Why this article matters: The claims process for insurance coverage following the loss of property due to a wildfire is complex, and has changed significantly over the past decade. This article explains homeowner protections for payment on claims made by property owners with coverage for wildfires.
Wildfire state
Wildfires are a constant threat to properties — and residents — across California. With every year, as the state’s climate grows hotter, drier and windier, the wildfire threat continues to grow, putting property owners in vulnerable locations in a precarious financial position.
The purpose of homeowners insurance is to provide payments to homeowners in the event of a covered loss. The homeowner pays a premium to the insurance company, and the company promises to provide money to repair or replace the property when a covered loss occurs.
Typically, a loss is a calculated and anticipated occurrence for an insurance company. However, any period when claims paid exceed premiums received, the shortfall is made up by increased premiums in the immediate future. But as wildfires become more common in California, many insurers negotiated for higher premiums by pulling back their insurance offerings, making the claims process more difficult, or temporarily pulling out of the state.
Enter California’s legislature. The last decade has seen a spate of new laws hit the books to provide better insurance coverage as a minimum for California homeowners who make a claim on their policy due to a wildfire loss: a necessity, when homes are allowed in wildfire zones.
Claims paid for a wildfire loss
Many property insurance policies provide for immediate payment to owners displaced by a wildfire, called additional living expenses (ALE). This type of coverage is designed to pay for the costs of:
- temporary housing;
- extra food to replace the food lost;
- furniture rental;
- relocation and storage fees; and
- transportation expenses.
When the loss is the result of a state of emergency, ALE payments are paid to a homeowner for at least 24 months following the date of the property loss. Further, the insurer advances funds for at least four months of ALE payments, with additional payments made following the homeowner’s submission of their proof of loss.
When reasonable delays occur during the reconstruction process, the insurer is required to extend ALE payments up to 36 months from the date of loss when the period for completion of repairs is reasonable. No matter the length of time, the total ALE amount is capped at the amount listed in the policy documents. [Calif. Insurance Code §§2060(b)(1); 2061(a)]
Homeowners have up to 100 days following the date of loss to submit proof of loss to the insurer. [I C §2051.5(b)(3)(A)]
During the claims process, the owner works with an adjuster, who investigates the owner’s claim for payments. They conduct interviews, take photographs and determine the value and veracity of the loss. The adjuster can be a:
- company adjuster employed by the insurance company;
- independent adjuster under contract with the insurance company; or
- public adjuster.
A public adjuster has the most motivation to work for as large a settlement from the insurance company as possible, since they are paid a percentage of the settlement amount. However, they do not work for the insurance company and homeowners suffering a loss need to be aware of potential scam artists who may demand fees upfront, have an interest in the contractors or other entities being paid to make repairs, or bribe homeowners into signing a contract.
A public adjuster may not solicit the homeowner’s business:
- while the loss is taking place, including during the period of an evacuation order;
- for seven calendar days following the loss; and
- between the hours of 6pm and 8am. [I C §15027(d); (e); 15027.1(a)]
Throughout the process, the Department of Insurance urges homeowners to document the loss, investigation and cleanup efforts through photographs and videos.
When a homeowner disagrees with the settlement offer or feels they are being treated unfairly, they may contact the Department of Insurance. To dispute the settlement, the homeowner hires an attorney.
Combining coverage
Consider a homeowner insured under a policy covering their primary residence and an accessory dwelling unit (ADU). Both structures are uninhabitable as destroyed, and the event is declared a state of emergency,
After beginning the claims process and determining the likely cost necessary to rebuild, the homeowner realizes the coverage for their primary residence is insufficient to rebuild the home following today’s building codes.
However, when the homeowner combines the coverage from both the ADU and the primary structure, the payoff is sufficient to rebuild the primary residence but not the ADU.
Here, the homeowner combines the coverage for both structures to rebuild only the primary structure. Further, when the coverage on both exceeds the amount necessary to rebuild the primary structure, the insurance company pays the additional amount as controlled by the terms of the policy. [I C §10103.7(a)]
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Rebuilding location
Consider a homeowner with a residence in a very high fire hazard severity zone. A wildfire occurs in the area, destroying the home. [See RPI Form 314-1]
The homeowner wishes to use the insurance payout to rebuild, but they will build elsewhere to avoid the risk present on the insured property. Thus, they will eliminate the need to use of fire-safe materials and landscaping. [See RPI Form 314 §3]
May they use their insurance benefits to rebuild at a different location?
