Twice Burned

Natural disasters, like the fires that have engulfed Southern California, tend to follow a familiar script. First, there's the battle against the elements, as homeowners struggle to save themselves, their belongings and their properties. Then, after the flames have been extinguished and the ashes have settled, there's the battle against the insurance companies. Homeowners fight over the fine print in their policies, lawyers file class-action lawsuits over payouts and consumer advocates denounce attempts by insurers to jack up rates. So should Californians be bracing for a brawl with insurance carriers similar to the free-for-all that followed Hurricane Katrina?

Not necessarily, according to insurance industry experts. So far, the California fires have destroyed more than 1,500 homes, causing an estimated $1 billion in damages. But that's just a fraction of the $41 billion toll that Katrina exacted. Insurance industry representatives say they don't expect this week's devastation to result in increased premiums or dropped policyholders. "Basically, events like these, as dramatic as they are and as tragic as it is for thousands of homeowners, are already factored into the rates," says Robert Hartwig, president of the Insurance Information Institute, an industry group. "People in these areas already pay a lot for insurance, and will continue to pay a lot for insurance … In California, if you want to live on a mountain ridge in a home built of cedar and have trees brush up against your house, you are going to see it in your rates."

If he's right, Californians may be spared the experience of their brethren in Eastern coastal areas. For them, two calamitous hurricane seasons in 2004 and 2005 have resulted in millions of cancelled policies and, for those lucky enough to secure coverage, skyrocketing premiums. In Florida, for instance, insurance rates have increased anywhere from 20 to 120 percent, according to the Insurance Information Institute. Carriers have even dropped policyholders in Northeastern states that haven't experienced a hurricane in years. "In a place like Florida, the rates were inadequate to begin with," Hartwig maintains. "We're in a 30-year period where storms are actually going to be more frequent and intense."

Still, many Californians affected by the fires may have unpleasant news awaiting them. The state's insurance commissioner, Steve Poizner, has said that many homes are underinsured--a situation reminiscent of 2003, when fires wiped out 3,600 homes and inflicted more than twice the damage of this week's conflagration. Back then, "when [homeowners] went to rebuild, they found the coverage they had didn't provide enough money to replace and rebuild their homes," says Doug Heller, executive director of the Foundation for Taxpayer & Consumer Rights (FTCR), a consumer advocacy group. Though he contends, "it's the insurance companies' responsibility to make sure [homeowners] have enough coverage," litigation over the issue resulted in a judge ruling in the insurers' favor earlier this year.

In the aftermath of the 2003 fires, the state passed a law that prevents insurance companies from dropping the policies on completely destroyed homes for one year, though it doesn't offer the same protection to unharmed homes in the same neighborhood. Candysse Miller, the Insurance Information Institute's spokesperson in California, says the overall nonrenewal rate following the 2003 fires was less than 1 percent. "Do people get their insurance cancelled because their house burned in a wildfire?" she says. "The answer is no."

Nevertheless, watchdog groups vow to scrutinize insurers' behavior. FTCR's Heller is particularly critical of Allstate Insurance, which stopped writing new policies in California on July 1, deeming the state "catastrophe-prone." "With the dry and hot summer approaching, they said, 'Fire season is here, and we don't want to be in the business of new insurance," says Heller. "I say, if they are not willing to stay with us through thick and thin, then stay out of the state." Terri Stackhouse, an Allstate spokesperson responds: "We wanted to make sure we could fulfill obligations to our existing policyholders. Overall, you look at California, and the landscape is riddled with catastrophes. Between fires, earthquakes and other disasters, we must have enough to cover the folks we already have."