Hurricanes, Wildfires and Impact on Insurance
By Michael Giusti
The heat of the summer brings with it two worrisome insurance risks — hurricanes and wildfires. Although seemingly as opposite as fire and water, both natural disasters are driven by the extremes of climate change, and forecasters warn that in the medium to long term, both stand to get worse if the long-term greenhouse gas emissions aren’t brought into check.
From an insurance industry perspective, both the hurricane season and wildfire season bring uncertainty and risk as forecasters warn of the coming months and homeowners warily await their policy renewals — if renewals are offered at all.
This guide will aim to lay out the risks wildfires and hurricanes pose to the insurance industry and some of the considerations policyholders and insurance companies should be keeping in mind in the coming months and years.
The Months Ahead
Forecasts are notoriously difficult for both hurricanes and wildfires, but the science community does its best to give as much advance warning as possible to keep people and property safe.
As far as hurricanes are concerned, according to the National Oceanic and Atmospheric Administration, 2023 looks like it may hold a typical hurricane season, driven largely by the conflicting forces of the El Nino Pacific Ocean weather pattern and the above average ocean temperatures.
These are competing forces, because El Nino tends to suppress hurricane formation, while higher ocean temperatures tend to fuel the storms once they do form.
NOAA predicts that between 12 and 17 named storms should form this year, with between five and nine of which will likely become hurricanes, and as many as four are predicted to become major storms of category three or larger.
The Colorado State University Tropical Weather and Climate Research team similarly echoes that sentiment of a near-typical hurricane season.
But they go on to remind residents that it only takes one storm making landfall near your home to make a storm season seem especially active.
Already three named storms have formed in the Atlantic Basin so far in 2023, though none have yet made landfall in the Continental United States.
Similarly, wildfires are looking at a mixed forecast in 2023, with California and much of the Southwest looking at a normal to below normal fire risk, while the Pacific Northwest and much of the Great Lakes Region face above-normal fire risks according to the National Interagency Fire Center.
Impact on Home Insurance
Many researchers say they worry that if greenhouse gasses continue unabated, disasters such as wildfires and hurricanes will only get more frequent and costly, leading to bigger losses for insurers. In many markets that is already happening, with repercussions in the insurance market.
For example, in many coastal communities in hurricane-prone states, such as Florida and Louisiana, mainstream insurance companies that are regulated by the state insurance commissions just aren’t writing homeowner’s insurance policies anymore.
Similarly, Allstate and State Farm have stopped offering new homeowner’s policies in California in response to wildfire risk.
For communities that can obtain policies, premiums are going up in high-risk areas, and in many cases, deductibles are higher.
For communities without mainstream insurers, one option homeowners have is to turn to their state-run insurer of last resort — so-called Fair Access to Insurance Requirements, or FAIR plans — which is typically priced by law above all other insurers in the state and often have lower policy limits.
Often the only other option aside from a FAIR plan policy is to opt for insurers in the un-regulated, so-called unadmitted or surplus market. But surplus policies are not without risk. That is because surplus insurers tend to cost more than their regulated counterparts, and if they go under because of major losses after a disaster, the state backstops won’t bail out the homeowners.
Part of what is driving the insurers out of these markets is that the higher number of losses means they aren’t making as much profit on the policies they are writing. But another major factor is the cost of reinsurance — the policies the insurance companies themselves take out to backstop themselves from catastrophic risks. Years of major disasters have driven up the reinsurance prices, meaning that riskier policies just aren’t profitable to write anymore.
What is Actually Covered
If a disaster is threatening a community, one of the first things a homeowner should do is to become familiar with what is, and what is not covered by their policies.
As a general rule, hurricanes and wildfires are covered by homeowner’s insurance policies.
But that doesn’t mean they always are. In some high-risk communities, those risks are specifically excluded from the policy, so it is important to ask an agent to be especially clear that the policy does cover those risks. In cases where they are specifically excluded, homeowners will have to get a separate policy to protect themselves from those risks in much the same way that they do for floods or earthquakes.
But, unless they have been specifically excluded, windstorms and fires will be covered by typical policies. That protection applies to the structure of the home, as well as any detached structures, such as garages, sheds, or gazebos. Though, those detached structures have separate and smaller coverage limits.
Homeowner’s personal property is also covered against losses from wildfires and hurricanes, again, at a specified coverage limit.
The contents are even protected if the home isn’t specifically damaged, but are damaged by nearby smoke or ash.
Sometimes the home’s landscaping is covered during a covered peril, specifically if the removal is required to help the homeowner gain access to the property. Occasionally replacing damaged landscaping is also covered, but that differs according to policy.
Sometimes damaged food lost when a refrigerator loses power is covered, but again, that is specific to the policy.
What is never covered by a homeowner’s policy is damage caused by rising water, such as a flood, or wind-blown water. If the water falls from the sky or comes from a broken pipe, the homeowner’s policy would cover it, but if the water was touching the ground when it entered the home, the homeowner will need a separate flood policy to be covered.
Another thing to keep in mind is that in many high-risk communities, policies have separate named storm and/or wildfire deductibles that are higher than the policy’s typical deductible.
Say the homeowner’s policy’s deductible was typically $1,000. A named storm deductible could be 10% of the value of the home, bringing it to $25,000 for a $250,000 home.
