The wildfires in Pacific Palisades and Altadena in January highlighted the importance of adequate insurance coverage for homeowners. Beyond the emotional impact of losing a home, many face significant financial challenges when their insurance coverage is insufficient.
A recent report from the San Francisco Chronicle found that many California policyholders are underinsured, meaning their coverage may not cover the full cost of rebuilding a home comparable to the one lost.
Data from LendingTree indicates that approximately 806,600 residences in California, or 10.5% of all homeowners, are uninsured. In some counties, including Lake, Kings, and Humboldt, the uninsured rate is higher.
“Being underinsured can turn a crisis into a financial disaster. Waiting until after a catastrophic event such as a wildfire to review your coverage is far too late,” said Kelly Butler, vice president and chief underwriting officer at Mercury Insurance. “That’s why it is essential to meet with your insurance agent at least once a year to ensure your policy reflects current replacement costs and risks.”
The issue of underinsurance in California is influenced by several factors, including rising construction costs, increased wildfire risk, and changes in the insurance market.
Insurance premiums in wildfire-prone areas have increased due to higher risk levels and rising construction and material costs. These increases may lead some homeowners to reduce coverage or allow policies to lapse. Some insurers have scaled back offerings in high-risk regions following increased losses, prompting some homeowners to rely on the California FAIR Plan, which provides basic fire insurance. Use of the FAIR Plan has increased 300% since 2018 and now covers about 4% of homeowners statewide. Many policyholders supplement these policies with additional “wrap-around” coverage to broaden protection.
The growing frequency and severity of wildfires in California have affected both the availability and cost of homeowners insurance in certain areas. Proposition 103, passed in 1988, requires insurers to base rates on historical losses. While intended to protect consumers, the regulation has complicated insurers’ ability to adjust rates to reflect evolving risks and rising rebuilding costs.
Understanding the difference between actual cash value and replacement cost policies is important. Actual cash value policies may not cover the full cost to rebuild, while replacement cost policies aim to cover rebuilding costs up to the policy limit.
Homeowners can reduce wildfire risk through measures such as creating defensible space and reinforcing home structures. These steps may help lower insurance costs and qualify homeowners for discounts.
Efforts are also underway to improve insurance availability and affordability in high-risk areas.
“Fortunately, it’s not all doom and gloom,” Butler said. “The state is beginning to make meaningful changes. Last year, Insurance Commissioner Ricardo Lara introduced California’s Sustainable Insurance Strategy, which supports more accurate pricing in wildfire-prone areas and aims to expand coverage options for homeowners who need it most.”
By staying informed and working with insurance providers, California homeowners can better manage their coverage and protect their financial interests amid increasing environmental risks.
