In my last year on the staff of the Big “I”, I did a monthly 30-minute webcast with Marty Agather called “Insurance in the News…What’s Goin’ On?” (complete with an intro by the Marvin Gaye song). We took current news stories and examined them from an insurance and risk management angle. This article seeks to accomplish the same thing.
The issue with wildfires and homeowners or commercial property insurance is not whether the peril of fire is covered, but rather what are some of the related coverage issues. In recent weeks, I’ve had several questions posed by blog subscribers regarding the California wildfires. For example, are government-ordered evacuation expenses covered?
Most homeowners policies cover additional living expenses and/or fair rental value for typically 2-3 weeks if a civil authority prohibits the use of the residence premises as a result of direct damage to neighboring premises by a covered peril. One question is what constitutes “neighboring premises”? Absent any case law to the contrary, and given the high public profile of these events, insurers would likely be hard pressed to deny such claims when potential fire damage is imminent and a mandatory evacuation order is in place. But coverage is time-limited.
Homeowners policies also usually include a governmental action exclusion that could apply to deliberate destruction of property to prevent the spread of fire (a “fire break”), but such exclusions invariably make an exception for the peril of fire.
For commercial property, business income and extra expense coverage also usually includes a similar civil authority clause but the ISO edition date or non-ISO language may vary. Earlier forms extended coverage if there was damage to property “other than at the described location.” However, given the potential for an extremely broad interpretation of this language, especially in the case of hurricanes, ISO changed it to limit coverage to damage to property within a mile of the subject premises. Also consider that BI/EE forms often have a 72-hour waiting period such that the extra expense coverage for certain types of properties (e.g., hospitals) might be of the greatest value.
Two other questions that have come up involve whether property must be replaced at the same location or within 180 days, that latter in order to receive replacement cost coverage. Using the ISO HO-3 as an example, the dwelling does not have to be replaced at the same location. The form simply says that the insurer won’t pay more for replacement elsewhere than what it would have cost to replace it at the same location. In the case of rebuilding within 180 days, the ISO form simply requires the insured to advise the insurer within 180 days of the intent to replace the property. This may not be the case for non-ISO policies.
Perhaps the biggest uninsured exposure with wildfires is when a neighborhood is virtually reduced to ashes, but not the home of a particular homeowner. In such cases, there is no direct loss but there is a huge loss of market value.
The bigger issue is how are these wildfires going to impact insurance availability and affordability? Without regulatory intervention, availability could be an issue for properties located in some heavily forested areas. Without regulatory or legislative intervention with regard to zoning ordinances and building codes, insurers could resist attempts to mandate unrestricted access to insurance. Someone asked me about the possibility of mandating sprinklers in homes. While my college degree was in fire protection engineering, I’ve not stayed current on issues like this. My initial reaction was that, in a conflagration, it’s possible that a sprinkler system could do more harm than good in that the opening of multiple sprinkler heads could drop water pressure at that location or in the general vicinity to a point that fire-fighting efforts could be hampered. But, again, I’m no longer current on this issue.
The still bigger issue is what does the future hold? A recent Forbes article takes the position that forestry management failures may contribute to these wildfires. We know that, as a risk management technique, prevention is often a wiser and more cost effective approach than insurance. Another technique is avoidance…don’t buy or build in loss-prone areas.
And what does the immediate future hold? Why floods, of course. If past history holds true, we can expect these deforested areas to experience flooding and mud flow IF precipitation follows. This is one instance where dry weather that contributed to the wildfires might be welcomed.
Before this article was even published, I received an email from John Putnam, CPCU in Colorado who had consulted in their Waldo Canyon and Black Forest wildfires. Below is an article he wrote regarding the role that residential sprinkler systems might play and the pitfalls involved. You can read more by John at his blog.
