss of life, there are many secondary issues that arise.
The California insurance market was already particularly hard due to past fires in the state; the Camp fire in 2018 burned over 153,000 acres, destroyed almost 19,000 structures and cost $15 billion. The Woolsey fire in 2018 cost $5 billion and the Tubbs fire in 2017 cost $8.9 billion. Many insurers had already pulled out of the state, leading people to obtain insurance from the California FAIR Plan. The FAIR plan’s exposure has grown significantly since 2018, from $50 billion to more than $450 billion. If the FAIR plan collapses or the capital cushion is significantly drained because of the fires, then an assessment may be levied on insurers in the state. The FAIR plan has $377 million in cash to pay claims.
A moratorium has been put in place for the next year to prevent insurers from canceling or nonrenewing policies of those in wildfire zones for the next year. This includes those who had received a non-renewal notice 90 days before the fires started.
While random house fires caused by Christmas trees, cooking accidents, open flames and other situations cause a large number of house fires, they are 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 concerns already wary insurers, as well as the fact that more development has occurred in areas closer to wildfire zones. The aftermath, however, is a different story.
Burn Scars
When wildfires destroy an area, the result is known as a burn scar. This is an area of ground that is 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. The scorched areas can be as water-repellant as pavement, so water can run off extremely quickly causing flash floods and debris flows. When the rains eventually come, the potential exists for flash floods, mudflows and landslides causing more property damage as well as taking lives. Without the vegetation, the rain easily saturates the earth, which rapidly becomes fast-moving sheets of mud and debris headed downhill. When this occurs, houses that escapedthe fires could be carried off their foundations by mudflows.
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? 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.
Efficient Proximate Cause
After the wildfires of 2018, then Commissioner Jones issued a bulletin stating that if fire was the efficient proximate cause of a mudslide, the damage from the mudslide should be covered even if the policy excludes mudslide, mudflow, landslide, or other earth movement. The department required insurers to perform a diligent investigation before denying any claims for mudslide or mudflow to ensure that the fire was not the efficient proximate cause of the damage.
Efficient proximate cause doctrine provides that if a loss is caused by two or more events, one a covered cause of loss and the other not a covered cause of loss, despite any policy exclusions, the loss will be covered. For example, earth movement damages a premises and the earth movement is excluded, but the insured claims that a third party was bulldozing land above her property, this is a non-excluded peril. Under efficient proximate cause, the earth damage should be covered because the bulldozing was the efficient proximate cause of loss of the earth movement. The California Insurance Code § 530 states that "An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause."
Debris Removal
Once the fires have been extinguished, massive cleanup efforts will begin. But cleanup from fires that damaged property are more complicated than fires that simply burn vegetation. Burned cars and buildings, as well as furniture, clothing, and other products leave toxic ash and debris. Certain metals will melt, gasoline and other fluids from cars, as well as household and industrial cleaning fluids, will likely have leached into the ground. All that needs to be cleaned up, and cleanup is likely to be more costly due to the toxic exposure. Both the homeowners policy and the commercial property policy have debris removal coverage. The homeowners policy HO 00 03 pays for the reasonable expense for the removal of debris from a covered peril, and if the cost of debris removal and actual damage exceeds the Coverage A policy limit, an additional 5% of the Coverage A amount is available for debris removal. While an exclusion exists for the discharge, dispersal, seepage etc. of pollutants, there is an exception if the discharge, release or escape is caused by a Coverage C peril. Fire is a Coverage C peril, so there is coverage for the debris removal of pollutants that resulted from the fire.
The commercial property policy is different, however. In the ISO form CP 00 10 10 12, the debris removal provision appears as an additional coverage providing for expenses to remove debris of covered property caused by or resulting from a covered cause of loss that occurs during the policy period, with fire being a covered cause of loss. The most the insurer will pay under the additional coverage is 25 percent of the amount paid for the direct physical loss plus 25 percent of the amount of the deductible. For example, the amount of the debris removal expense that would be available for a paid loss of $5,000 where a $500 deductible was used would be $1,375 (25 percent of $5,500).
If this amount is insufficient to cover the cost of debris removal, or the sum of the amount of direct physical loss plus debris removal exceeds the applicable limit of insurance, an additional $10,000 per occurrence for each location is available to cover debris removal. This amount may be increased by use of endorsement CP 04 15 10 12, Debris Removal Additional Insurance.
Also, under the Building and Personal Property Coverage form, all debris removal expenses must be reported in writing to the insurance company within 180 days of the date of direct physical loss or damage. And, though the cost of debris removal is not required to be calculated for the coinsurance clause, debris removal costs still affect coinsurance calculations during loss settlement.
For more information on debris removal, see Debris Removal Coverage.
Additional Living Expenses
Homeowners are entitled to additional living expenses if the premises has been made unfit to live in. Coverage is for the shortest time to repair or replace the damaged property or the time for the insured to resettle elsewhere. Coverage is for what maintains the insured to their normal standard of living.
Commercial Properties
The commercial property form provides for certain specified extensions of coverage and additional coverages in event of a covered loss that will help an insured during the loss, or to continue or restore operations following a loss. For a review of the commercial property coverages, refer to the contract analysis of the Building and Personal Property Coverage Form.
Business Income and Extra Expense
A business will lose not just the building, but income from the property being destroyed. Coverage for lost income exists under the Business Income and Extra Expense form. Business income includes net income, as well as normal operating expenses and payroll. Extra expenses cover the additional costs to keep the business running had not the loss occurred.
Conclusion
These are just some of the issues likely to occur after a catastrophe such as the wildfires in California. The loss of life and property is devastating, and cleaning up afterwards will take an extensive amount of time.
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Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.