Insights into Business and Personal Insurance for Wildfire Risks

Impact on Insurance

Let’s take a look at how the California wildfires will impact insurance moving forward:

Insurance rates in California are expected to rise significantly following the recent wildfires as insurers face mounting losses in an already strained insurance market. The recent wildfires are among the costliest in state history potentially exceeding $20 billion.

These California wildfires may also indirectly affect the rates in other states through reinsurance costs, risk modeling adjustments, and a spillover affect where carriers try to maintain profitability with rate increases across its book. Property owners in wildfire-prone areas will likely see higher deductibles and more limited coverage going forward. When policies are renewed following a disaster such as a wildfire, insureds should review the documents carefully to understand their coverages and any limitations of coverage that may apply.

Understanding How Insurance Policies Work

A detailed analysis of previous claims indicates the importance of understanding the extent of coverage a homeowner and business owner purchase. It’s critical to understand how a policy’s wording and the property’s valuation will impact the outcome of a claim

Business Interruption and the Importance of Coverage Forms & Conditions

For business owners, one of the biggest concerns following a wildfire is whether their Business Interruption (BI) insurance will cover loss of income. This depends on how the policy form is written. Some policies state that BI is payable only if there is direct property damage, while others may provide coverage for loss of income even if there was no fire damage to the insured property. If, for example, neighboring businesses were destroyed which caused the insured’s business to close, a BI policy could be triggered if Contingent or Dependent Business Interruption coverage is included. It’s also important to understand there is typically a time element involved indicating how long coverage will be applicable.

Similarly, Extra Expense coverage, which helps businesses relocate and resume operations, is crucial. If a company has to set up operations in a new location while rebuilding, this coverage can pay for the additional expenses.

Total Insurable Value (TIV) and the Coinsurance Clause

TIV calculations are critical for commercial property owners, including accounting for betterments and improvements. Businesses with inaccurate TIV calculations may lack adequate coverage after property losses and could  pay out-of-pocket costs to recover. Property undervaluation might also result in coinsurance penalties. Many Commercial Property policies include coinsurance clauses, requiring a policyholder to pay a penalty—usually a lower payout of a claim—if their coverage limit is less than a predetermined percentage (for example, 80%) of their property valued at the time of the loss.

Homeowners should also understand if their dwelling is adequately covered and whether a coinsurance penalty is included in the policy. Policies that include agreed value coverage remove this risk by ensuring a predetermined payout amount rather than relying on fluctuating market conditions. It is a good practice to review the property values annually since property values can increase significantly in certain areas.

Ordinance or Law Coverage

Including Ordinance or Law coverage in a Commercial Property policy and Homeowners insurance is critical to pay additional costs to bring a structure up to the current building code after a loss. This covers the extra expenses (up to a certain amount) needed to comply with new regulations when rebuilding or repairing a property following damage. 

Loss of Use/Additional Living Expenses for Homeowners

Loss of Use or Additional Living Expenses can impact the road to recovery for a homeowner after a wildfire or other catastrophe. Typically a percentage of the dwelling limit on a Homeowners policy, Loss of Use coverage will pay for temporary housing (for example, renting a house, apartment, or condo, staying at a hotel), meals, and other living expenses when a home is uninhabitable due to a covered loss. These expenses are capped and may be limited to a specific time period (depending on the insurer); therefore, policyholders should confirm how long their Loss of Use coverage will last.

In addition, it’s important to note that homeowners covered by the California FAIR Plan, a last-resort insurance option, provides only basic Fire coverage without loss-of-use protection. Additional expenses such as temporary housing will be paid out of pocket.

Coverage for Collectibles, Fine Art, and Jewelry

Homeowners with valuable items should make sure those are covered separately. A Homeowners policy includes sublimits on high-value personal property such as fine art, musical instruments, collectibles, and jewelry. These sublimits can range from $1,000 to $5,000, minus the policy’s deductible. Schedule these items with their values on a Personal Articles Floater.