Yes! When the insured structure is a total loss, the homeowner may use the insurance proceeds to rebuild at a new location — or to purchase a previously built home at a new location. The claim paid is limited to the current replacement cost (including the building code upgrade cost) to rebuild the destroyed structure at the insured location. [I C §2051.1(c)(1)]
When calculating the replacement cost to rebuild in a different location, the insurance company may not deduct the value of the land at the original location from the amount recoverable. [I C §2051.1(c)(2)]
Inventory of contents
Most policies require the owner to replace the contents before the insurance company will fund the replacement cost. Further, when the owner chooses not to replace any items, they will be paid their cash value.
The replacement cost is the cost to replace a structure with one having the functional equivalent to the structure being appraised but constructed with modern materials and methods.
However, the cash value of an improvement is comprised of the costs to replace and the value lost due to aging, called depreciation. For insurance claim payments, depreciation is deducted from the value of improvements that a homeowner normally repairs or replaces throughout their useful life. For example, the value of a stove depreciates, but a homeowner does not depreciate the value of their jewelry collection. [I C §2051(b)]
Further, when a property owner loses the entire contents of the structure due to a natural disaster, such as a wildfire, they rarely have an itemized list of contents lost.
While the California Department of Insurance recommends keeping an up-to-date inventory of contents, in the event of a total loss without an inventory list, the Department provides a list at their website of belongings in a typical household. The Department recommends each household keep information like:
- serial numbers for electronics;
- photographs or videos of items (date-stamped); and
- receipts.
This information can be kept in a safe deposit box, off-site and/or electronically so it can be accessed anywhere. It’s suggested to keep at least two copies of this information in different places.
The Department urges homeowners to update their personal inventory list three times a year and after major purchases. Further, insurance coverage ought to be reviewed at least annually, and anytime improvements are made to the property.
When a homeowner does not have an itemized list of contents lost, insurers need to provide at least 60% of the personal property policy coverage limit, up to $350,000. [I C §10103.7(b)(1)]
Free inventory guides can be downloaded at insurance.ca.gov.
Time to collect
A homeowner has at least 12 months from the date the first payment is made toward the actual cash value of the property to collect the full replacement cost.
However, when the loss is the result of a state of emergency, the homeowner has at least 36 months to collect the replacement cost (or the policy limit, whichever is less). [I C §2051.5(b)(1)]
Further, when the homeowner reasonably experiences construction or related delays, one or more additional extensions of six months is granted by the insurer. [I C §2051.5(b)(2)]
Insurance covers the mortgage holder first
When the property is encumbered by a mortgage, the insurance payment is made payable to the named insureds, which includes both the:
- property owner; and
- mortgage holder.
As a result, the payment may not be cashed unless both the owner and the mortgage holder have endorsed the check — ensuring the payment is applied toward repairing the structure and restoring the mortgage holder’s security.
The mortgage holder usually requires the money be placed in an escrow account for disbursement in progress payments as repairs are completed. The mortgage holder authorizes release of the final payments after determining all repairs have been completed in a satisfactory manner.
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Mortgage forbearance for homeowners affected by 2025 wildfires
Cancellation moratoriums
As global warming worsens, natural disasters like California’s wildfires will continue, and even increase. In recent years, insurance moratoriums declared by the Department of Insurance prohibiting insurers from cancelling insurance policies for a year following a state of emergency have become increasingly necessary for homeowners.
Insurance companies may not cancel or refuse to renew insurance policies issued to homes with zip codes located within or adjacent to a fire perimeter for at least one year from the date a state of emergency is issued based solely on the home’s location. [I C §675.1(b)(1)]
Passed in 2018, this law was in response to insurance companies dropping customers in the aftermath of a wildfire, leaving them unable to access coverage. As is the case here in California, dozens of wildfire declarations have been made across the state since the law’s passage, providing homeowners with time to make other arrangements for coverage.
Further, when a homeowner files a claim for a total loss to the primary structure on the property, the insurance company may not cancel coverage while the home is being rebuilt, unless insurance premiums are not paid. [I C §§675.1(a); 676(a)]
The insurance company allows a 60-day grace period for payment of premiums by homeowners located in an affected area following a state of emergency. [I C §2062]
Insurance premiums
In 1988, annual insurance premium increases were limited to no more than 7%. The only way around this for insurers is an arduous approval process with the California Department of Insurance.
Unable to fully recover claims paid through immediate increases in premiums, insurers began exiting the state.
In an effort to keep the market of insurers viable and competitive and give insurance companies a reason to issue policies in California, an executive order in 2023 ordered the Department of Insurance to:
- modify the insurance rate approval process to account for natural disaster risk;
- improve the efficiency and transparency of the rate approval process; and
- ensure long-term availability of property insurance options for Californians.
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