Fires become routine. How can businesses afford insurance?

As Napa and Sonoma counties, and so much of California, continues to burn, there could be another issue for business owners - a larger insurance bill.

Even before the devastating Glass Fire that erupted near St. Helena in the wee hours of Sept. 27, commercial property owners in California, particularly wineries, were already getting notices of premium increases of 400% to 500% . Some policies were being canceled.

“Obviously, with the change in weather patterns and with California becoming a wildfire state, as it is perceived by the insurance industry, many insurers are pulling back. There is less capacity in the market place to write insurance in high wildfire areas,” said Debra Costa, senior vice president with Heffernan Insurance Brokers in Petaluma.

And now with the area being devastated again, “I think there will be more restrictions in the market place based on the amount of paid losses. There will be coverage restrictions.”

Today it’s challenging for most people to change a residential or commercial insurance policy in any of the fire areas because of moratoriums put in place by the insurance industry. It means no new policies can be written and existing ones cannot be changed.

Moratoriums are set by individual insurers, and are the norm during most catastrophic incidents. Sometimes they cover entire counties, sometimes it’s by ZIP code. Usually they are in effect until the fire is 100% contained.

“This time of year is really bad. Oct. 1 is the start of a fiscal quarter so lot of businesses start their insurance on fiscal quarters,” explained Jeff Okrepkie, a commercial insurance producer with George Petersen Insurance Agency in Santa Rosa.

For people without a new signed policy, they will likely be left with the parameters of the existing policy. Each company can devise its own policy when it comes to insureds who are caught in this state of limbo. This is why during a devastating fire calling one’s insurance agent should be on the top of the to-do list.

Legally, insurance companies must give clients written notice within 60 days if rates are going up significantly or if the policy will not be renewed. This year some companies are giving clients 90 days’ notice.

It’s not unusual for insurers to send letters to their entire portfolio of clients, not just to those who have filed claims or who are doing business in wildfire areas. That’s because with the rising cost of paying claims, revenues are declining and the way to replenish the pot is to raise rates for all policyholders. They also have to satisfy company investors seeking a good return.

Companies could also pull out of markets that are high risk, which, after several years of devastating wildfires, much of the state is now deemed.

“Any commercial property in California is likely to see an increase in rates based on the overall portfolio experience of the insurer,” Costa said.

Wineries threatened

In the fires which continue to burn in Napa and Sonoma counties, wineries have been damaged or destroyed, adding to the hit the industry has taken through the area’s wildfires. The very nature of where wineries are located put them at risk.

“In the more rural areas it is through the roof. In general wineries are on the hillside or the valley floor backed up to a hill. They are more prone to wildfire risk,” Okrepkie said. “We are seeing an inability to get coverage a lot of time or at least affordable coverage. It’s sad because the smaller, traditionally called mom and pop wineries, are seeing rates go from $19,000 for a commercial package to the next best thing they can get costs $40,000 to $50,000. I’ve seen it go from $27,000 to $80,000.”

It was two years ago this November that the Camp Fire wiped out the town of Paradise in Butte County and killed more than 80 people.

Just last October the Kincade Fire in northern Sonoma County destroyed 374 structures, and damaged 60 others.

The fires in the state this year have burned at least 4 million acres, destroyed thousands of structures and resulted in nearly three dozen fatalities.

In 2017, insurance companies paid out $11.8 billion from wildfire claims; in 2018 the total was $12.4 billion. Detailed data from the 2019 fires was not collected by the state Department of Insurance. These figures are for residential and business customers. Actual losses could be higher based on people being underinsured or uninsured. The losses are continuing to mount in 2020.

“Right now your insurance agent is going to be a crucial aspect of your recovery team,” Okrepkie said of people who suffering immediate losses. He knows this firsthand, not just as a businessperson.

Okrepkie lost his home in the 2017 Tubbs Fire and later founded the nonprofit Coffey Strong. He said it’s important for business owners who have losses or have been displaced to be in communication with their insurance agent or their team.

