You’ve seen the big headlines in the news every summer about huge wildfires wreaking havoc. In 2018, one fire alone — California’s Camp Fire — destroyed over 18,800 buildings (mostly homes).
The wildfire threat is increasing across the country. This can cause issues with homeowners insurance. Some insurance companies are finding new ways to cope with the threat. And it’s often at your expense.
“It has gotten worse. At least that’s the perception of insurers, many of whom are taking steps reminiscent of the aftermath of Hurricane Andrew,” says Robert Hunter, Director of Insurance at the Consumer Federation of America.
Even if this is the case, you’ll still have options. If you own a home outside of a big city, double check if your homeowners insurance covers wildfire damage. Here’s what else you can do to protect your home.
How has the wildfire threat changed over time?
Let’s face it, climate change is real. The numbers are indisputable: wildfires are increasing, and fast.
The kinds of wildfires we’re seeing nowadays are much different than before.
Nationwide, the wildfire season is about two months longer now than in the 1970s, according to the Union of Concerned Scientists. In some areas, like the Southwest, wildfires can now burn year-round.
A 2017 report estimated annual wildfire economic losses at between a staggering $64 billion and $285 billion.
In some areas of the country (particularly the West), more and more people are moving out into the boundaries of rural and urban areas. This is known in wildfire-fighting lingo as the “wildland-urban interface.”
For example, it’s estimated that about 28 percent of homes in Montana and 26 percent of homes in Idaho are at risk for wildfires, according to one study.
Are wildfires covered by homeowners insurance?
The short answer, for most people, is yes.
Most homeowners insurance policies will cover wildfire damage to your home, whether it’s smoke damage or if it burns down completely.
A standard homeowners insurance policy protects your home from wildfires under:
Dwelling Coverage
This helps with any expenses related to repairing and rebuilding your home. But only up to your coverage limits that you chose for your policy. Under this coverage, some insurers will replace any trees, shrubs, and plants on your property. Some policies also come with an “additional structures” add-on for you to cover a shed or gazebo.
Personal Property
This insures your personal belongings for loss and damage. This includes items ranging from furniture, electronics, and clothes. You should take inventory of your belongings in case they’re damaged. This will help speed up the claims process. Make sure to keep it updated too.
Additional Living Expenses
This pays for your hotel lodging and restaurant meals while your home’s undergoing repairs. But of course, it’s important to ensure you have this protection under your current policy.
Always vet your insurance company
“Make sure your company is licensed in your state,” says Hunter. “If it is, it’s a part of the state’s guarantee association, which backs up insurers who go bust. If your company is not licensed, like a surplus lines insurer, you have no such protection.”
We don’t often think of insurance companies going under. But as recently seen in California, it’s possible. Merced Property & Casualty Co. faced $64 million in claims after the infamous Camp Fire. Yet it only had $23 million in assets.
Luckily for homeowners with policies through Merced, it was state-licensed. People are still entitled to their money through the state’s guarantee association. Others who had homeowners insurance policies through non-state-licensed insurers might not be so lucky.
Is your insurance company licensed in your state? Find out through the National Association of Insurance Commissioners’ website.
Know what type of homeowners insurance policy you have
Another thing to consider is what type of policy you have. There are essentially two types: “actual cash value” and “replacement cost value.”
Actual cash value policies will pay to repair or replace your home and its contents according to what they’re current worth, factoring in depreciation. This generally results in a much lower payout for you.
It’s so low that you may not be able to replace your current standard of living before the wildfire happened.
Replacement cost value policies, on the other hand, are better. They’ll reimburse you to repair or buy everything in a new condition. This allows you to replace everything in a new state, unlike actual cash value policies, which only reimburse you for used (i.e., depreciated) items.
It’s the difference between rebuilding your life with a fresh, new start and essentially having to rebuild everything from a thrift store.
Insurers can (and are) dropping coverage for risky homeowners
One of the more disturbing trends in the insurance industry is that some companies are raising rates. They’re even dropping coverage for policies when it comes time for renewal.
This can happen for policies deemed too risky. This would be if someone lives on a brushy canyon hillside in the wildland-urban interface.
“In some areas of California, customers face that sort of situation,” says Hunter. “There may be a separate, much higher deductible for wildfire. There are also ‘wrap-around’ policies that wrap around a fire policy.”
If your insurer drops you and you can’t find coverage elsewhere, you still have options. In California, for example, you may be eligible for the California FAIR Plan. It offers up to $1.5 million in wildfire-only coverage for anyone who can’t get homeowners insurance elsewhere.
Once you purchase a wildfire-only policy, you can purchase a “wrap-around” policy from a homeowners insurance company on the open market. This covers all of the other potential perils, such as hail, liability, and water damage.
These wrap-around policies exclude wildfire damage. So by combining these two products, you can ensure that your home is fully protected. It’s similar to how flood insurance operates.
Make sure you’re protected
Wildfires move fast and can burn down entire towns in the blink of an eye. You don’t want to wait until your home is a pile of ashes before you figure out if you have adequate coverage or not.
Instead, take a few quick steps today to ensure you’re covered:
- Find out if your insurer is licensed in your state
- Figure out whether you have an actual cash value or replacement cost value policy. Consider switching to replacement cost value if you can afford the higher premium for it.
- Verify that your homeowners insurance policy covers wildfire damage
- Make a plan for if your insurer drops your coverage at renewal
Wildfires are one of the worst things you could potentially deal with as a homeowner. But if you follow these steps, the burden will be a little bit lighter.
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