Unveiling the Concealed Perils in Your Wildfire Insurance Coverage and Strategies for Rectification
Take a Gander at the Wildfire Insurance Crisis
The U.S. wildfire situation is out of control. More than 28,000 wildfires have burned over a million acres in 2022, exceeding the 10-year average. This escalating threat is causing a seismic shift in the home insurance sector. Insurers are jacking up premiums, bailing on certain regions, and revising policy rules. The outcome? Thousands of homeowners and renters find themselves without adequate coverage or none at all.
Wildfire Insurance: A Growing Nightmare
Typically, standard homeowners insurance covers wildfire damage. However, finding a policy offering ample protection is getting tougher, particularly in disaster-prone areas. Even if you have coverage, sneaky pitfalls lurk within.
Stringent Rate Cap Regulations
Commissions are required to submit price hikes to regulatory bodies for approval in various states. In wildfire-prone Colorado, the government can reject rate increases if they violate the law, limiting how insurers adjust to growing threats.
"The increasing frequency and severity of wildfires force insurers to adapt, but they can't alter rates to align with actual risk," asserted Diane Delaney of the Private Risk Management Association.
Lack of Alternatives
Given these restraints and surging climate-related perils, some insurers ramp up rates or quit taking new policies in areas with high wildfire risk.
"Homeowners are left with sky-high premiums for inadequate coverage or finding themselves uninsured entirely," Delaney warned.
Struggling State Programs
California, the wildfire epicenter, has forced an increasing number of residents into state-backed FAIR Plans, which offer only basic fire coverage to those unable to secure it elsewhere. Beyond supplying sparse policies at high prices, California’s FAIR Plan is vulnerable. Its total exposure equaled $599 billion as of March 2025, up 31% since September 2024 and 259% since September 2021, raising questions about its resilience during a catastrophe.
The Peril of Policy Cancellation
Insuring against wildfire damage is no guarantee. Many insurance policies carry cancellation clauses that allow companies to scuttle coverage with adequate notice or justification. Regulatory notice periods vary by state.
For instance, California law mandates an insurer to give at least 75 days' notice if it plans not to renew a homeowner's policy, and 45 days' notice if it intends to decrease the homeowner's coverage. The state also puts a one-year moratorium on policy cancellations and non-renewals in areas under a state of emergency, like the California regions torched by wildfires earlier this year.
Insufficient Coverage
Those with wildfire insurance are often inadequately covered. Research conducted by United Policyholders revealed that two-thirds of homeowners are underinsured in case of wildfire loss. A similar study in Colorado unearthed the same results.
Hidden Perils: Sublimits and ALE Gaps
Insurers are now slapping "wildfire sublimits" onto policies, so while your homeowners insurance may cover $2 million in damages, only $500,000 in wildfire damages might be covered. Sometimes, there are no alternatives to boost this amount.
Another common shortfall surrounds additional living expense (ALE) coverage, which helps pay for hotel bills, meals, and additional costs if your home is rendered uninhabitable. Many policies limit ALE coverage to 12 months, often not enough time to rebuild. Policies may also cap ALE coverage at 20% of dwelling coverage, potentially leaving you on the hook for additional, out-of-pocket expenses.
Protect Yourself
While the insurance industry and regulators work on long-term solutions, you can take action to safeguard your home and family.
"Regulators should standardize policy language, incentivize mitigation efforts, and create reinsurance backstops or public-private partnerships to preserve the private market's viability," argued Anthony M. Lopez, founder, and CEO at Your Insurance Attorney.
Decode the Fine Print
Identify your policy's coverage limits, sublimits, cancellation policy, and ALE terms. If you reside in a wildfire-prone area, your policy may not cover wildfire damage, making it essential to read your policy attentively before signing up for coverage.
Be aware of wildfire exclusions, such as damages caused by fire retardants or homeowner negligence.
"Many people don't realize that smoke damage, power outages, or fire department access clauses can affect a claim," Lopez cautioned.
Upgrade Your Coverage Limits
Inflation is raising construction material costs, meaning your insurer might have based your policy on an outdated property valuation.
"It's vital that your dwelling coverage accurately reflects the current rebuilding costs, not what you originally paid for the property," said Kara Credle, a licensed personal lines insurance producer with Guardian Service in North Carolina.
Explore Mitigation
Some insurers offer free wildfire mitigation assistance to policyholders in perilous states like Arizona, California, Colorado, and Texas. Carriers like Chubb and Travelers, for example, collaborate with Wildfire Defense Systems, Inc., to offer personalized wildfire hazard assessments and recommendations. USAA, Liberty Mutual, and Safeco have similar programs.
"If your insurance provider offers a wildfire mitigation inspection or provides discounts for hardening your home, take advantage, as these steps boost safety and financial savings," Credle advised.
Weigh the Risks
Factor in the cost and stability of insurance and the growing wildfire risk when purchasing a home in a desired market.
"Given the high cost of insurance and escalating wildfire threats in certain areas, consumers should, of course, include these considerations in their decision-making process about where to live," said Alex Burgess, principal industry strategist at Hi Marley.
The Bottom Line
Climate change has ignited a wildfire crisis in the U.S., making insurance costs more exorbitant and policies less reliable in wildfire-prone areas. Homeowners need to be aware of this evolving landscape and adapt their policies accordingly.
In the face of escalating wildfire threats, homeowners in disaster-prone areas might struggle to find or afford comprehensive insurance coverage.
Government regulations, such as rate cap restrictions in states like Colorado, can limit insurers' ability to adjust rates in accordance with the growing risks posed by wildfires, leading to increased premiums or policy cancellations for homeowners.
The burden of rising insurance costs, insufficient coverage, and policy cancellations disproportionately affects homeowners in areas most affected by wildfires. Ensuring policyholders are well-informed about their coverage, mitigation opportunities, and the importance of updated coverage limits is crucial for navigating this challenging insurance landscape.