“The process could take a long time to get everything closed out. You want to be able to take care of yourself, your employees with lost wages. It’s a difficult concept to be fastidious and proactive when you are suffering a loss.”

Limited options

Insurance by definition is meant to make property and business owners whole. That is going to be impossible when people either can’t get insurance or they can’t afford it. Costa said people may have to choose to leave a barn or the irrigation system off the policy in order to afford it.

For property owners with a mortgage and business tenants with a loan they must have insurance to satisfy the lender. Those who own their property outright could opt to not be insured. Tenants without a loan could forego insurance unless it’s a condition of their lease.

California law dictates that property insurance must cover losses from fire. There is no talk of changing that requirement, or making fire an add on like earthquake and flood insurance.

The FAIR Plan (Fair Access to Insurance Requirements), which was created in summer 1968, is an option for businesses if the traditional insurance route is no longer possible. It is not a state agency and no taxpayer money is involved. It’s considered one of the last resorts because it is basic coverage, though fire is covered. It has limits that would not be sufficient for some businesses, especially wineries.

The plan’s website says, “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.”

For business owner policies, “The limit is $2 million for the structure and $1 million for the contents. Business liability coverage is included at $300,000 per occurrence/$600,000 aggregate.”

If the FAIR Plan doesn’t work for a business “forced placed” coverage is the next option. This is considered a last resort. It’s when a lender protects their financial interest in the property. It doesn’t help the property or business owner if there is a loss.

While the state Department of Insurance does not set rates, it does approve them. The agency’s stance is that rates are driven by businesses. Commissioner Ricardo Lara was elected in 2018, though a department official said rates started going up in 2017. Those in the insurance business says Lara is approving more rate increases than his predecessor.

“Commissioner Lara is extremely sympathetic to our businesses who are having a harder time obtaining affordable insurance due to our increasing wildfires. That is why he announced actions (in September) that will help homeowners and businesses harden their properties against wildfires and increase transparency for consumers about their overall risk,” Michael Soller, spokesman for the Department of Insurance, said.

Going forward

After multiple years of losses, insurance companies are ramping up their use of technology to help them navigate this new world of constant wildfires. In the last few years, computer models have improved to help determine areas prone to future wildfires.

Factors being considered are where the property is located in relation to wildfire potential, how far it is from previous fires, the pattern of past fires, how close it is to a natural fire break, how close it is to open space/brush, how far apart buildings, and other criteria.

“We want to know how many dollars of value are exposed in any one area,” Costa said.

Some companies are still writing business insurance policies in fire prone areas, but they are only taking on clients who pose the least amount of risk—those considered best of class. These businesses have created defensible space around their property by clearing brush and removing low hanging branches. If a fire ball the size of a softball were thrown onto a property, nothing should catch fire.

Those looking to avoid an exorbitant property insurance bill or being dropped must be proactive. Insurance companies are looking for clients with dedicated water sources for fire suppression, such as having a 20,000-gallon water tank. Some wineries have their own water tenders and firefighting equipment, along with employees trained to use the apparatuses.

Others have contracted with private firefighting companies. External and internal sprinklers for dwellings, using non-combustible building materials, foam systems, and creating fire breaks are things businesses can do to curry favor with insurers.

“A property has to invest more in their own defense. This includes rebuilding with more fire resistant material, using steel vents so embers cannot get in, hard proofing the structures,” Costa said. “And they need to make sure they are insured to value.”

Businesses need to become educated about what it will take to ensure their property. The Wine Institute is helping to provide members with tools to help them navigate the changing world of insurance. The advocacy group in September brought together experts for a webinar open only to members about fire insurance, COVID-19 and other timely issues. Costa was that day’s expert on fire insurance. A page on the Institute’s website is dedicated to “wildfire resources & guidelines.”

Costa believes it will take a couple years of no fires or less catastrophic ones than the last few years for insurance companies to feel good about going back into the Wine Country in a more robust manner.

“We can’t control the weather, but we can control the topography. It hasn’t been managed very well,” Costa said. “There is just a lot of fuel. Every summer we have hotter summers and things are drying out quickly. The fuel sources need to be mitigated.”