More than 16,000 structures were destroyed in the recent Los Angeles wildfires, upending thousands of lives and leaving millions of homeowners wondering, Do I need fire insurance?
Good news: Homeowners generally do not need to purchase separate fire-insurance coverage. Unlike damage caused by earthquakes and floods, damage caused by fires—including wildfires—is covered by the standard homeowners insurance policy.
But: Homeowners would be wise to pay attention to this component of their homeowners insurance coverage. While homeowners insurance does cover wildfires, many homeowners find out the hard way that it doesn’t cover them very well, and insurers increasingly are not renewing policies in high-wildfire-risk areas.
Bottom Line Personal asked insurance consumer advocate Douglas Heller what homeowners and renters need to know…
Your Coverage Might Come Up Short
Homeowners tend to assume that their insurance will cover the cost of rebuilding following a disaster—after all, that’s why they have insurance. But that’s not necessarily the case.
Example: Thousands of policyholders in the Boulder, Colorado, area filed claims as a result of a wildfire in late 2021. Researchers from University of Colorado and University of Wisconsin focused on 5,000 of them and found that a stunning 74% did not have enough insurance to cover their rebuild costs, and 36% were so severely underinsured that their insurance covered less than 75% of their costs. Result: Approximately one-third of those who lost their homes still have not rebuilt more than three years later. Unfortunately, such underinsurance is not uncommon.
Three reasons why homeowners insurance often is insufficient to rebuild following a wildfire…
Construction costs often increase sharply following a major disaster. Reason: When thousands of people lose their homes in an area at the same time, the demand for homebuilders and building materials skyrockets, pushing prices above their normal levels.
Low coverage limits and high deductibles conspire to leave homeowners shouldering an unexpectedly large slice of the costs of rebuilding. Insurers have sophisticated digital tools that allow them to very accurately estimate how much it will cost to rebuild a home, excluding the post-disaster construction cost price spikes described above. Yet many homeowners are sold policies that leave them with lower coverage limits than they need. Possible reason for this: Some insurers and insurance agents might quote potential customers lower coverage limits—and higher deductibles—than are prudent to make the coverage seem more affordable than the competition’s. Insurers are well-aware that most homeowners simply pick the lowest premiums when shopping for insurance, with little attention paid to other details.
Actual Cash Value (ACV) coverage pays only the depreciated value of items lost or damaged rather than their full replacement cost. Many policies provide ACV coverage for damaged or destroyed possessions, and an increasing number also do so for the dwelling itself or components of it, such as the roof.
What to do: When you get quotes on homeowners insurance policies, compare policy limits as well as premiums. If there are substantial differences between the amount of coverage that various insurers recommend, consider avoiding the low-end outliers or ask the insurers that recommend relatively low coverage limits whether those limits can be increased. Or contact a well-established local contractor, and request a rough cost estimate for building a home of your home’s square footage in your area to get a sense of how high your coverage limit should be.
To greatly reduce the odds that your insurance will be insufficient, you also could pay an insurer extra for “extended replacement cost coverage,” which will, if necessary, pay a certain amount more than the policy’s usual coverage limit to rebuild…or better yet, “guaranteed replacement cost coverage,” which will pay as much as necessary to rebuild, leaving the policyholder to pay only the deductible. The costs and availability of these policy add-ons vary, and most insurers no longer offer the guaranteed coverage.
Ask your insurer about its fire-prevention discounts, too. Many insurers will lower a policyholder’s premiums slightly if he/she invests in fire-safety or prevention devices ranging from simple fire extinguishers to elaborate sprinkler systems and fire-resistant roofs. The discounts have historically been modest, but insurers are slowly improving them.
Warning: Homeowners in wildfire-prone regions sometimes are offered insurance that does not include any fire coverage. These are not standard “homeowners insurance” policies—and they are typically offered as a supplement to a Fair Access to Insurance Requirement (FAIR) Plan policy that provides the necessary fire insurance but not much else.
Coverage of a Home’s Contents and Other Expenses
Insurance companies are increasingly making homeowners jump through hoops before providing compensation for possessions damaged or destroyed in covered events. It’s not uncommon for homeowners to be handed forms following fires and told to document every single item lost. Insurers are well-aware that many homeowners will be unable to do this after virtually everything they own has been reduced to ash.
What to do: Once a year, use your smartphone’s video camera to create a narrated tour of all of your possessions. Walk through every room in your home—even the basement—filming every item and verbally describing anything of note. Open cabinet and closet doors and drawers to show what’s inside. Save this video somewhere outside your home—e-mail it to yourself and/or a loved one so it’s stored on a remote server, for example.
Also worth noting…
If your car is destroyed in a fire, it will not be covered by your homeowners insurance, even if it was parked in your garage at the time. Fire damage to a parked car is covered by the comprehensive component of an auto insurance policy.
Most homeowners insurance policies will help pay for living expenses, such as hotel and restaurant bills, if a covered event such as a fire renders the home uninhabitable. But this coverage typically has limits, and it could easily run out if it takes years to rebuild. Review the “Additional Living Expenses” (ALE) section of your homeowners policy for details.
Renters insurance typically covers fire damage to the policyholder’s possessions. It usually also includes some coverage for “Additional Living Expenses,” as described above.
Wildfire-Risk Non-Renewals
Homeowners who live in high-wildfire-risk regions might receive an unwelcome notice from their insurance provider—their policy is not being renewed. Some of these homeowners will manage to obtain coverage from other insurers—though potentially at steep rates—or from an insurer that offers pricey “surplus lines” insurance to high-risk homes. Others will discover that no insurance company will cover them…or they will only be offered a “difference in conditions” (DIC) policy that excludes fire damage. As noted above, this is not full homeowners insurance and won’t satisfy mortgage lenders.
Often the only option for these homeowners is to obtain coverage from their state’s FAIR plan. These state-created insurer-of-last-resort programs typically cover only very specific risks, such as fire, and usually are very expensive. Precisely how expensive varies dramatically by state and other factors, but FAIR plan coverage almost inevitably will cost significantly more than standard homeowners policies even though these plans cover much less than standard homeowners insurance. Homeowners who obtain coverage through a FAIR plan generally must also purchase DIC coverage from a private insurer to have anything approaching the overall protection that a standard homeowners policy would provide, further increasing their costs. Example: FAIR plan coverage rarely, if ever, includes liability coverage, which protects homeowners in the event that they’re sued by someone who is injured on their property.
As costly and limited as FAIR plan coverage can be, some homeowners in wildfire-prone areas find themselves in an even worse predicament—no private insurer will sell them insurance, and their state doesn’t have a FAIR plan. If these homeowners have mortgages, their lenders likely will obtain coverage on their behalf—but that coverage will inevitably be extremely expensive and protect only the mortgage lender’s financial interests, not the homeowner’s. Here, too, the homeowner will have to purchase a DIC policy to avoid massive coverage gaps.
