What California’s plan to get insurance to high-risk fire areas means for Orange County

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By Yosi Yahoudai
Founder and Managing Partner

Ted Wright has lived in Orange County for a little over three decades — and had homeowners insurance through a regular insurance company for over two of them.

But within a few years of Wright moving from Irvine to Modjeska Canyon, where he’s been living for the past 11 or so years, the company decided against renewing Wright’s home insurance since his place is located in a high-risk area prone to wildfire, he said. Around the time Wright moved to the canyons, several fires touched the region, including the Silverado Canyon wildfire in 2014, the 241/Santiago fire in 2015 and the Holy Jim fire in 2016.

That meant Wright had to pivot to the state’s FAIR Plan, a last resort for Californians who are unable to obtain traditional insurance. Policies written by the FAIR Plan — which has limited coverage but higher premiums — have gone through the roof in recent years, from around 127,000 in 2018 to more than 350,000 today.

Wright’s story isn’t particularly unique for many California residents in the aftermath of major property insurers — including State Farm and Allstate — pulling out of high-risk areas of the state, like Orange County’s canyon country, due to rising costs, increasing catastrophic risk and outdated regulations.

But earlier this month, Ricardo Lara, the state’s insurance commissioner, unveiled a plan that aims to provide some relief to the insurance crisis by mandating insurers write policies in high-risk fire areas — including where Wright lives.

Under the new regulations Lara has proposed, insurance companies would have to provide coverage of at least 85% of properties in distressed areas (for large insurers) or increase coverage by 5% in distressed areas (for small and regional companies unable to meet the 85% threshold).

While Orange County is not included in the Department of Insurance’s list of distressed counties, two residential ZIP codes in the unincorporated canyons area — 92676 and 92678, which cover Silverado, Trabuco Canyon and parts of Modjeska and Williams Canyon — are among those the department identified as “high-risk.”

These ZIP codes represent areas where more than 15% of the residential policies are under the FAIR Plan. There are 1,093 housing units and some 2,651 people who live in those two districts, according to 2020 census data.

“Those are areas where, for many people, the FAIR Plan is their only option,” said Michael Soller, a spokesperson for the Insurance Department. “Insurance companies aren’t writing policies, and we’ve seen the FAIR Plan grow.”

California is the only state requiring insurance companies solely to take into account historical data for setting future rates, Soller said. Insurers in other states could also consider potential disasters and projected losses when they write policies in what’s called “catastrophe modeling.”

However, with the big fires that have swept through the state in the last several years, the California way has caused problems; insurance rates have spiked, and premiums have increased due to major losses.

“We used to say you have to search for insurance,” Soller said.

“Today, you have to hunt for insurance.”

Wright, who lives near heavily wooded hillsides and thick brush, said he completely remodeled his home a few years ago to harden it to wildfire.

“The whole house is poured concrete. We cleared away all the brush and grass and there’s nothing on the outside that can burn,” Wright said. “This is what we did because we were in a high wildfire area, and we wanted to feel safe out here.”

But due to the risky nature of the canyons and the recent fires that have ignited in the area, it’s almost impossible nowadays to find someone who lives in the canyons who has traditional insurance, he said.

“We’ve tried calling a number of companies to see about insurance, and they won’t even consider this house because we’re in the canyons,” said Wright, who sits on the board of directors of the Silverado Modjeska Recreation and Park District.

Wright said he hopes Lara’s plan will get an insurer to come out to the area and look at his concrete home, which he said has no real heat sources nearby and stands as a fortress against fire.

Aside from the designated high-risk ZIP codes, Lara also proposed a mandate for insurance companies to take over FAIR Plan policies anywhere in the state with moderate to very high fire risk, which Soller said is important for residents living in very urban areas.

“There are pockets of FAIR Plan policies all over the state, including in parts of much more urban Orange County,” Soller said. “It may be a street, a neighborhood; it may even be house by house. You might have traditional insurance and your neighbor might not. That doesn’t show up in the county or in the ZIP code.”

“Those folks qualify, too, for insurance companies writing policies,” he said.

Commercial insurers would also have to increase coverage by 5% in distressed ZIP codes statewide, under the commissioner’s plan.

In Orange County, several ZIP codes, including in Buena Park, La Habra and Seal Beach, are among the hundreds for commercial properties across the state that partially overlap a high or very high fire hazard severity zone, as defined by CalFire.

“With our regulation, insurance companies have to hunt for you,” Soller said. “So they’re going to actually have to go out and find consumers.”

While the state cannot force insurers to write policies, in order to use catastrophe modeling — which insurance companies for long have lobbied for in hopes of making rates more predictable and sustainable — Soller said they must agree to write more policies in higher-risk areas. Under Proposition 103, which California voters passed in 1988, insurance companies are free to choose where they write policies in the state.

Regulations are on track to be finalized by the end of this year, Soller said. The department has received positive reactions from insurers, he said.

Farmers Insurance in May said it will reopen its commercial policies in California beginning Aug. 1, said spokesperson ​​​​​Luis Sahagun.

“We have been consistent in our belief that a fundamental condition for offering coverage is that rates need to reflect the risk exposure we are insuring. Fortunately, through constructive discussions with the (Insurance Department), we are now ready to take this step back into the market,” Eric Coleman, president of business insurance for the company, said in a news release.

In an emailed statement, an Allstate spokesperson said the company is working with the Insurance Department to improve insurance availability in the state and “once home insurance rates fully reflect the cost of providing protection to consumers,” it will be able to offer home insurance policies to more Californians.

California already has a program that aims to reduce the number of residential FAIR Plan policies by allowing homes insured by that plan to be reviewed by insurers to determine if they could be moved to the traditional market. A similar program for commercial insurance policies is scheduled to launch by July 1.

A workshop where the public is invited to provide input on the catastrophe modeling regulation is scheduled for Wednesday, June 26 at 2:30 p.m. The workshop will take place via Zoom and those interested could register online.

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About the Author
Yosi Yahoudai is a founder and the managing partner of J&Y. His practice is comprised primarily of cases involving automobile and motorcycle accidents, but he also represents people in premises liability lawsuits, including suits alleging dangerous conditions of public property, third-party criminal conduct, and intentional torts. He also has expertise in cases involving product defects, dog bites, elder abuse, and sexual assault. He earned his Bachelor of Arts from the University of California and is admitted to practice in all California State Courts, and the United States District Court for the Southern District of California. If you have any questions about this article, you can contact Yosi by clicking here.