Wildfires Make for Difficult Insurance Market

More businesses in wildfire-prone areas are facing a difficult commercial property insurance market as insurers reduce their exposure and some have left the market altogether. Many businesses in areas that have already been ravaged by fires in the past, or those located in areas that are near forests and large grassy areas, are seeing their premiums increase – sometimes substantially by 300% or 400%. Also, more businesses are finding few insurers that are willing to cover their properties. According to a new report by insurance rating firm AM Best, California wildfires have caused over $4 billion in commercial property losses for insurers in three of the past four years. It’s expected that 2021 fire losses could be even greater than those of the prior four years.

The Fallout

• Some insurers have stopped writing property insurance in high-risk areas.
• Most insurers are increasing their rates substantially in high-risk areas.
• Insurers are requiring policyholders to have mitigation measures like defensible space (see below).
• Many policies have worse terms. One winery owner interviewed by the Los Angeles Times said that his premium was typically $200,000 with a $25,000 deductible. His new policy costs $800,000 and includes a $500,000 deductible, and would only cover 20% of the value of his buildings.

The New Playbook

Many insurers are applying three metrics in evaluating exposure to fire:

Brush mapping – This is a map of the tinder and brush, nearby trees and other items that could contribute to your building(s) catching fire.

Wildland-urban interface – The closer that a building is to nature, the more at risk it is. A wildland-urban interface is defined by the Forest Services as a place where “humans and their development meet or intermix with wildland fuel.”

Concentration of properties an insurer covers in your area – If your carrier has a high concentration of policies for other properties in your area, they may opt to non-renew policies in order to reduce their exposure.

Protecting Your Commercial Property

• Zone 1 (0-5 feet): Concrete, gravel mulch and low-growing plants or lawns are good choices for this zone. Avoid combustible materials. 
• Zone 2 (5-30 feet): Vegetation island. Prune low tree branches. Remove shrubs.
• Zone 3 (30-100 feet): Thin out vegetation between trees. Don’t let tree canopies touch

Coverage Options

If all insurers have rejected a property, we have two options:

The non-admitted market – These insurers, which include Lloyd’s of London, are often willing to write buildings in higher-risk areas, but they too have increased their underwriting criteria.

The California FAIR Plan – If we cannot find an insurer in the non-admitted market, the last choice is the FAIR Plan, which is the market of last resort for property owners. Policies cover losses from fire, lightning and explosion only. Also, policies are limited in what they will pay out, so if you have millions of dollars tied up in equipment and/ or inventory, the policy may not be enough to cover all the damage you incur from a wildfire. The maximum limit for commercial properties is $3 million for structures and $1.5 million for all other coverages, for a combined $4.5 million limit for all commercial properties at one location. But there are some exceptions. But, in October, Insurance Commissioner Ricardo Lara ordered the FAIR Plan to increase coverage limits for commercial property policies to $5.6 million for the building and $2.8 million for all other coverages. These new limits will take effect the first quarter of 2022.

Your Options

We have the ability to layer excess property coverage in addition to the FAIR plan to increase the overall coverage limit. Also, for perils that are not covered by the FAIR plan we can offer a “differences in conditions” policy. A DIC policy combined with the FAIR Plan can provide similar coverage to that of a standard commercial policy.