This Will Be Painful

What a disaster! I’m sure all of our hearts are going out to the displaced residents of Los Angeles, who have lost much, if not all, of what they have to give. If there is to be any good news at all, it is that insurance will cover the financial portion of their loss…

Or will it?

I think we are getting ready for a very painful — and very public — lesson regarding homeowner’s insurance, and the ability of the insurance companies to be here for us when they are most needed. We have been seeing this in our part of Oregon, where our premiums have risen 20% to 30% each of the past three years in response to the wildfire risk in this area. Painful? No doubt!

But there is absolutely nothing that can be done — especially when a mortgage requires the coverage in the first place — other than write the check, and hope the insurance companies even continue to offer coverage. After last year’s bill arrived, our agent let Susie and I know that the company we have is the only one left who will cover fire risk for our home. If/when we are dropped, we’ll have to fall back to the state-funded Oregon FAIR Plan. According to the Oregon Division of Financial Regulation:

The Oregon FAIR Plan is an insurance policy of last resort if a property owner cannot find insurance coverage in the standard market. The premiums are often more expensive than in the standard market, and the coverage is less comprehensive, but the plan does provide important protections.

Yeah, good times all around.

Anyway, enough whining. It seems to my simple understanding of economics that while the loss of a single dwelling may be affordable, how can any company — or even a state — absorb the costs involved when the destruction impacts entire neighborhoods and communities? As we learned with Hurricane Katrina, this is where the federal government, with its perceived bottomless pockets, is expected to step in.

The fires currently consuming parts of Los Angeles may be a case in point. According to a New York Times opinion article from this morning (1/15/25):

The California FAIR Plan … was created by state lawmakers in 1968 to cover people who couldn’t get standard home insurance for various reasons. As climate change intensifies, the rapidly growing FAIR Plan has become the linchpin holding together California’s increasing fragile insurance market.

About what would be expected, but The Times wasn’t done…

As of last Friday, the FAIR Plan had just $377 million available to pay claims, according to the office of Senator Alex Padilla, Democrat of California. Total insured losses from the fires so far have been estimated at as much as $30 billion. Because the fires are still burning, that number could grow.

Oops! Sounds like LA homeowners are facing a shortfall of $29,623,000,000… and counting. We can only hope that the Santa Ana winds that are driving the disaster subside, and that the guys in the yellow suits with the McLeods and Pulaskis can fulfill their sacred trust here in Oregon. My fingers are crossed for both…

But fires aren’t the only natural disaster Mother Nature can throw at us (or our insurance agent). Other than wildfire, how can insurance coverage (or lack thereof) affect the rest of us? Unfortunately, it’s all too simple:

I don’t care if the rupture occurs along the San Andreas in California, the Cascadia Subduction Zone in the Pacific Northwest, or the New Madrid system that will rattle the eastern half of the country, the result will be the same: any quake with a magnitude greater than 6.5 on the Richter Scale, in any of these areas, will result in damages that will be ever so much more wide-spread (and therefore more expensive) than what is happening in Los Angeles. (Click here for an index of earlier posts that touch on earthquakes and seismic risk.)

There is little doubt that, along with the long-term economic disruptions that will surely encircle the globe, the paid-for insurance coverage will surely fall well short of the need — just like is going to happen in LA.

At least with fires we know what to do in advance to minimize the risk (whether we do it or not is an entirely different matter). Sadly, prediction and control of earthquakes — and therefore protection efforts — are likely impossible.

And by the way: most, if not all homeowner’s policies — even if they do cover fire — DO NOT as a rule include earthquake damage. You have to buy a separate policy to cover your seismic risk. If you live west of the Cascade/Sierra Mountains, Joshua Tree National Monument or the Salton Sea, or anywhere east of the Rockies, this means you.

Is your earthquake insurance paid up?