On February 25, 2022, California Insurance Commissioner Ricardo Lara unveiled new regulations centered around wildfire safety. With fire season now essentially year round in some areas, insurance rates for residents and businesses have skyrocketed. These new regulations would require insurance companies to take into consideration fire mitigation measures taken by policyholders or applicants in assessing their wildfire risk number as well as premium rates. It will also require insurance companies to be more transparent about policyholders wildfire risk scores used to assess rates.
Policy Behind the Regulations
In recent years, the threat of wildfires has threatened Californians and others around the globe like never before. A recent report from the United Nations found that wildfire risks are significant; especially for homeowners in high fire danger areas. In response to this extreme risk, insurance companies have raised policy premiums in areas of high fire danger. The result- inaccessibility of insurance for many property owners, with the more wealthy able to protect their homes despite the rising costs, and those with less resources choosing to take the gamble with no insurance.
Many consumers submitted complaints regarding this issue to the Insurance Commissioner. The Insurance Commissioner took notice of their pleas and stated, “With more Californians rolling up their sleeves and reaching into their own pockets to protect their homes and businesses, insurance pricing must reflect those efforts.” The Commissioner laid out the following policy reasons behind the regulations:
- Provide incentives for individual property owners as well as fire prone communities to initiate mitigation measures in high fire risk areas.
- Mitigation measures reduce the risk of loss caused by wildfires.
- Increase uniformity and accuracy for insurance companies in assessing fire risk for a particular property and assigning proper rates in accordance with the new guidelines.
- Protecting consumers by establishing an appeals process.
- Improving availability and accessibility to property insurance for areas that have implemented mitigation measures by making it more affordable.
With property owner responsibility at the forefront of achieving an insurance discount, the Insurance Commissioner hopes that the new regulations will be win-win. Lower insurance rates for property owners and lower risk for insurance companies.
Safer From Wildfires Framework
The announced regulations incorporate the “Safer from Wildfires” framework. This framework was born when several state agencies worked together to identify a common insurance framework and mitigation measures for homeowners and businesses in high fire risk areas. Not only does the framework protect consumers from excessively priced insurance policies, but it also incentivizes property owners to take more proactive measures to ensure their own safety. The hope is that it will lead to a more competitive insurance market for all California residents and businesses. Currently, there is no legally imposed insurance benefit when consumers take fire mitigation efforts on their own. These mitigation efforts often cost them thousands of dollars out of pocket.
The new regulations will allow consumer discounts for those property owners who can show proof of mitigation measures on their property. The regulations will apply to all insurance companies who use wildfire risk factors in determining premiums rates. Insurers will be required to submit their Wildfire Risk Models to the Department of Insurance for approval within 180 days of the date this new section is filed with the Secretary of State. The application must incorporate a rating plan that includes the specified mandatory factors below. If any edits or revisions are made, the company will also have to submit the newest version for review. The mandatory factors that insurance companies must consider in their Wildfire Risk model include:
Mandatory Factors
- Community-level mitigation efforts.
- Property level mitigation efforts such as clearing vegetation and debris around the property and any movable combustible objects. Incorporation of non-combustible products when property improvements are conducted.
- Building hardening measures such as Class-A fire rated roof, enclosed eaves, fire-resistant eaves, multipaned windows, and at least six inches of noncombustible vertical clearance at the bottom of the exterior surface of the building.
- In addition to the mandatory factors listed above, a number of optional factors may be considered by insurance companies in formulating their risk rating plans as well.
Optional Factors
- Fuel: Accounts for combustible materials in the vicinity if the structure.
- Slope: Position of the structure on a slope relative to potential sources of ignition and the steepness of the slope between the potential sources of ignition and the structure.
- Access: How easily can firefighters and their equipment reach the property?
- Aspect: Direction of the slope in relation to the direction the structure faces.
- Structural Characteristics: materials used in construction; unique qualities of the home that may increase or decrease fire risk.
- Wind vulnerability
- Other unspecified community level or property level mitigation efforts.
Additional New Requirements for Insurance Companies
Insurance companies will also be required to submit any documents associated with formulating the fire risk rating plan to the Department of Insurance upon request. Any rate application must include the insurer’s own California wildfire loss data if it supports or informs their rating system for insurance policies. In addition, the insurer must provide to the policyholder or applicant, in writing, their wildfire risk score or classification no later than 15 days after an application is submitted, 45 days prior to any renewal, 75 days prior to any nonrenewal, or following a mitigation measure by the policyholder and a request for reconsideration, within 30 days of receiving that request.
Policyholder and applicants also now have the ability to appeal the rate assessed and the procedures used to make that assessment. The insurer must acknowledge receipt of the appeal within 10 calendar days and make a decision within 30 days. If the insurer chooses to deny the appeal, the Department of insurance may request a copy of the appeal as well as a copy of the response.
Requirements Information for Wildfire Risk Score
As part of its explanation of the offered rate, insurance companies should provide the insured:
- The range of scores or classifications that could possibly be assigned to any policyholder or applicant.
- Relative position of the score or classification assigned to the policy holder or applicant within that range of possible scorers on the rate and premiums, and
- Detailed written explanation on why the insured received that score.
- Insurers should also provide information on possible mitigation measures that can be taken on the property as well as informing the owner their premium may be reduced upon completion of such a mitigation measure.
Insurance Company Action Items
- Insurers will be required to submit their Wildfire Risk models to the Department of Instance for approval within 180 days of the date this new section is filed with the Secretary of State.
- Insurers must incorporate the “Safer from Fires” framework in assessing their pricing for insurance of property.
- When calculating fire hazard risk scores, insurers should consider any mitigation efforts-whether on the community or individual level- that property owners complete to reduce their risk.
- Insurers must inform policyholders and applicants of their wildfire risk score and also provide information on mitigation efforts they can take at their property to improve their score and in turn, possibly lower their payment.
- The wildfire risk score or classification no later than 15 days after an application is submitted, 45 days prior to any renewal, 75 days prior to any nonrenewal, or following a mitigation measure by the policyholder and a request for reconsideration, within 30 days of receiving that request.
- If a policyholder or applicant appeals their wildfire risk score insurers must acknowledge receipt of the appeal within 10 days and issue a response within 30 days.
- Insurers should be prepared to submit all documents relating to their wildfire risk assessment process and procedures as well as any documentation on appeals to the Department of insurance upon request.
The attorneys at Wood, Smith, Henning and Berman have thoroughly reviewed and analyzed these new provisions and stand ready to assist you adjust your polices and procedures as needed. Please do not hesitate to reach out to a member of our team should you have any questions or concerns.