The devastating southern California wildfires could cause between $52 billion and $57 billion in economic losses, according to experts at AccuWeather. But homeowners affected have unique insurance factors in play as they try to put their lives back together. In the months leading up to the disaster, many affected homeowners lost their original insurance coverage.
There are at least five fires covering more than 45 square miles affecting the region. The Palisades Fire is the biggest, burning through nearly 27 square miles and destroying more than 1,000 buildings. As of the morning on Thursday, Jan. 9, it was zero percent contained and being called the most destructive fire in Los Angeles’ history.
The wildfires spread from unseasonably dry conditions and strong Santa Ana winds. At least five people are dead while more than 100,000 people evacuated areas under threat.
“Should a large number of additional structures be burned in the coming days, it may become the worst wildfire in modern California history, based on the number of structures burned and economic loss,” AccuWeather Chief Meteorologist Jonathon Porter said.
The area from Malibu to Santa Monica has some of the most expensive properties in the United States. The median home value in the area is more than $2 million, with Pacific Palisades sitting right in the middle of the region.
Insurers are pulling out
In the wake of the devastation, homeowners in the area will face an uphill battle to rebuild. State Farm, a major insurer in the state, reportedly canceled hundreds of policies for homes in the Pacific Palisades over the summer to avoid “financial failure.”
“Insurance is a social good,” said Chuck Nyce, a professor of risk management and insurance at Florida State University. “It is really good at covering a loss that you may have when a bunch of other people who have the same exposure to it don’t have the loss at the same time. For one person who has an auto accident, there are hundreds of people who are insured who don’t have an accident at the same time.”
“When you have these things like wildfires or hurricanes or floods, and the loss affects a large portion of the population, especially in a very small geographical area at the same time, insurance works, but it doesn’t work as well,” Nyce said. “It becomes more expensive and the losses to the insurance company, when they become what they call ‘correlated,’ it makes insurance companies’ cost of capital higher, it makes their losses higher, it makes them more reluctant to do a large volume of business in a specific area.”
Filling the insurance void
Insurers have been backing out of the area as wildfires become more frequent and destructive. But there are options for those who can’t find private coverage in their communities.
“Every state has some type of a residual market called a FAIR plan. In most states, that will enable you to get access to that insurance, even if the private market is not willing to provide it,” Nyce said.
In California, Fair Access to Insurance Requirements “is a syndicated fire insurance pool comprised of all insurers licensed to conduct property/casualty business in California.” The program uses no public or taxpayer funding. But that doesn’t stop the cost from being spread to policyholders throughout the state.
“States have a variety of different ways in which they fund their FAIR plans. Some of them just allocate those policies to insurance companies,” Nyce said. “Other ones, what they’ll do is they will bill the insurance companies for losses that the FAIR plan absorbs. And if that’s the case in many states, what those insurance companies do, they can pass through those additional losses that they’re paying to the FAIR Plan to their current policyholders. So even though the state’s not paying for it, the citizens of that state are paying for it.”
The number of California FAIR policies has doubled between 2020 and 2024, reaching more than 450,000 customers, as insurers dialed back coverage in fire-ravaged regions. Since 2020, FAIR’s insurance exposure has surged from $153.43 billion to more than $458.08 billion, a 200% increase.
Nyce said all of this will eventually result in a secondary problem for people seeking homeowner policies.
“Price, availability, affordability, these are all issues that are going to be on the docket for California, probably for the next 10 or 20 years, with regard to insurance.”
Many celebrities live in the region, and many have lost their homes. That includes reality TV star and hotel heiress Paris Hilton.
“Sitting with my family, watching the news, and seeing our home in Malibu burn to the ground on live TV is something no one should ever have to experience,” she wrote in an Instagram post. “This home is where we built so many precious memories … My heart and prayers are going out to every family affected by these fires.”
Despite the fact that many homeowners in the Palisades Fire have the means to recover, Nyce still says it’s not a good idea to go without insurance.
“These are some of the wealthiest homes in the country, some of the most expensive homes in the country, they can afford it, then they should be able to afford their insurance premiums,” he contended.
