Since the catastrophic firestorms of 2003, insurance companies covering homeowners in areas prone to wildfires have redoubled efforts to identify areas of highest risk and provide adequate coverage at competitive prices. To do so, they’re increasingly relying on advanced technology, including the latest in satellite mapping and sophisticated computer modeling.
But California's top insurance regulator worries that reliance on these tools may miss important conditions that simply don't show up in computer analysis, and, — in some cases — leave homeowners without adequate coverage.
Last year’s fires provided a wake-up call to homeowners in fire prone areas — and to insurers and state regulators. Total losses from from those fires exceeded $2 billion. Major fires in California's San Diego and San Bernardino counties alone killed 24 people, destroyed 3,700 homes and burned 750,000 acres.
"While efforts to protect property are on the increase, the indications are this year could shape up to be a very costly one, since there has been little change in the conditions that were seen in 2003," said Loretta Worters, vice president of communications at the Insurance Information Institute, a trade group.
Too little insurance
The California fires exposed a big problem: Many of the homes that were razed were not adequately insured. One of those was Don Halte's, whose home in Crest, Calif., a mountain community east of San Diego, was destroyed last October. He said the replacement cost listed on his Farmers Insurance policy was $200,000 less than the actual cost of rebuilding his house.
“I thought replacement meant replacement,” he told a recent hearing outside San Diego held by California insurance officials. “A gentleman here has a dictionary. Maybe I should look at it.”
Halte is one dozens of homeowners who have filed complaints with the California Insurance Commission, saying they thought their policies would cover the cost of replacing their homes. And many more homeowners could be in for a similar surprise, according to California Insurance Commissioner John Garamendi.
“Ninety percent of Californians are probably underinsured,” he said.
Garamendi says part of the problem is that insurance agents in a highly competitive market like California are under pressure to offer homeowners the best deal — which sometimes means skimping on coverage.
'A very big mistake'
But he also says increased reliance on technology has added to the problem — including computerized forms used to estimate replacement value that are not always fully filled out. In some cases, incomplete information is provided by a third party such as a real estate agent. And some insurers are skimping on home inspections, he said.
“Insurance companies, in an effort to reduce its costs, are using technology to the exclusion of the personal knowledge and review of an underwriter — to go and see the property,” Garamendi said. “And they’re making a very big mistake that may cost them dearly in the future, both in terms of losing a good customer and in terms of underinsuring.”
As housing development pushes deeper into the woods — and into the remote terrain where the risk of wildfires is greatest — insurers have begun relying more heavily on various computerized mapping technologies, known generally as geographic information systems, or GIS.
“There are a lot of private companies out there,” said Stephen Niccolai, a loss mitigation coordinator at State Farm. “And they’re a lot of GIS folks within the forest services, the BLM (Bureau of Land Management), U.S. forest services, individual state forest services, counties, and municipalities. And a lot of them are doing their own assessments.”
How the technology works
One popular product, known as , determines fire risk using several key factors, including the type and amount of combustible fuel near a , the slope of the terrain, and available road access for firefighters. In a study of the 2003 California wildfires, 97.5 percent of the areas that burned was in the highest risk areas identified by the system, according to ISO, the insurance information and consulting firm that sells FireLine to insurers.
“Knowledge is there on the cheap,” said Bill Raichle, head of Risk Decision Information at ISO and FireLine's product manager. “It used to cost a lot of money to find out who was exposed to a problem. You used to have a truthful agent who wasn’t concerned about losing business or have someone to go drive out there and look at it.”
Insurers insist that technology is only a starting point, and that inspections are still required to determine whether specific conditions, like uncleared brush or wood roofs pose a serious fire risk.
“Maybe at some point we’ll have some standard measurements that would allow us to pick and choose effectively between customers,” said Brian Guimond, a senior product manager at Safeco, the Seattle-based insurer. “But right now we just don’t have that.”
The longer-term solution, say insurance experts, is to cut the risk of wildfire damage by regulating development of new homes in high-risk areas. One important component is the enactment of building codes that require fireproof roofing materials, or closed eaves to prevent sparks from entering attics. Mandatory clearance of brush around homes has also been effective in saving houses from fire.
Other measures include laying out new developments with cul-de-sac roads that surround a cluster of homes, providing a fire break. Some areas are requiring developers to build cisterns to provide adequate water supplies to fight large-scale fires.
Companies could withhold coverage
At least one insurance company is threatening to withhold coverage unless homeowners minimize risk by taking steps like cutting brush around their houses. Starting last June, State Farm gave customers in high-risk areas up to 2 1/2 years to make recommended changes or risk losing coverage.
“Our hope is that we don’t lose any customers over this,” said Niccolai. “We know some people are going to be angry and say, ‘Hey, my grandfather planted that tree 75 years ago. I’m not cutting it down.’ Well, you may not have to.”
But for some homeowners — those without enough of what fire officials call “defensible space” — there may be no way to eliminate risk.
“The wildfires of 2003 were so powerful that homeowners didn’t own enough land — even if they cleared the land they were still exposed,” said Raichle.
So far, no homeowners have been denied coverage. In California, a so-called insurance pool has been set up to cover homeowners in areas that are considered at highest risk. Much like assigned risk automobile insurance for drivers with the riskiest driving records, the Fair Plan is backed by all insurers that write policies in the state.