As residents and business owners continue to grapple with the fallout of this month’s devastating wildfires in Los Angeles County, one long-standing thorn in everyone’s side has only been pushed deeper: insurance.

Although insurance pricing has become a growing headache nationally, residents in California have been especially feeling the pain for a myriad of reasons. In terms of natural market forces, the scarcity of housing and the supply-demand imbalance of construction materials and labor make any residence here onerously expensive. Exacerbating things, government-sanctioned distortions by way of regulations or the ability for residents to stonewall development only add to the bottom line of construction. The pandora’s box of natural disasters that come with California – mudslides, coastal erosion, earthquakes and, of course, wildfires – only pushes insurers to factor that into their pricing models or decision to decline coverage altogether.

The ruinous fires this month aren’t likely to help the perception of the latter point.

“It’s certainly not going to get better,” said insurance recovery attorney Kirk Pasich, who noted coastal erosion and storm surges have impacted other areas outside of California. “All of these climate issues are going to make insurance more expensive with less coverage that is narrower in scope and harder to get.”

California’s insurance woes have largely been punctuated by the gradual exodus of major providers during the past several years, and are likely to be a factor in the decision by residents to leave the state for less expensive prospects. Still, the state figures to be the United States’ largest – and strongest economic engine – for the foreseeable future.

Given the reality that it is essentially impossible to get a home mortgage without property insurance, something – though it’s unclear what – will have to give.

“Things were a mess before this. I was hopeful as of three weeks ago that we were heading in a good direction for personal insurance, including home insurance,” observed Tim Gaspar, owner of Gaspar Insurance Services Inc. in Woodland Hills.

“With this happening, it’s really going to turn things upside down. The losses will be so huge that we’re going to see some carriers, even large ones, go insolvent. The FAIR Plan’s going to be out of money in a couple of weeks probably,” he added, referencing the state’s guaranteed insurance program for those who cannot find private carriers.

Flurry of activity

To be clear, insurers have been busy this month receiving claims and meeting their state-mandated obligations to customers displaced by the fires.

As of Thursday, State Farm – the largest insurance provider in the state – said it received more than 7,850 home and auto insurance claims from customers affected by the fires and has disbursed more than $50 million.

Meanwhile, Farmers Insurance – which is based in Woodland Hills – did not disclose its own such figures, but has opened at least four relief sites near the affected areas for customers to make in-person claims and inquiries. For those facing a total loss, insurers are obligated to pay out a third of the property value in addition to four months of area median rent and living expenses within 72 hours of a claim being filed.

That’s good news for the insured, who, Gaspar said, probably won’t face the same nickel-and-diming that happens with isolated damage claims from flooding or water damage.

“If it’s the whole house (that’s gone), there’s no discussion about any of that,” he said.

Pasich – whose insurance litigation boutique firm Pasich LLP largely folded into the Century City operation of McGuireWoods LLP last year – added that businesses will continue to have claims as long as their operations are negatively affected.

“What happens in California has economic effects and insurance implications beyond Los Angeles. Most of corporate America has a form of business interruption insurance that covers interruptions of customers and suppliers,” he explained. “To the extent they can’t get business or can’t deliver their business, they would have insurance claims. Those would be outside of the Los Angeles area. The magnitude (of this disaster) isn’t known yet.”

However, Pasich said he’s seen estimates that as much at 30% of homes in and around the areas that burned are uninsured. This did not surprise him – he said he’s seen plenty of Palisades home warrant monthly insurance premiums between $10,000 and $20,000, and sometimes higher.

And even those covered by the California FAIR Plan – the Fair Access to Insurance Requirements program, which covers homeowners unable to find private insurance – may not be fully reimbursed; even after the disbursal rates were raised last year, homeowners are entitled to maximum payouts of $3 million. (Businesses are capped at $20 million.) Complicating matters, the New York Times reported the program had just $377 million available for claims this month – not a great prospect for an insurer that, by design, is overrepresented with high-fire-risk homes because it cannot deny coverage and is now involved in a disaster event that has caused at least $30 billion and growing in property damage.

Ryan Lapine, an insurance recovery attorney with the Century City outpost of Venable LLP, wondered whether the FAIR Plan would remain viable after this event.

“A lot of homeowners have had limited choices outside of the FAIR Plan,” he said. “That’s the existential crisis being borne out of this event.”

Mid-Wilshire-based Mercury General Corp. noted in a Jan. 10 release that its preliminary assessment of its damages would likely exceed its reinsurance retention level – that is, the amount to which it has insured its own payouts – of $150 million. The FAIR Plan’s reinsurance retention, meanwhile, reportedly nears $6 billion.

Rebuilding – and where

All of this is to say, insurance is probably just going to get more expensive for Angelenos.

Insurers will certainly have more evidence to bring to the state Department of Insurance – which holds the final say on whether providers can raise their rates – that they need to charge more to stay in business.

The department’s failure for years to allow rate raises is a major reason for the exodus of providers from the state, Gaspar said. And fewer providers magnifies losses for those remaining, because the nature of insurance is that companies spread out their customers instead of concentrating them, so an isolated catastrophe doesn’t largely fall on them.

On top of that, when the FAIR Plan’s funds run dry, private insurers are required to kick in funding commensurate to their coverage in the state. That’s likely to be passed off to their own consumers in the form of surcharges in their next contracts.

“There have been a handful of events in the past 25 years that represent the catastrophic worst-case scenario for insurance companies,” Lapine said, citing 9/11, Hurricane Katrina, the Maui fires and the 2020 California wildfires. “It’s just remarkable in size or scope. I cannot imagine the conversations taking place.”

Some positives ahead?

On the other hand, there may be some steps in the right direction coming out of this.

State Farm – perhaps under pressure by the optics of opting to not renew more than 70,000 California homeowner and apartment building policies beginning last year – announced it would offer renewals to customers affected by these fires. State Insurance Commissioner Ricardo Lara also declared a one-year nonrenewal moratorium in ZIP codes directly affected by and surrounding the fires.

Entrepreneurs, too, may see a chance to break into the insurance market here. Depending on the attitudes of the second Donald Trump administration, a potential nationwide disaster insurance plan might also benefit residents here.

“If you were selling insurance, you might say to yourself, ‘How often are we going to have a once-in-a-century event?’ Palisades just burned down. What’s the chance it’ll burn down next year?” Pasich speculated. “It may actually be economically desirable for companies to sell insurance in those areas for some time.”

In any case, state officials seem determined to rebuild these communities. Gov. Gavin Newsom suspended a series of permitting rules in hopes of spurring quicker reconstruction. The question of what those communities look like is probably harder to answer.

“At present, there are impediments to hillside construction at the city and county level that make rebuilding expensive and time consuming. I hope this event isn’t used to justify further impediments to construction. At the same time, you need to consider where you can safely construct properties,” Lapine said. “We have a housing shortage as it is in California. I don’t know that simply saying, ‘We’re not going back there’ is viable.”

And when these homes are rebuilt, insurers may be more motivated to help their customers harden their properties against future fire risks.

“With the right hardening of your home, you can’t make it impossible for a wildfire to burn down, but you can make it very difficult for a wildfire to penetrate,” Gaspar said. “It will make it easier for folks to get insurance to get that hardening.”