California Wildfires May Take Longer to Settle

Industry analysts are predicting insured losses from the Freeway Complex, Sayre and Tea Fires that burned Southern California in mid-November will range from $600 million to $800 million, as of estimates gathered in early December. Comparatively, those losses are relatively minimal; insured losses from the 2007 Southern California wildfires amounted to approximately $2.36 billion. However, in some cases, the November 2008 fires may create costlier claims that take longer to settle.

According to the California Department of Forestry and Fire Protection, more than 43,000 acres burned and close to 1,000 properties were destroyed in Los Angeles, Orange, Riverside and Santa Barbara counties. Given the large geographic exposure, heavily populated areas and extent of the fires, First American found the damage could have been much worse because approximately 10,431 commercial, public and residential properties were located within the combined perimeter of the three wildfires. The company estimated residential property loss would likely reach more than $737 million, and it noted the number could exceed $1 billion when contents and additional living expenses are added to the losses.

AIR Worldwide expects insured losses to be in the $600 million to $800 million range. “The number of claims is likely to be significantly larger than the number of destroyed structures,” said Dr. Tomas Girnius, senior research scientist for the firm.

The Freeway Complex Fire, the largest wildfire in terms of area that affected Orange, Riverside and San Bernardino counties, targeted an estimated 8,430 properties with residential properties valued at $4.7 billion. In this area, the average price per house is estimated at $710,000 with the median estimated at $634,000. The actual residential loss for this area is estimated by First American to be approximately $224 million with 314 homes impacted.

The Sayre Fire that struck Los Angeles county had an estimated residential loss of more than $283 million with approximately 500 homes, mostly mobile homes, affected. First American estimated 1,303 residential properties valued at $452 million were exposed to the fire. In this area, the average price per house is estimated at $566,000 with the median estimated at $537,000.

With only 695 properties exposed, the Tea Fire in the Montecito and Santa Barbara areas was actually the smallest fire but posed the highest level of risk with estimates of exposure reaching $632 million for residential properties. First American estimated the total residential loss in this area will reach approximately $280 million or more with 200 homes impacted. In this area, the average price per house is $1.4 million with the median estimated at $1.3 million.

High-Value Homes

Don Parkes, senior director of business solutions for First American, said it wouldn’t be unreasonable to see higher claims values coming out of Tea Fire properties. The Montecito area has one of the most exclusive ZIP codes in the country, some owned by Hollywood stars like Oprah Winfrey, Michael Douglas and Rob Lowe. Actor Christopher Lloyd lost his $11 million home, The Associated Press reported.

“If you look at the Tea Fire, the average home value is close to $1.5 million, and that’s only half of the exposure,” Parkes said. “Typically a homeowners policy’s contents coverage is 50 percent of the home value, and additional living expenses are about 20 percent. I imagine that for folks with a median home value of $1.5 million, they may have some coverage above and beyond the standard contents coverage. Some may have fine arts coverage, a separate personal property endorsement that would cover jewelry, and so forth. Speaking from a conservative standpoint, it’s probably double the value of the home when you look at the true exposure figure.”

However, AIG, Chubb and Fireman’s Fund said they were able to prevent some of the losses in the Tea Fire area — as well as in the Freeway Complex and Sayre fire areas — thanks to their risk prevention measures.

“We work very closely with customers in certain areas to mitigate wildfire risks,” said Atle Erlingsson, spokesman for Fireman’s Fund. He said the company sends out risk management teams pre-fire to evaluate customers’ properties and provide times on protecting homes from fires. “This has tended to work very well,” he said. “We’ve had a lot of reports of customers taking on recommendations and saving their homes.”

AIG and Chubb said they take risk mitigation steps as well, helping customers evaluate properties before fires hit. Additionally, AIG said for its Private Client Group, whose homes are worth $1 million or more or who pay at least $10,000 a year in premiums, the company offers additional protection during wildfires.

“We monitor fires and in cases where we see insureds’ houses in peril, we will spray properties with fire retardant as a preventive measure for high-net worth insureds,” said Peter Tulupman, AIG spokesman. He said the service supplements, but doesn’t replace, the work of public fire agencies.

Chubb, too, sends in its appraisal unit to help customers assess and mitigate their fire risks, spokesman Mark Schussel said. And, any Chubb policyholder can enroll in a free wildfire defense service, which monitors wildfire activity and sends in certified firefighters and equipment if a property is in danger. For example, the fire protection teams can move exterior items such as patio furniture that might catch on fire, set up a temporary perimeter sprinkler system, or spray a fire-retardant gel if the risk warrants it, Schussel said.

Because of such fire protection and risk mitigation efforts, the insurers said they don’t expect the recent wildfires to affect their future ability to offer coverage. As with most carriers, risks are individually written on a number of factors, so their underwriting processes and ability to write risks will largely remain the same.

“The wildfires do not affect our underwriting requirements, nor do they impact our capacity,” AIG’s Tulupman said.

“Chubb’s general philosophy — and this is fairly universal with most carriers — is to look at each home individually and assess the risk related to that individual, and make recommendations in helping to mitigate the risks individually,” Schussel said.

“Our appetite for risk won’t change in the foreseeable future,” Fireman’s Fund’s Erlingsson said.

Changes Ahead

What has changed, however, is the claims process and homeowners’ ability to rebuild following the wildfires.

In some areas, homeowners are not being allowed to rebuild because properties are on landslide areas. Santa Barbara Mayor Marty Blum indicated that a municipal code implemented in 1984 prohibits reconstruction in some areas because of the unstable hillside.

After seeing the Sayre Fire affect many mobile homes, Gov. Arnold Schwarzenegger wants to pursue new building codes for mobile homes. “We should start thinking about building … mobile homes with the same fire retardant materials that we now build in those fire-prone areas when we build homes,” he said.

Additionally, claims are generally taking longer to close because of additional living expense (ALE) legislation that was implemented in 2004, according to Candysse Miller, executive director of the Insurance Information Network of California. The law protects victims of a natural disaster by granting them an additional 24 months of living expense coverage following a declared state of emergency.

“Following the 2003 fires, people uniformly rebuilt their homes,” she said. “But following the San Diego Witch Fire in 2007, a lot of people took advantage of the two-year ALE rule and are not settling quickly. Some are sitting on the ALE or buying foreclosed homes because the real estate market is devalued. In San Diego in some areas, what used to be a $4 million home you can now get for $600,000 today. … One of the unintended consequences of the law is that it makes it mandatory to give customers more time to settle claims, and claims are not necessarily closed or settled as rapidly as before.”

Miller said given the current real estate market, she expected claims in 2008 to be similar to 2007, in that they will take longer to close.

Every natural disaster provides lessons for the future. Industry experts say the November 2008 fires will likely encourage people to evaluate their insurance coverages.

For people with high-valued homes, they “tend to be insured with more generous policy terms. Terms are more generous but the policies are more expensive, which influences and inflates the ultimate claims value that comes out of these events,” First American’s Parke said. For mobile homes on the other hand, 50 percent contents limit might not be necessary.

The key thing to keep in mind, Parke and other insurance carriers said, is coverage for homes in wildfire-prone areas will be structured to best fit the property owners’ needs.

Reports from AP contributed to this article.