LA Fires: Is Insurance the Next Battleground for Californians? | Business and economic news

As Wildfires continue to ravage Los Angeles County, Californiaattention is now turning to how the tens of thousands of people directly affected by the devastation can recoup what they’ve lost—and the potential insurance storm that lies ahead.

Thousands of properties have been damaged or destroyed, and owners are unsure if their insurance will cover them. The ongoing wildfires could become the costliest in terms of insured losses in California history, with analysts estimating that losses could approach $20 billion.

Here’s what you need to know.

How much damage have forest fires caused so far?

At least 27 people have was killed in forest fires.

The wildfires, the first of which broke out in Pacific Palisades, are captured 9,596 hectares (23,713 acres) of land, according to the California Department of Forestry and Fire Protection (Cal Fire). There were more than 12,300 homes and buildings destroyed.

Two fires are active in Los Angeles County: Palisades, with 27 percent retention, and Eaton, with 55 percent retention.

How much do wildfires cost in LA?

Analysts predict based on preliminary estimates that wildfires in LA could be the cause the most expensive forest fire occur in California, in terms of insured losses, which probably exceed $20 billion. An insured loss is financial damage caused by an event that is covered by insurance.

Private forecaster AccuWeather estimates the total damage and economic loss at between $250 billion and $275 billion, which would make the LA fires the costliest natural disaster in US history, surpassing Hurricane Katrina in 2005.

So far, it was the most expensive forest fire in terms of insured damages Campfire 2018 in Butte County in northern California, with losses of $12.76 billion.

Historically, some of the costliest natural disasters in terms of insured claims have been US hurricanes and earthquakes. Insured losses from Hurricane Katrina totaled $105 billion.

What did the insurance companies do before the forest fires?

Before the fires, insurance groups such as State Farm and Allstate began canceling insurance policies on homes in fire-prone areas.

As of 2022, Illinois-based State Farm was the largest insurer in California.

In July 2024, it canceled about 1,600 policies for homeowners in Pacific Palisades, which meant 69.4 percent of its insurance policies in the county were not renewed.

Between 2020 and 2022, insurers did not renew 2.8 million California home policies. More than half a million of them were in Los Angeles, according to the California Department of Insurance.

“There’s been a massive exodus of big players from the market in these parts of California,” Ben Keys, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, said at a conference Friday.

“We’ve seen a huge number of non-renewals recently,” he said.

David Flandro, head of industry analysis and strategic consulting at Howden Re, a global reinsurance broker, said the size of the wildfire and the extent of the damage could be cause for concern.

“There may not be coverage that covers everything, unfortunately,” he told Al Jazeera.

Why did State Farm cancel the insurance?

In May 2023, State Farm released a statement that it would stop accepting new claims, including business and personal property and casualty insurance. The statement added that this was due to “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market.”

Brooklyn-based journalist Jake Bittle told the PBS network that State Farm and other insurers have dropped or limited policies in California because “the state of California has limited the amount insurance companies can charge their customers.”

In 1988, California passed a ballot measure called Proposition 103 or the Insurance Rate Reduction and Reform Act in its general election.

The proposal reduced insurance rates and established a pre-approval system in which an insurer must obtain approval from the California Insurance Commissioner before instituting property and casualty insurance rates.

However, these approvals take time. California’s system has been slow and is getting slower. Between 2013 and 2019, it took an average of 157 days between filing and processing a claim for home insurance rates. This increased to an average of 293 days between 2020 and 2022.

California law also requires insurers to justify their rates for catastrophe-related losses based on average losses from that catastrophe over the past 20 years.

As for wildfires in California, future projections based on past losses would be inaccurate because fires are unpredictable and becoming more destructive than they have been in the past, insurers say.

Between 2004 and 2013, wildfires in California destroyed an average of about 653 structures per year. However, between 2014 and 2023, wildfires in California destroyed an average of about 5,669 structures each year. This average was pulled down by devastating fires in 2017, 2018 and 2020.

In 2017, the Thomas Fire destroyed 1,060 structures in California’s Ventura and Santa Barbara. In July 2018, the Mendocino Complex Fire destroyed 280 structures in Mendocino, Lake, Colusa, and Glenn counties, and in November 2018, the Camp Fire destroyed nearly 19,000 structures in Butte County, Northern California.

