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Feeling the Burn: the Future of California’s Electric Utilities and Homeowners Insurance in Continual Wildfire Season

Wednesday, January 23, 2019
Sierra Killian

Sierra Killian

Research Associate

Months after the devastating Camp, Woolsey, and Hill fires in California, the fallout of the blazes continues to rock the state. In the past month, PG&E, the state’s largest electric utility, transitioned out several top executives, had its credit rating downgraded to junk status, and was mandated to inspect its entire electric grid in a sharply worded court order. Last week, the company announced plans to file for bankruptcy by January 29. Citizens, insurance companies, and the state government are also feeling the heat as expected damage costs rise and climate change intensifies the frequency of wildfires. The strain on California’s public and private institutions foreshadows the difficult decisions to come across the fire-prone American West.

The destruction of California wildfires over the past two years is staggering. The Camp, Woolsey, and Hill fires destroyed or damaged more than 20,000 structures in 2018, and fire insurance claims totaled $9 billion by December. This figure will likely increase as the extent of fire damage becomes clearer. In the aftermath of the 2017 fires in Napa and Sonoma Counties, the initial loss estimate of $3.3 billion ballooned to $10 billion. Put in global context, the economic losses from California’s two major wildfires in 2017 comprised two-thirds of the economic cost of all wildfires around the world for the year.

Californians who live in high-risk fire areas have suffered immensely from wildfires. The Camp Fire was the state’s deadliest on record, with at least 86 lives lost in the fire. Homeowners who escaped recent fires are left with few options to insure their property. Three million of California’s eight million houses are in the wildland-urban interface (WUI), the zone between developed areas and often tinderbox-like vegetation. Of those in the WUI, 1.7 million homes are in areas at risk of wildfire. Because of the potential devastation of a wildfire, homeowners sometimes cannot renew their fire insurance. According to the California Department of Insurance (CDI), homeowner complaints about nonrenewed fire insurance in highest-risk ZIP codes increased 249% between 2010 and 2016. Actions taken at the scale of individual homes, like retrofitting and removing flammable material, are required by state building and public resources codes for structures in high-risk areas. However, these codes are often not enforced, too costly for homeowners, or not considered by insurance companies in setting premiums. Taken together, the circumstances make it more difficult for people to move out of areas with high fire risk.

WildfiresPG&E faces mounting challenges on top of those that arose in recent days. The company’s safety practices have been questioned for a decade. In 2010, a PG&E natural gas pipeline exploded in San Bruno, killing eight people. The January 9 federal court order to inspect the company’s infrastructure came as a term of PG&E’s probation in the criminal proceedings related to the explosion. The order also contemplated mandating that the company operate electric transmission only in safe wind conditions to prevent fires. Wildfire victims have sued the company for its role in igniting wildfires, adding to the legal pressure. Last month, the California Public Utilities Commission (CPUC) opened for comment an investigation into PG&E to consider whether alternative corporate structure arrangements would better protect the citizens the public utility serves. Public comments made two weeks ago at the commission’s first voting meeting of the year indicate continued ratepayer frustration with the company. As its infrastructure ages and court and oversight proceedings continue, the company has a fraught future.

Insurance companies that provide homeowners insurance in parts of California at risk of wildfire struggle to stay solvent while staying in the good graces of state regulators and ratepayers. One insurance company that operated in the area affected by the Camp Fire has already been liquidated because it could not pay for its liabilities. Other insurance companies are hesitant to offer or renew coverage in high-risk areas. A coalition of insurance providers wrote in a letter to the CDI that the economic realities of fire damages made it “difficult to embrace further calls for insurers to increase their costs of doing business” by lowering rates or covering high-risk areas. California’s Fair Access to Insurance Requirements (FAIR) Plan, which provides insurance of the last resort, fills gaps left by insurers. However, insurance companies that provide coverage through the FAIR Plan share the losses, profits, and expenses of the plan, making it in the best interests of the insurance market to avoid reliance on the program.

State agencies have limited authority to strengthen the legal and regulatory framework connecting utilities, homeowners insurance, and wildfires. The CDI does not have the authority to change fire insurance requirements without new legislation, limiting its ability to ensure that Californians have access to affordable policies. In a 2017 report on the wildfire loss coverage in the WUI, the agency suggested possible reforms that would improve fire insurance, including incorporating homeowner mitigation actions in insurance policies, mandating that insurance companies only use wildfire risk models approved by the CDI, and instituting an appeals process for homeowners denied insurance. The insurance industry sees many of these potential changes as infeasible. The California Office of Emergency Services, which cleans up debris after wildfires, is also staggering under the weight of the recent disasters. Because the 2017 fires stretched its resources, the agency is depending more on federal agencies to clean up after the 2018 fires.

Despite the shortcomings of the current system, there is reason for hope. In September 2018, then-governor Jerry Brown signed into law a suite of bills related to homeowners insurance in counties affected by states of emergency, limits in insurance policies, and assistance to wildfire survivors. The wildfire crisis is also pressing government entities to consider a broader array of solutions, including adopting a program similar to Colorado’s Wildfire Partners program, municipalizing PG&E’s assets, and expanding the FAIR Plan. The status quo in response to California’s wildfires is untenable, and the state and its neighbors will need to act swiftly to mitigate further damage as an interminable wildfire season stretches forward into an uncertain future.

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