Image: Burned San Diego homes
Chris Carlson  /  AP
Damage estimates for neighborhoods such as these Tuesday won’t begin to become clear until well after the fires are under control, but the losses are already being compared to the 2003 fire that swept through San Diego, destroying more than $1.1 billion in property.
By John W. Schoen Senior producer
updated 10/23/2007 4:10:41 PM ET 2007-10-23T20:10:41

It’s too soon to know just how widespread the damage will be from the wildfires raging in Southern California. But widespread drought and rapid growth in the housing market have made the area more prone to fires and increased the potential for losses. And while insurance companies appear financially well-positioned to cover losses, they’re increasingly pressing homeowners to reduce fire risk and increase coverage. 

As of Tuesday,wildfires had burned 1,200 homes and businesses and set 335,000 acres — more than 400 square miles — ablaze. The fires were fueled by brisk Santa Ana winds and prolonged drought conditions that raise the risk of additional flare-ups. So far this year, some 8.3 million acres of western lands have been destroyed by fires, approaching the record of 9.9 million acres set last year.

Damage estimates won’t begin to become clear until well after the fires are under control, but the losses are already being compared to the 2003 fire that swept through San Diego, destroying more than $1.1 billion in property. That was the second costliest firestorm on record; the worst damage was brought by a series of 1991 fires in Oakland and Alameda counties that caused an inflation-adjusted $2.5 billion in damage, according to the Insurance Information Institute.

While prolonged drought has raised the risk of fires, the spread of development into areas more vulnerable to fires in recent years has also increased the risk of damage to homes.

“The growth in the California housing market from 2003 to 2007 has been phenomenal,” said Jason Kimbrough, a spokesman for he California Department of Insurance. “That has dramatically increased the urban interface with wild lands.”

For the moment, the insurance industry appears to have plenty of financial resources to sustain the expected heavy losses. So far this year, the property casualty industry is on track for its seventh most profitable year since 1920, according to the Insurance Information Institute.

In recent years, the difference between premiums and loss claims in California left the industry with sufficient profits that homeowners insurance premiums have been rolled back by roughly 15 percent, saving California policyholders nearly $600 million in rate cuts through May, according to the state Dept. of Insurance.

Video: Firestorms’ economic impact "Even with these reduction they have plenty of (profit) margins,” said Robert Hunter, director of insurance for the Consumer Federation of America. “I don’t think these fires are going to cause them to have losses in California. I still think they’ll be profitable.”

When it comes time to file a claim, many California homeowners may also fare better than those who lost property to the San Diego wildfires of 2003, when nearly a quarter of those who filed claims complained about their coverage. Nearly half of those complaints were from homeowners who found out after they filed a claim that they were not adequately insured. Many learned the hard way that their “replacement” coverage wasn’t adequate to pay for their losses.

"People had policies, but their policies hadn’t been kept up to date," said Joe Annotti, a spokesman for the Property Casualty Insurers Association. "They had done additions to their home, they had bought lots of upgraded electronic equipment, but they never updated their policies. I think the lessons that were learned in 2003 will come to fruition, hopefully, in this fire."

In other cases, homeowners may have ended up without enough coverage when the value of a home was estimated with computerized forms that may have contained incorrect information rather than an on-site inspection by an underwriter.

In part as a result of those 2003 losses, some insurance companies began pressing homeowners to take steps to minimize fire risk, including clearing brush near their homes and  taking other precautions.

“There has been a more concerted effort — be it through inspections or re-inspections, or homeowner awareness, or increased public affairs efforts from fire departments — to get people more aware of that they can do,” said Kimbrough.

Some insurance companies have gone further, requiring homeowners to install a new fire retardant roof or make other improvements with upgraded building materials. That’s brought complaints from consumer groups that the industry has been too heavy handed in demanding costly improvements before they’ll renew an existing homeowners policy.

But it’s also renewed debate about the question of who should bear the cost of insuring against risk in areas that are prone to catastrophic losses from fire or flood. Government-sponsored flood insurance provides coverage in areas that private insurance companies won’t insure; it also uses tax dollars to cover newer homes built in coastal areas that have long been prone to flooding.

Rather than raise insurance rates for people who live in risky areas, part of the solution may be to reduce overall risk by creating tougher regulations on where building can take place. Heavy losses in Gulf coast states have been due in part to overbuilding and the availability of insurance in areas prone to flooding, according to  Amy Bach, Executive Director of United Policyholders, a insurance consumer group.

“We have to do a better job with mitigation so we don't get into these situations,” she said.

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