MORE BUSINESSES in wildfireprone areas are facing a difficult commercial property insurance market as insurers reduce their exposure and some have left the market altogether.
Many businesses in areas that have already been ravaged by fires in the past, or those located in areas that are near forests and large grassy areas, are seeing their premiums increase – sometimes substantially by 300% or 400%.
According to a new report by A.M. Best, California wildfires have caused over $4 billion in commercial property losses for insurers in three of the past four years.
Some insurers have stopped writing property insurance in high-risk areas.
- Most insurers are increasing their rates substantially in high-risk areas.
- Insurers are requiring mitigation measures like defensible space (see below).
- Many policies have worse terms. One winery owner interviewed by the Los Angeles Times said that his premium was typically $200,000 with a $25,000 deductible. His new policy costs $800,000 and includes a $500,000 deductible, and would only cover 20% of the value of his buildings.
The new playbook
Many insurers are applying three metrics in evaluating exposure to fire:
Brush mapping – This is a map of the tinder and brush, nearby trees and other items that could contribute to your building(s) catching fire.
Wildland-urban interface – The closer a building is to nature, the more at risk it is. A wildlandurban interface is a place where “humans and their development meet or intermix with wildland fuel.”
Concentration of properties – If an insurer has a high concentration of policies for other properties in an area, they may limit their writings and non-renew policies in order to reduce their exposure.
If all insurers have rejected a property, we have two options:
The non-admitted market – These insurers, which include Lloyd’s of London, are usually willing to write buildings in higher-risk areas, but they too have increased their underwriting criteria. They are not licensed to write business in California, but they are able to through the surprlus lines market.
The California FAIR Plan – If we cannot find an insurer in the non-admitted market, the last choice is the FAIR Plan. Policies cover losses from fire, lightning and explosion only. Also, policies are limited in what they will pay out, so if you have millions of dollars tied up in equipment and/or inventory, the policy may not be enough to cover all the damage you incur from a wildfire.
The maximum limit for commercial properties is $3 million for structures and $1.5 million for all other coverages, for a combined $4.5 million limit for all commercial properties at one location. But there are some exceptions.
Your options if you go to the FAIR Plan
FAIR Plan coverage is not a complete replacement for a commercial property policy. For risks that are not covered, you can secure “differences in conditions” policy. Combined with FAIR Plan coverage, adding such a policy can nearly mimic the coverage of a commercial policy.
INSURERS REQUIRE A ‘DEFENSIBLE SPACE’
- Zone 1 (0-5 feet): Concrete, gravel mulch and low-growing plants or lawns are good choices for this zone. Avoid combustible materials.
- Zone 2 (5-30 feet): Vegetation island. Prune low tree branches. Remove shrubs.
- Zone 3 (30-100 feet): Thin out vegetation between trees. Don’t let tree canopies touch