Beyond the home and the contents, insurance can step in and protect policyholders in some other ways, too.
For one, a policy can protect the homeowner from what is known as “loss of use.” That comes during an evacuation when the homeowner has to flee from the danger of a wildfire or a hurricane. When the homeowner evacuates to a neighboring community, the homeowner’s policy will often pick up the bill for the hotel and other additional living expenses.
But policy language is important here. Often the policy requires that the civil authorities issue a mandatory evacuation before the loss of use clause kicks in. Voluntary evacuations are often not covered.
If the home is damaged in the wildfire or hurricane to the point that it is uninhabitable, the loss of use clause will help the homeowner pay for a rental home or even a trailer to put on the property while the home is being rebuilt. But keep in mind, there are limits to how much the policy will pay for each loss, and it is important to document every expense along the way.
Loss of use coverage isn’t limited to homeowner’s policies, either. Renter’s policies won’t cover the structure of a home, but they will cover the renter’s property that is lost in a wildfire or a hurricane, and they also kick in to pay for loss of use costs as well. The same goes for condo policies, which pay for everything “from the inside walls in,” as well as those loss of use costs.
If an automobile is damaged in a wildfire or a hurricane, the comprehensive insurance portion of the policy will kick in. That would apply whether it burns up, gets crushed by a falling tree limb, or even gets flooded.
On the Road
If a family does find themselves evacuated during a storm, keeping an eye on health care costs is a wise move. That is because evacuating could mean that they have moved outside their typical health care coverage network.
A coverage network isn’t a concern in an emergency. Health insurance will always cover an emergency, so something like a heart attack or a broken bone will always get full coverage. But less clear-cut cases get into a gray area.
For things that need medical attention but that don’t fall under the category of emergency, like the flu or a stomach bug, families can often find themselves in a loophole without coverage.
One option is to call their insurer to see if there is a reciprocal provider who might be able to provide care. Another option is to see if there are telehealth options that might get care remotely but stay within the care network.
Evacuation may not be the only reason people are on the road during an emergency. If someone had a trip planned during a disaster, travel insurance would be able to step in. Having a natural disaster hit someone’s home or the destination they were about to travel to both count as valid reasons to trigger travel insurance policies for full coverage.
If someone didn’t buy a travel insurance policy, it is still worth calling and asking for a refund. Many places will waive their deposit policies if they hear the traveler is personally affected by a natural disaster.
Business Owners Risk
Homeowners aren’t the only ones who suffer during a wildfire or a storm. Business owners struggle, too. And their insurance policies are resources to help as well.
If their buildings, office spaces, equipment, or inventory get damaged, the business owner’s policy will step in to cover the cost of those losses.
If the business has to shut down for any extended period of time, a business income or business interruption insurance policy can step in to help cover those losses.
One major loss many people didn’t consider during the smoke emergency that enveloped the Eastern Seaboard this spring was the damage that smoke could wreak on agricultural products and food inventories. Even when those products don’t burn in an actual fire, the smoke can damage things like wine grapes, cannabis flowers, or even just run of the mill groceries. Smoke carries a powerful smell, and once it permeates a product, it is unsellable.
Smoke-damaged agricultural products can be a nightmare for underinsured businesses who might not have properly insured their inventories.
Tricks of the Trade
Once a natural disaster hits, the last thing anyone wants to do is argue with an adjuster about what they owned or what their property was worth. So, one best practice is to have a full inventory of all the things they own before disaster strikes.
Making a list of everything in the home, or business, ensures that after a disaster, everything can be claimed and properly reimbursed.
Typically, insurance policies put special limits on high-value items, such as electronics, jewelry, computers, furs, artwork, and the like. If someone has any particularly valuable collectibles, making special note of them and ensuring they are within their coverage limits ahead of time is key, and then communicating with the agent and buying floaters or additional coverage as needed will ensure they are properly covered.
While it is easy to say keeping an inventory is a best practice, often times the best laid plans aren’t always followed, and there are only a few minutes before a family has to evacuate.
If a family finds themselves in that situation, the next best thing to do is to open their phone’s video app and record a walking video of the entire house so they can go back later and have a documented walking tour of what the house looked like before the disaster to help back up their claim later.
Another little-known aspect of insurance after the claim is something called accumulated depreciation. That is a line item on an insurance claim that the insurer holds back until after the damage is actually fixed.
So, say the insurer says the windows took $10,000 in damage. They might front the homeowner $8,000 on the settlement but hold back $2,000 in accumulated depreciation.
After the homeowner makes the repairs, it is up to the homeowner to then send the proof of the repair to the insurance company, which will then send the remaining $2,000, making the homeowner whole.
If the homeowner never makes that second claim for the accumulated depreciation, the insurer just assumes the repair was never made and it will pocket the remainder, so it is important to know to make that second claim.
Conclusion / looking ahead
Knowing a natural disaster season is coming can be unsettling. But it is easier to stomach that risk if a suite of insurance policies is already in place.
The time to shop for an insurance policy is not when a named storm is bearing down on your community or when an evacuation order is being announced because of a fire in the next county.
Planning ahead can keep a family’s finances safe in much the same way as boarding up a home’s windows can keep a property safe.
Michael Giusti, MBA, is senior writer and analyst for InsuranceQuotes.com