Wildfire Lessons Learned: Sprinklers
by John Putnam, CPCU
Are residential sprinklers a solution to the increasing wildfire risk? As an insurance professional, my first exposure to this question came in the aftermath of the Black Forest Fire that occurred near Colorado Springs in June 2013. I was asked to serve as an independent consultant to the survivors based upon the lessons learned in a similar capacity following the Waldo Canyon Fire that burned into the City of Colorado Springs in June 2012. Sprinklers were not an issue in the Waldo incident, but they certainly were during the Black Forest Fire aftermath. This question’s answer depends on who, when, and where you ask the question.
Before addressing each of these factors, it is important to identify the players with an interest in the recovery following a major wildfire catastrophe. Why does this matter to insurance professionals? While the insurance world is focused on assessing the damages from the recent event and deciding what is covered under the respective policies, there are many other non-insurance forces that are unleashed following these events which play a significant role in the trajectory of the recovery. As it relates to sprinklers, the involved players were:
- Fire professionals who are charged with enforcing fire codes and minimizing the exposure to future events;
- Public entities who adopt fire codes;
- Builders who are trying to maximize building replacement who often resist codes that they do not feel matter;
- Sprinkler installation contractors who stand to directly benefit from such codes;
- The wildfire survivors who are concerned they will not have enough coverage to rebuild; and
- The insurers who may pay for these code changes if there are adequate limits.
As it worked out in the Black Forest aftermath, most of the “politics” involved the first five players because the insurers constrained by their policies regarding expanding coverage. As the insurance professional in these discussions, this dialogue was very different than the usual conversations that I had seen in certain commercial insurance risk management scenarios.
The two primary fire departments in the area were advocating the adoption of the most recent International Fire Code (2009) at that time which would require more rebuilt homes to install sprinklers based on that code. The builders and survivors pushed back on the potential costs to install sprinklers which would complicate the financing of reconstructing the homes. The sprinkler installers never had a large voice in this conversation likely due to their small numbers. The county commissioners stepped in and stopped the adoption of the more recent fire code effectively ending the discussion of sprinklers in the area. Politicizing this decision was an amazing process to watch on the sidelines. Bottom line: the rebuild was allowed to proceed using the old codes with no real efforts to minimize future events.
Why does the “when” matter? If this decision was made for new construction, it might have a better chance to succeed. However, when you are changing the codes after a natural catastrophe, it is all about who is subject to the new code and who pays. Since the wildfire victims are required to get their building plans approved, this would be one more cost they need to absorb to rebuild. Because many were under insured and/or their law and ordinance (L&O) limit was insufficient to pay the additional cost, this factor played a large role in adding political pressure to not enforce the more rigorous fire codes. Thus, the wildfire survivors were spared the cost of sprinklers estimated to cost between $7-30K depending on the size of the home.
Note: A post wildfire code change adopted by the City of Colorado Springs following the Waldo Canyon Wildfire which did not include sprinklers was successful in overcoming community objections with a series of community meetings as well as general insurer acceptance that L&O would cover the approximately $5k additional cost per home.
The conversation regarding sprinklers depends upon where the residence is located. Black Forest is an unincorporated area of El Paso County that has its own fire department, but there are minimal fire hydrants and no public water supply. Water is generally provided by private wells on each property which depend on electrical power to pump the water throughout the home. There are four challenges for sprinklers in this type of neighborhood:
- Loss of power could render the water supply insufficient for a long-term fire event;
- Most wildfires are ignited on the building’s exterior where sprinklers would not help until the fire spread to the inside of the structure; and
- Most destructive wildfires have high winds that drive the fires themselves for which sprinklers would unlikely make a huge impact.
While I was a little amazed initially at the political outcome of the Black Forest decision to not mandate sprinklers, I continually access this decision as each new larger wildfire addresses the same issue. In retrospect, had sprinklers been mandated, the rebuild would have been even slower with many people unable to afford the new code upgrades. As I watch the horrific wind driven fires, I am convinced that sprinklers are not the answer to the prevention of wildfires for homes in unincorporated wildland urban interface (WUI) neighborhoods. As the recent Camp and Woolsey wildfires demonstrate, there is great public discourse in finding single solutions to the wildfire problem. Beside the sprinkler lesson I learned, I also learned and continue to learn that wildfire is a multi-dimensional natural peril for which there are no quick or easy answers.