By Cat Woods -
Thousands of Los Angeles homes, businesses and landmark structures have been destroyed in the merciless wildfires that have raged - and continue to rage - across California. According to an ABC report, analysts have estimated the insurance cost arising from the Los Angeles fires to be more than $US20 billion ($AU32 billion).
To further add to the trauma facing Californian residents, many remain uninsured, especially those in the affluent Pacific Palisades neighbourhood. Estimates have suggested that approximately 10 per cent of the 1.6 million homes in Los Angeles are uninsured, most likely owing to private insurers opting not to cover catastrophes in California. There is an avenue for insurance through FAIR (California’s Fair Access to Insurance Requirements Plan), which caps home damages at $US3 million. In the Pacific Palisades, homes are often worth $US3.4 million.
The withdrawal of private insurers has been multifaceted in rationale. Not only has the severity and frequency of weather conditions causing natural disasters increased, insurers face a hostile regulatory environment. The drawn-out process of raising premiums for California policyholders may take anywhere from months to years, and in some cases, rate increases are denied.
Announced in March 2024, California introduced a risk pricing mechanism process akin to the Australian process whereby catastrophe models are relied upon to determine rates as part of the California Sustainable Insurance Strategy.
Kirsty Evans is the Director of Cheney Suthers Lawyers and The Law Society of NSW’s 2024 President’s Medal winner. Her work has been elemental in calling insurance companies to account after floods in Orange in 2022. She says, “The catastrophe model considers a range of historical, current and forecasted data. If an insured is seeking to insure their family home, for example for fire, the insurer will carry out catastrophe modelling to determine the risk of a fire event occurring in the area.”
“This includes the current age, condition and structure of a property or building, the demographic of the area, as well as modelled climate events, exposure and seasonal changes, to name a few things. Insurers use computer modelling to estimate likely losses in the event of a catastrophe. From this, insurers then set the risk profile and premium for the policy.”
Many private insurers had already departed the market. However, Allstate was one of the first to hike their premium by 34 per cent following reforms, affecting more than 350,000 home-owners across California. As a bandaid measure, insurance commissioner Ricardo Lara issued a one-year moratorium on insurance non-renewals and cancellations and further notified insurance companies covering properties near wildfires to cease any pending non-renewals or cancellations for six months in those areas. This includes non-renewals issued up to 90 days prior to 7 January, but taking effect after the start of the wildfires. The Commissioner’s Bulletin shields those within the perimeters or adjoining ZIP Codes of the Palisades and Eaton fires in Los Angeles County for one year from the Governor’s 7 January emergency declaration regardless of whether they suffered a loss.
On 13 January, Lara issued an emergency declaration, requiring insurance companies, qualified licensed adjusters, and qualified managers authorised to do business in California, and all nonlicensed claims adjusters must be overseen by a California qualified licensed adjuster, qualified manager, or insurer and properly trained on the California Unfair Practices Act, Fair Claims Settlement Practices Regulations, and all laws relating to property and casualty insurance claims handling.
Global reinsurance market under pressure
According to the Insurance Council of Australia (ICA), the global annual insured losses from natural catastrophes totalled more than US$100 billion for six out of the last seven years.
Alix Pearce, General Manager of Climate, Social Policy and International Engagement at the Insurance Council of Australia, tells LSJ, “The California wildfires are a devastating reminder of the urgent need to better protect lives, livelihoods and homes from the increasing risks of worsening extreme weather events, fueled by a changing climate. It is still too early to predict whether there will be cost implications for local insurance markets. As an industry that prices risk, we continue to advocate for programs that reduce risk as the most effective and sustainable way to reduce rising pressure on insurance premiums.”
Evans explains, “Global reinsurance is where insurers share their risk profile with other insurers. Essentially, it is insurance for insurers. Insurers approach a reinsurer to obtain a proportional policy or limit on insurance. A proportional policy is where the reinsured and the reinsurer share in proportions of the payment of a claim (for example 50/50). The other type of policy is where a reinsured agrees to be responsible for a claim(s) up to specified amount and the reinsurer steps in thereafter.”
She says climate and catastrophic events are some of the main events that insurers obtain global reinsurance for due to the large volume and scale of claims that may be made.
