California Implements New Insurance Rules for High-Risk Wildfire Areas

California mandates that insurers increase wildfire coverage to 85% by 2026, responding to the crisis from climate risks and limited policy options.

In a bold move to tackle the ongoing insurance crunch in wildfire-prone regions, the California Department of Insurance has introduced fresh regulations.

This comes in direct response to major insurance companies scaling back their offerings, largely due to the growing threats posed by climate change.

New Coverage Requirements

On Monday, California Insurance Commissioner Ricardo Lara announced a new rule that is now under administrative review, with a projected launch by the end of January.

This regulation requires all insurers operating in the state to gradually increase their coverage in high-risk wildfire zones, specifically raising it by 5% every two years.

The goal is to ensure that a minimum of 85% of available policies cater to homes in these vulnerable areas—an important step that did not exist before.

Lara highlighted the necessity of having a reliable insurance market for Californians.

With many communities grappling with the compounded dangers of wildfires and climate change, he noted the significance of this regulation for the state.

The Sustainable Insurance Strategy will play a crucial role in navigating current challenges while fortifying the market’s resilience for years to come.

This initiative grew from input gathered from thousands of residents across California and strives to strike a balance between protecting consumers and nurturing a strong insurance marketplace.

Encouraging Participation from Insurers

To encourage insurers to take part, the state has decided to allow them to pass on reinsurance costs to policyholders.

This practice, already common in many other states, will now be regulated by an industrywide standard, thus promoting fair pricing and competitive practices among different insurance companies.

Acknowledging the rising threats posed by climate change, Lara’s office pointed out the importance of reinsurance in preserving coverage for high-risk areas.

By revising regulations surrounding reinsurance, the state aims to motivate insurers to broaden their policies in these vulnerable communities, boosting stability and resilience within California’s insurance sector.

Impact on Homeowners and Real Estate

In recent times, major players in the insurance market, including State Farm, Allstate, and The Hartford, have significantly reduced their operations in California.

Some of these companies have even stopped selling new policies or have opted to discontinue existing ones.

Allstate has indicated a readiness to reopen its doors for new policies as long as they are permitted to incorporate reinsurance costs into their pricing structures.

This tightening of policy availability has forced many homeowners into the arms of the California FAIR Plan, which was designed as a short-term fix.

The number of FAIR Plan policies has more than doubled between 2020 and 2024, underscoring the pressing demand for broader insurance options.

The lack of adequate coverage isn’t just a personal concern; it’s also disrupting real estate transactions.

Reports from the California Association of Realtors reveal that around 13% of their members experienced failed deals in 2024 due to issues related to insurance availability.

According to the Department of Insurance, rising temperatures and increased dryness—both linked to climate change—have led to eight of the largest wildfires in California history occurring since 2017.

Among these, the Camp Fire of 2018 was particularly catastrophic, claiming 85 lives.

Data from CoreLogic underscores that approximately 2.6 million homes across 14 western states face wildfire risks, with nearly half situated in California.

The recent Franklin Fire in Malibu, which burned around 4,000 acres and forced 20,000 residents to evacuate, highlights the seriousness of the situation.

In Malibu, the average home price is a staggering $5.6 million, far exceeding the $3 million cap provided through the FAIR Plan, leaving many homeowners scrambling for solutions.

Source: Housingwire