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By Leslie Kaufman
A year after the
Los Angeles wildfires, many survivors face the
same problem: Their insurance policies aren’t
paying out enough to cover the cost of
rebuilding.
It’s a tragic
predicament. And it will happen again when the
next disaster hits.
Since the 1990s,
American homes have been systematically
underinsured in the event that they are
completely destroyed. Study after study shows
that, counter to the public’s understanding,
many home insurance policies are not required to
cover total replacement of homes.
The trend, though
decades old, has been somewhat hidden. But
climate-driven events that cause massive
destruction, especially wildfires, are revealing
just how pervasive and severe the problem has
become.
A home is
engulfed in flames during last year’s Eaton
Fire. Photographer: JOSH EDELSON/AFP
“Climate change did
not cause underinsurance, but it does expose it
and amplify it,” said Kenneth Klein, a professor
at the California Western School of Law
specializing in the topic.
Global warming is
creating a hotter and drier world. Combined with
more construction in areas with lots of
flammable vegetation — the wildland-urban
interface — it’s led to a rise in damaging fires
in the US. Researchers at the University of
Colorado Boulder in 2023 found that
wildfires in Western states destroyed 243% more
buildings in the decade between 2010 and 2020
than in the previous decade. The fires in LA
claimed in excess of 15,000 structures.
United
Policyholders, an advocacy group, was formed in
part to help homeowners not being adequately
covered for rebuilding costs after the Oakland
firestorm of 1991. The group began sending
surveys to wildfire survivors in 2007, and
since then, an average of two-thirds of
respondents said they had found themselves
underinsured, by an average amount of $200,000
or more.
Acute demand for
labor and materials can send prices soaring
after a disaster, and it’s hard for the
insurance industry to know before an event
occurs how much costs will go up.
That wouldn’t have
been a problem before the 1990s, according
to Klein, because until then most US home
insurance policies included a guaranteed
clause to replace no matter the cost. But as
American houses got bigger and more expensive,
the guarantee lost ground to
replacement-cost-value coverage, which sets an
upper limit on how much the insurance company
will pay out.
Most major insurers
use third-party estimator tools to determine the
upper limit. Consumer advocates and plaintiffs’
attorneys have
charged that such tools routinely
underestimate rebuilding costs, which in turn
helps insurers keep premiums low and sales
strong on the front end.
“If any state
legislature were to pass a law” that made it the
insurer’s responsibility to fully restore a
fire-damaged home, said United Policyholders
Executive Director Amy Bach, “the problem would
be solved because to avoid litigation liability,
insurers would figure out how to get it right.”
A disaster-recovery
reform bill recently introduced in the
California state senate would require insurance
companies to at least offer guaranteed
replacement cost policies.
Colorado Insurance
Commissioner Michael Conway said his state
considered a similar measure but decided “it
would destroy our market.” Most big insurers
don’t even write guaranteed replacement cost
policies anymore, he said, and aren’t interested
in doing so, at least for Colorado customers.
Conway has other
ideas for how to cut rates, for example, by
getting insurance companies to credit homeowners
for steps taken to reduce their risk of
wildfire. In the meantime, he worries, “the next
big hailstorm, we are going to see a wave of
underinsurance there, too.”
Read
the full story, including more about the
risk tools insurers use.
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