The last thing insurers expected when wildfires raged in Southern California was to see their already battered reputations as masters of disasters going up in flames. Yet that is exactly what threatened to happen as it was revealed that many of the homes destroyed in the October catastrophe were in fact underinsured.
As of late November, a survey by the Insurance Information Network of California reported total insured losses from the fires of some $1.6 billion, with at least 22,700 claims confirmed.
If that total holds, it would make this the second-worst U.S. wildfire for carriers, topped only by the October 1991 fires in the Oakland, Calif. area, which produced losses of $1.7 billion—coming out to over $2.4 billion in 2005 dollars, according to the Insurance Information Institute’s “2007 Fact Book.”
The only other losses that were close to this year’s both hit in the fall of 2003—with the first in San Diego County producing insured losses (in 2005 dollars) of $1.125 billion, and the next in San Bernardino County, with losses just over $1 billion.
Such losses might be more frequent going forward, however, with more land being developed every year in areas prone to wildfires, observers warn.
Insurance company associations—eager to avoid the public relations backlash they are still combating after Hurricane Katrina in 2005—were quick to respond, publicizing the personal sacrifices made by industry personnel during a mid-November briefing for Congressional staffers on Capitol Hill. For example:
• Farmers Insurance, beyond quickly putting numerous agents, adjusters and a mobile claims center into the field, had its CEO visit the scene to personally inspect the damage.
• Safeco employees donated $250,000 to help the rebuilding effort.
• Fireman’s Fund offered policyholders the choice to rebuild their homes in a more environmentally friendly way.
However, insurers were put on the defensive by a Nov. 13 story in The New York Times, which reported that “as many as 40 percent of homeowners statewide lack enough insurance to cover their home-replacement costs.” Citing California Insurance Department statistics, the article added that “most [policyholders] realize the problem only when it is too late.”
The industry was taken to task by an old nemesis—the state’s former insurance commissioner, Lt. Gov. John Garamendi—who complained of a “lack of clarity” in policy language and suggested that insurers and their agents might be “giving bad information to the consumers.”
At an Oct. 24 press conference with Gov. Arnold Schwarzenegger, Mr. Garamendi warned that the state would keep its eye on the industry.
Firing back was Robert P. Hartwig, president of the Insurance Information Institute, who told the Times that any notion insurers are at fault for inadequate coverage was “a figment of John Garamendi’s political imagination.” He said there is no evidence to support the argument and “no report from any state agency that suggests that’s the case.”
He added that “the principal cause of underinsurance is the failure to report improvements to the home to the insurance company, and it’s a common problem.”
Marc Racicot, president and chief executive officer of the American Insurance Association—one of the executives who went to Washington to hail the industry’s response to the fires—said that “it is during these times of tragic loss that the value of our industry and the financial safety net we provide consumers, businesses and local economies becomes clear.”
I doubt this controversy will have anywhere near the staying power of the post-Hurricane Katrina wind vs. water claim debacle, but you never know what might happen when the persistent and politically opportunistic Mr. Garamendi gets involved. Stay tuned!
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