“What this means for Australia is that where there is a payout by the global reinsurer for a large-scale event, the reinsurer will move to increase its premiums to recoup these costs for all reinsureds. Thereby passing these costs on to other reinsureds worldwide, which then filter down to policy holders in Australia,” she says.
Australian insurance owners need to read the fine print
Evans explains, “Insurance companies may reject fire damage claims on several grounds. This includes non-disclosure or misrepresentation which occurs when a policyholder fails to provide important information or misrepresents facts at the time of obtaining the policy, such as omitting previous claims history, underestimating property value, or not reporting high risk factors like contamination [or] non-compliant structures. Policy exclusions are another common reason, as insurance policies often limit coverage for certain fire risks, such as damage to outdoor structures or properties uninhabited for a period of time. Claims may also be denied if the policyholder fails to meet policy obligations, such as paying premiums on time, maintaining the property, or taking steps to mitigate risks, like clearing excessive vegetation.
“Additionally, claims for items not explicitly covered under the policy, such as expensive jewellery or artwork not listed as specified items, are often rejected. Fraudulent claims, including exaggerating the value of damaged property or claiming for pre-existing damage, are grounds for denial.”
The legal process for challenging claim rejections begins with lodging a formal complaint with the insurer’s internal dispute resolution (IDR) team, which is required to respond within 30 days. If the dispute is not resolved through IDR, the policyholder can escalate the matter to the Australian Financial Complaints Authority (AFCA).
Evans says, “AFCA aims to resolve disputes within 60 to 90 days, although in my experience, this has taken much longer. If AFCA cannot resolve the issue, policyholders can pursue litigation in the courts which at a time when a policy holder has lost their home or business, is often untenable.”
Rebuilding with sustainability and safety as priorities
California Governor Gavin Newsom has said he is overriding the environmental regulations that would have delayed rebuilding to ensure very fast rebuilding. Without comprehensive environmental risk management protocols taking place, nor the requirement to meet certain standards of sustainability and disaster-aversion, Evans says, “there is a very real risk” that insurance companies will avoid this market.
“While businesses and residents will want to rebuild for the community, Newsom must balance this with the ethics of forcing them to reopen in the same location, in climate-exposed locations without environmental considerations and investment in mitigation strategies,” she says.
Evans continues, “If we consider this in the context of Australian law, the committee for the Parliamentary Inquiry into insurers’ responses to the 2022 major flood claims recommended that building codes and planning rules be strengthened to future proof and improve the resilience of communities and households. This is in stark contrast to the position of Newsom.
“Without environmental risk management and adherence to disaster-aversion protocols, insurers may model significantly higher risks associated with properties rebuilt in catastrophe prone areas. Homes that are reconstructed without incorporating sustainability or mitigation measures, such as fire-resistant materials, proper zoning, or defensible space, are inherently more vulnerable to future disasters. This heightened vulnerability could result in substantially higher claims costs for insurers.”
Ultimately, a considered, careful rebuilding strategy is good for insurers and good for residents, Evans points out.
“Insurers base their premiums and coverage decisions on catastrophe modelled calculations of risk. If the rebuilding process neglects appropriate standards, leading to increased risks of property damage or loss, insurers may find themselves facing unsustainable financial exposure. As a result, they may respond by raising premiums, limiting coverage options, or even withdrawing entirely from high risk markets where the risk outweighs the potential returns.”
Australian insurers face reforms
Evans tells LSJ, “In Australia, insurers are largely self-regulated. Insurers may elect to sign up to the General Insurance Code of Practice (the Code) however the code is not mandatory.
Without legislative change to enforce the standards set by the Code, insurers will still have room to dodge their responsibilities, leaving vulnerable customers at risk. We’ve seen record breaches of the voluntary Code by insurers in Australia since 2022, yet the government continues to rely on insurers to self-regulate—a system that has failed us time and time again.”
She concludes, “What we need is mandatory compliance through amendments to the Insurance Contracts Act, giving consumers the power to hold insurers accountable when they breach the Code.”
“One of the recommendations by the committee following the recent Parliamentary Inquiry, was the power for the Australia Securities Investment Commission (ASIC) to compile a report of complaints made by policy holders against insurers for breaching the Code and for ASIC to then name and shame insurers quarterly. This might create some public pressure, but without meaningful penalties, it won’t be enough. The government must give these reforms teeth, or we’ll continue seeing the same failures the next time disaster strikes in Australia.”
