Remains of the Sodhi’s Bell Canyon home / Courtesy Photo

California homeowners find themselves in a quandary. The homeowners' insurance companies have informed them that their policies will not cover fires because they live in a high-risk area. 

While the cost of insurance is exorbitant, experts at the Ethnic Media Services briefing on June 6 said that in their experience insurance is absolutely fundamental to long term economic solvency. 

Homeowners are feeling the heat. The price of having insurance and of not having it, is a high one. 

The importance of insurance

To document the important role that insurance plays in recovery, Carol Kousky, associate vice president for economics and policy at the Environmental Defense Fund, and a colleague at Freddie Mac Insurance undertook a survey of survivors of one of four US counties that had experienced hurricanes. 

They looked at their financial recovery over time. Those with insurance were more likely to rebuild, rebuild faster, and have higher self-reports of recovery said Kousky. 

“We have also seen in our research that more people in a community with disaster insurance create positive economic spillovers. So for example, as more people have flood insurance after a big flood, you see more visitations to local businesses. So it helps jump start the entire economy,” she said at the briefing.

Insurance markets have a snowball effect on financial markets

There is also the danger, Kousky said, of the mortgage market unraveling like it did in  the mortgage crisis of 2008. “We see in research that higher insurance costs get capitalized into home values.” In order to get a mortgage, homeowners insurance is essential. Mortgage costs go up which can make some locations unaffordable. Lack of insurance can set back rebuilding and recovery as well. 

Homeowners insurance is available but at a high cost 

Californians are scrambling for ways to affordably insure their homes while the insurers like State Farm say they are exiting the state given climate change and the fires California has experienced.

In an effort to stabilize the state's shaky home-insurance market, the Sustainable Insurance Strategy was developed by the governor's office and Insurance Commissioner Ricardo Lara, who recognize the significance of ensuring that households have insurance. In exchange for allowing insurers to raise rates based on the growing threat of climate change — long an industry demand — companies would agree to expand coverage in parts of the state with the greatest wildfire risk.

Those areas would include vast swaths of the North and Central coasts, the Sierra Nevada Mountains and most of far Northern California reported Mercury News. In the greater Bay Area, insurers would be required to write more policies in Marin, Napa and Santa Cruz counties, as well as parts of San Mateo and Sonoma counties and a sliver of Santa Clara County. Insurers would also have to offer new policies for fire-risk homes in more urban areas such as the Oakland Hills and Los Gatos.

What about low income households? 

A report authored by Stanford and University of North Carolina researchers found that areas experiencing frequent wildfires tend to be low-income.
The communities found in the “high-hazard” places identified are often wealthier, they said. But when looking at areas that face frequent wildfires, the report offers a different perspective. 

“Disaster insurance fundamentally costs more money than non disaster insurance and this can put it out of reach for many households,” said Kousky. “In our survey, for example, we found that lower income households are less likely to report finding insurance useful. And that points to affordability challenges.”
Underinsurance is rampant. Not all costs are covered

“People don’t go through their policies and nine out of ten times they are underinsured. I have a picture of everything I owned. How many people have that?” said a homeowner whose house in Mill Valley, California, got burnt down. 

“Having to get your life together at that point when your house has burned down is a difficult process on a good day,” said the homeowner whose house burnt down last year. “The experience of dealing with the insurance company is hard and depends on the quality of the people you are dealing with as much as  the written clauses.”

Certain post-disaster needs are not covered by current types of insurance, said Kousky. “Particularly emergency needs right after a disaster and also non-property losses, like a generator and fuel when the power is out, higher commuting cost when transit is down, temporary lodging because you can't live in your house, higher rents etc.”

“While there's not much evidence of direct discrimination in our property insurance markets, there's lots of indications of unequal impact and procedural inequities when it comes to various aspects of insurance like getting a fair claim payout.”