Getting Burned on Insurance

What’s shaping up as the worst wildfire season in years comes as property insurers, already stung by higher claims and lower investment earnings, are raising premiums and restricting policies.

With that as a backdrop and construction costs and home prices up sharply in recent years, experts urge homeowners to check their policies to be sure they have adequate coverage. Many never do so, either to keep from pushing their premiums still higher or simply through neglect.

“About two-thirds of policyholders are underinsured,” said Robert P. Hartwig, chief economist for the Insurance Information Institute, an industry-funded organization. “They bought a house five or 10 years ago and never updated their coverage, while the cost to rebuild goes up 25%, 30% or even 50%.”

Insurers and consumer groups advise homeowners to review fire coverage terms carefully, noting that today’s policies are far less likely than in the past to allow large cost overruns or pay for unusual materials and details.

Insurers “have been whittling away at coverage for years. And the courts have largely allowed them to deny claims based on the new exclusions,” said Amy Bach of United Policyholders, a group that worked closely with victims of the devastating 1991 Oakland Hills fire.

Before summer has even officially begun, insurers already have flown in emergency teams to help fire victims in Colorado and temporarily have stopped writing new policies and upgrading old ones near raging wildfires there.

By Tuesday, more than 156,000 acres had burned in Colorado. According to a spokeswoman for state regulators there, uninsured homeowners were besieging insurance agents near the fires, but new coverage was unavailable.

“If you wait until you’re sick, you’re not going to get insurance,” said Gary Litchenberg, a Farmers Insurance Group agent in Woodland Park, 65 miles south of Denver.

As disasters go, fire is a lesser threat to insurers than hurricanes and earthquakes. Since 1981, fire claims constituted only 2.9% of what the industry calls “catastrophic losses,” single events with insured losses topping $25 million. Indeed, the only fire among the top 10 catastrophes was the Oakland Hills conflagration, which caused $1.7 billion in insured claims.

Despite recent complaints of tough financial times, insurers say they should be able to pay all claims, even if the fire season is as severe as feared.

“We’re confident and secure in our ability to handle what comes down the pike,” said Bill Sirola of State Farm Insurance Cos. His company recently stopped taking on new homeowner business in California, citing rising claims, shrinking reserves and downgrades to its financial-strength ratings.

After a winter of scant rain and snow, a terrible fire season appears likely across much of the nation. According to the National Interagency Fire Center in Boise, Idaho, the 1.5 million acres burned this year nearly double the 10-year average for this time of year.

In California, three firefighters died in an air tanker crash near Yosemite National Park on Monday, and hundreds of people fled as another fire leaped across Interstate 15 north of San Bernardino.

Tests on brush reveal “material down there in Southern California that is drier than kiln-dried lumber,” said Karen Terrill, spokeswoman for the state Department of Forestry and Fire Protection. She cited “unprecedented levels of drought” in San Diego, Riverside and San Bernardino counties.

That recalls the fall of 1993, when wildfires in the hills near Altadena, Malibu and Laguna Beach destroyed hundreds of homes. One positive note from those disasters was how quickly insurers brought in emergency teams and began writing checks--policies brought on by what Hartwig of the Insurance Information Institute acknowledged was a “black eye” two years earlier in Oakland.

That fire, which burned 2,900 structures, also was a wake-up call to homeowners because so many were badly underinsured. After numerous policyholders complained they hadn’t been advised of coverage gaps and were badly treated after the blaze, most insurers decided to pay claims in full despite what the policies said.

The experience taught insurers to routinely offer to review policies and provide plain-language explanations to customers of what is and isn’t covered. That has helped educate policyholders who pay attention, but also makes it tough for victims to complain after the fact that they weren’t informed.

Since Oakland, Hartwig said, insurers have been more aggressive about requiring homeowners to have fire-resistant roofs and siding and to clear nearby brush.

But those safety measures have been offset greatly as population growth in the western United States puts more houses near brush-covered hills and other danger zones, he said.

To limit their exposure, most insurers also have done away with “guaranteed replacement” clauses, instead capping payments at 20% above the stated value of property, he said. And they have begun to rate homes individually for ease of access by firefighters and proximity to hills and fire fuel.

“If you live on a dead-end street with a steep slope and you have heavy brush all around it, you’re going to pay a lot more” for insurance, Hartwig said. “You may not get it at all unless you get the brush cleared first.”

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Up in Smoke

Californians are bracing for a busy wildfire season. Here are some of the state’s most destructive wildfires since 1980.

Location of Structures fire/cause Date destroyed

Oakland-Berkeley/rekindle October 1991 2,900 Shasta County/undetermined October 1999 954 Santa Barbara County/arson June 1990 641 Shasta County/arson August 1992 636 Laguna/arson October 1993 441 San Bernardino County/arson November 1980 325 Topanga-Malibu/arson November 1993 323

Source: California Department of Forestry and Fire Prevention