Insurance Law
Following natural disasters, lawyers have growing concerns about insurance policies
A Los Angeles Fire Department firefighter works on extinguishing hot spots in the aftermath of the Palisades fire in California on Jan. 12. (Photo by Scott Strazzante/The San Francisco Chronicle via the Associated Press)
The Southern California wildfires in early January engulfed the home insurance market in crisis, but even before the flames left billions of dollars in destruction, many big insurers, including Allstate, Farmers and State Farm, already had left the state or reduced coverage.
David Shaneyfelt, who represents insurance policyholders in claims against insurance companies, fears the exodus of admitted carriers from the nation’s largest insurance market will continue.
“Sign me up on the worried list,” the Calabasas, California, lawyer says.
It’s a concern in other states too, where wildfires, floods and hurricanes have caused significant damage for homeowners. Also, lawyers interviewed by the ABA Journal say it’s not unusual for homeowners to think their insurance covers some things, like flood damage, when it does not.
David Shaneyfelt represents insurance policyholders in claims against insurance companies.
Shanneyfelt, an attorney with the Alvarez Firm, says he’s been “deluged” with calls and emails from people who lost their homes in the wildfires. He considers his advice a public service.
“I tell most of them, ‘You don’t need to hire me. It would be throwing good money after bad,’” he says. “You’re not well served by hiring an attorney if you have total loss. Those are the fastest checks that get cut.”
The more difficult issue, according to Shaneyfelt and other attorneys who spoke with the ABA Journal, is whether total inhabitability, where the structure is still standing but no longer fit to live in, constitutes total loss.
“You have people who may not be able to move back for up to 10 years,” Shaneyfelt says. “Even if they can, there are no schools, restaurants or stores. With elderly people in particular, you could make the argument they have total loss.”
John Duffy, a business litigator, can relate. His Pacific Palisades home survived the wildfires, but some of his neighbors were not so lucky.
“Dozens of houses around us were incinerated. Two houses directly above me were burned to the ground,” the Gray Duffy partner says. “I never in my wildest dreams could have imagined downtown Pacific Palisades would look like Hiroshima after the atomic bomb. When you see it in person, it’s mind-numbing. There’s no town left.”
Echoing Shaneyfelt, Duffy notes that many people running into insurance coverage problems have homes that are still standing. He and his wife have not had insurance problems, but they had to move elsewhere.
“There’s no coverage for smoke and ash remediation,” Duffy explains. “And there are lots of toxins … so you can’t get back into your house.”
California FAIR Plan
According to the Insurance Journal, seven of the 12 biggest insurance companies have ended or limited their coverage in California during the last two years, in large part due to the fire risks. Fire victims have been turning by necessity to the state insurer of last resort, the California Fair Access to Insurance Requirements plan.
About 5,000 claims had been filed with the FAIR plan as of mid-February with the number rising daily, according to the California Department of Insurance.
Jesse Rubin, a Los Angeles claims adjuster and a director with the Pacific Coast Association of Public Insurance Adjusters, says the plan can be very bureaucratic, and the claims are delayed, compared to private insurance companies.
But that’s not without good reason, according to Lucy Wang, deputy commissioner and special counsel at the California Department of Insurance, which oversees the state’s FAIR plan.
“The FAIR plan was created as an insurer of last resort in the 1960s and evolved over time into a bridge for Californians who live in wildfire zones, but that was not the original intent,” Wang says.
The state agency calls the FAIR plan a vital safety net, but says its expansion creates a “negative feedback loop” that further increases consumer dependence on the plan.
“Most who get coverage through the FAIR plan are grossly underinsured,” Shaneyfelt says. “If all the insurers pull out and you’re left with the state stopgap plan, you’ve got problems.”
California Insurance Commissioner Ricardo Lara tried to ensure coverage by banning insurance companies from canceling or not renewing existing policies for homeowners affected by the Palisades and Eaton wildfires for one year.
But multiple attorneys say they expect big insurance carriers will continue to depart the state.
“A big problem is not being able to find homeowners insurance with any reputable company,” Duffy says.
Wang acknowledges that large companies like Allstate and State Farm “taking a pause” from writing new California policies is a concern.
“What we’re hearing from insurance companies is that they’re not able to charge the rates that they need,” she says.
But she expresses confidence that companies will start writing policies again because regulatory reform will allow them to charge more to cover their costs.
“Insurance companies are private companies. They’re not legally obligated to provide coverage to anyone,” Wang says. She adds that the California Department of Insurance is working to bring insurers back to the market.
“Allstate has stated it will come back but wants to adequately assess the risk and charge for that,” Wang says. “Some would be thrilled to pay any amount, but they don’t have [insurance] availability in Southern California.”
Francesco Palanda is a Miami attorney who represents insurance companies.
Meanwhile, in Hurricane Alley
Francesco Palanda, a Miami attorney who represents insurance companies, says there are definite parallels between the insurance market issues in California and what he is seeing in South Florida. Recent disasters there include Hurricane Irma in 2017 and Hurricane Ian in 2022.
“State Farm isn’t writing policies in South Florida, and that’s leading to the state’s quasi-government insurer, the Citizens Property Insurance Corporation, having to take on more and more coverage each year,” the Hinshaw & Culbertson partner says. “I definitely agree that insurers are going to pull out of these markets, and it’s going to become increasingly difficult to find insurance.”
As more disasters hit, coverage exclusions, such as roof exclusions, increase, Palanda says.
“What happens is, people are getting a lot less coverage for a lot more money,” he adds. “There’s an ongoing crisis in these risk-prone areas and with disasters getting more frequent, that’s leading to increased rates.”
According to Palanda, the biggest question with hurricane-related insurance claims is trying to deal with flood damage and figuring out what policy—flood or hurricane—is responsible for what damage.
That’s a luxury most western North Carolina homeowners did not have when Hurricane Helene caused devastation in September, says David Marlett, an Appalachian State University risk management professor, who heads the school’s Brantley Risk & Insurance Center.
According to him, fewer than 1% of North Carolina homeowners are protected by flood insurance.
“A lot of people assume their standard homeowners policy covers a wide range of perils, but the typical person doesn’t know floods are excluded,” Marlett says.
Landslides, which were a major problem with Hurricane Helene, were not covered, even for homeowners who did have flood insurance,’ according to Marlett. He and others interviewed by the ABA Journal agree that insurance companies are struggling nationally with homeowners policies, and the problems aren’t going away anytime soon.
“Insurers will keep doing what they can to remain viable,” Palanda says.
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Alice J. Roden started working for Trending Insurance News at the end of 2021. Alice grew up in Salt Lake City, UT. A writer with a vast insurance industry background Alice has help with several of the biggest insurance companies. Before joining Trending Insurance News, Alice briefly worked as a freelance journalist for several radio stations. She covers home, renters and other property insurance stories.