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The latest wildfire catastrophe in California has once again tested the resilience of the state’s insurance industry. As entire communities are reduced to ash and thousands are displaced, homeowners now face an additional layer of stress: navigating the complex insurance recovery process. In a recent interview on California Insider, insurance expert Karl Susman offered an inside look at how insurers are responding to the Los Angeles fire losses and what homeowners need to know to protect themselves.
1. The Scale of the Disaster: A Financial Earthquake
Wildfires in Southern California have become more than just seasonal events; they’re annual crises. Susman shared that over 100 of his clients alone have experienced total losses, with hundreds more suffering smoke and heat-related damage. The scale of destruction has overwhelmed insurers, who are bringing in adjusters from across the country and issuing emergency payments for temporary living expenses. But, as Susman cautions, not all insurers are equipped to handle such widespread damage, which leads to varying speeds in claim processing.
2. Why Some Insurers Pay Quickly and Others Don’t
Larger, national insurers like State Farm and Allstate are able to respond quickly with specialized catastrophe teams, assessing damages and processing payments within days. On the other hand, the California FAIR Plan, which is often relied upon by homeowners in high-risk wildfire zones, faces significant delays. This plan, though financially secure, struggles with limited staff and resources, leading to slower payouts despite its solid financial backing.
3. The California FAIR Plan: The Last-Resort Safety Net
The California FAIR Plan isn’t state-funded; rather, it’s a shared insurance pool supported by all licensed insurance companies in California. While it has cash reserves and access to reinsurance, the plan’s lack of personnel and infrastructure makes it less efficient in processing claims compared to private carriers. Susman reassured homeowners that while payouts are slower with the FAIR Plan, they are still guaranteed, but patience is key.
4. Rebuilding vs. Relocating: Understanding Your Options
After a total loss, homeowners typically have three options: rebuild on the same lot, buy another home, or build somewhere else and transfer the mortgage. If homeowners decide not to rebuild or relocate, insurers may only pay the Actual Cash Value (ACV), which reflects the depreciated value of the property, rather than the full replacement cost. Susman stressed that homeowners should clearly communicate their intentions to their insurer to avoid misunderstandings that could lead to a reduced payout.
5. The Mortgage Complication: Banks Still Have a Say
Even after a total loss, the mortgage lender plays a role in the insurance claim process. The insurance check is often made out to both the homeowner and the lender, requiring dual endorsement. This process ensures that the loan is satisfied before the funds are released to the homeowner, which can create additional delays, especially for homeowners planning to relocate.
6. Underinsurance: The Growing Coverage Gap
One of the most significant challenges, according to Susman, is underinsurance. Many homeowners, in an effort to save on premiums, have lowered their coverage limits over the years. When faced with skyrocketing construction costs after a wildfire, these homeowners find themselves underinsured. Post-disaster inflation can push rebuilding costs far beyond policy limits, even with extended replacement cost coverage, leaving many homeowners to rely on FEMA grants or SBA disaster loans—neither of which fully cover the gap.
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7. Admitted vs. Non-Admitted Carriers: What’s the Difference?
The fires have highlighted a critical difference between admitted and non-admitted insurance carriers. Admitted carriers are regulated by the California Department of Insurance, must participate in the FAIR Plan assessments, and are backed by insolvency protection funds like the California Insurance Guarantee Association (CIGA). Non-admitted carriers, on the other hand, operate outside these regulations and often have more flexibility in pricing and underwriting. However, these policies tend to be more expensive and come with less consumer protection, so homeowners need to be cautious when considering non-admitted coverage.
8. The Global Impact of Reinsurance
When California faces billion-dollar wildfire events, reinsurance companies worldwide step in to help insurers share the risk. These reinsurers write massive checks in the wake of catastrophic losses, and this has a ripple effect on global insurance markets. As reinsurers pay out claims, they often raise rates, leading to increased premiums for policyholders everywhere—even those far from wildfire zones.
9. The FAIR Plan Paradox: Expensive Yet Essential
Contrary to popular belief, the California FAIR Plan is not a cheap alternative. It is expensive, often costing up to $15,000 per year for a basic fire-only policy, and it doesn’t cover other types of damage like water or theft. To fill those gaps, homeowners must purchase additional coverage, such as a Difference in Conditions (DIC) policy, which can make the total cost of insurance far higher than traditional homeowners policies.
10. What Homeowners Can Do Now
Susman urged all California homeowners—not just those affected by the current fires—to take proactive steps to safeguard their financial futures.
These include:
- Reviewing coverage annually to ensure that policy limits reflect current construction costs.
- Adding extended replacement cost coverage to protect against post-disaster inflation.
- Including ordinance and law coverage to cover building code upgrades required during reconstruction.
- Documenting all personal property with photos, receipts, and digital backups for easier claims processing.
- Engaging with your agent or broker early to explore options before a disaster strikes.
11. The Takeaway: Realism and Communication
Susman’s final advice emphasized patience and communication. While the insurance system is under pressure, most insurers are paying claims—they’re just overwhelmed. Homeowners should stay in touch with their insurers, document everything, and escalate issues when needed. By staying informed and proactive, policyholders can navigate the aftermath of a wildfire more effectively.
Final Thoughts: Adapting to a New Era of Wildfire Risk
As wildfires become more frequent and severe, California’s insurance system must evolve to meet the challenge. While rate increases and tighter underwriting may become the norm, transparency, collaboration, and realistic expectations will be key to ensuring that homeowners remain protected in the face of increasingly frequent disasters.
For Susman, the path forward is about more than just recovering from disasters—it’s about rebuilding with resilience, both in the insurance market and in the communities that rely on it. Informed homeowners are not only better prepared—they’re better protected.
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