Proposition 103 “added to the challenges” facing California’s insurance market, Ray Lehmann, a senior fellow at the independent research organization, the International Center for Law and Economics, told Al Jazeera.

Lehmann said the most significant of these challenges was that the proposal “historically did not allow insurers to consider reinsurance costs or the results of forward-looking catastrophe models when submitting rates.”

“This effectively means that the state is not allowing insurers to consider the impact of climate change or that future losses could be much more significant than past losses.”

Amid this devastation, insurance companies “lost decades of insurance revenue” and “became convinced that they couldn’t make money or enough money doing business in California,” Bittle told PBS. He explained that this also contributed to the withdrawal of companies from California.

What have the homeowners done about it?

Some homeowners have opted for a state-mandated insurance program called The California FAIR Plan (Fair Access to Insurance Requirements), which was established in 1968 to cover people who, for various reasons, could not get standard home insurance.

Funded by private companies, not taxpayer money, the FAIR plan was originally designed to hand out a limited number of policies to people who don’t have standard insurance. As of 2024, 452,000 people in California have a FAIR plan. However, the plan only offers basic coverage, up to $3 million, which may not be enough to completely rebuild some homes.

As of July 2023, there are nearly 15 million housing units in California, and as of July 2024, California’s population is nearly 40 million, according to the US Census Bureau website.

The FAIR plan is also more expensive than standard insurance. A December 2024 note from New York-based financial services firm Bankrate said that in California, the average annual cost of a FAIR plan policy was about $3,200.

By comparison, average home insurance costs $1,480 in California for a $300,000 home policy, according to Bankrate.

The result: hundreds of thousands of homeowners do not have property insurance in California.

A report released Jan. 9 by online marketplace LendingTree estimates that 806,651 homes in California are uninsured, out of 7.6 million homes in the state. In Los Angeles, 154,108 homes are uninsured out of 1.5 million homes, meaning 1 in 10 homes are uninsured in the county, LendingTree estimates.

Still, as a result of private insurers pulling out of California, “the state’s insurer of last resort, FAIR Plan, has grown exponentially,” Lehmann said.

Indeed, as private insurers have pulled out, the FAIR plan’s exposure has grown dramatically, up 61.3 percent between September 2023 to $458 billion in September 2024. FAIR has $5.9 billion in exposure to Pacific Palisades.

Is the climate crisis an insurance crisis?

Forest fires are among the environmental disasters that are intensifying as climate change towering over the planet.

A report by the US Environmental Protection Agency (EPA) says that climate change has contributed to an increase in the frequency, length of the season and area burned by wildfires. While wildfires in California were previously limited to a period of several months, the state’s governor, Gavin Newsom, recently talked about how there is no longer a “fire season” in California.

“It’s in the state of California year-round,” Newsom said in a video posted to his X account on Jan. 8.

Research shows that the insurance world is not sufficiently prepared to pay the price of the climate crisis.

In 2024, a report by campaign group Insure Our Future found that climate change was responsible for a third of weather-related insurance losses worldwide over the past 20 years.

“The California Department of Insurance has taken some steps in the right direction by promulgating new rules to allow consideration of catastrophe models and reinsurance costs for those insurers who agree to write a significant amount of business in wildfire-prone areas,” Lehmann said.

He added that “to ensure California remains secure in the future,” state leaders must consider significant investments in wildfire mitigation. That could mean “changing building codes, allowing utilities to invest in underground transmission lines, or rethinking land-use planning and zoning at the wilderness-urban interface.”

Will companies be able to cover insured losses?

Despite the high cost of damages, experts believe that insurance companies should have no problems compensating their clients.

“For the most part, insurers writing homeowners insurance in California are financially strong and should not face serious solvency issues,” Lehmann said.

According to a report by Standard and Poor’s, insurers are entering 2025 with comfortable reserves thanks to strong financial results over the past two years.

Analysts at JPMorgan say that as things stand, they expect “the vast majority of wildfire losses to be concentrated in homeowners insurance,” with a “significantly smaller amount” in commercial and auto losses.

However, Lehmann added that “the Palisades fire has disproportionately affected very high-value assets, many of which will likely have high-net-worth coverage.”