Report: California insurers are lowballing or denying wildfire coverage

If you own a home that suffered smoke damage from a wildfire, don’t be surprised if your insurance coverage falls short — or is denied.

A new report from Consumer Watchdog alleges that insurers have inserted provisions into the fine print of their home, condo and renters policies that allow them to limit or deny coverage after a wildfire.

Farmers, Nationwide and the Automobile Club of Southern California are among the insurers cited in the Los Angeles-based organization’s “Up in Smoke” report. The California FAIR Plan — which often serves as a last resort for homeowners in fire-prone areas where insurance companies won’t provide coverage — is using the same tactics, the study claims.

The report says insurance companies are lowballing or denying claims as California’s wildfire season grows longer and becomes more damaging. The state’s three most destructive years on record were 2017, 2018 and 2020.

Insurance Commissioner Ricardo Lara has scheduled a public hearing on the FAIR Plan at 9 a.m. Wednesday, July 13 in Oakland.

In a fact sheet released Tuesday, the California Department of Insurance said the report “contains demonstrably false claims” and that Lara and the department use “every legal and regulatory tool available,” to hold insurance companies accountable for their actions.

The fact sheet added that 20 insurers deleted illegal smoke-limit policy provisions in 2018 after being notified by the department. It further noted that an examination of Nationwide resulted in more than $22.4 million additional claims paid out to consumers and $165,000 in premiums returned.

A similar investigation of the FAIR Plan resulted in in more than $156,000 inadditional payouts to consumers to date, the department said.

Consumer Watchdog founder Harvey Rosenfield, who also serves as an attorney for the organization, still maintains that insurers’ tactics have made bad situations worse.

“People pay into these policies year after year in hopes that they’ll never have to use them,” he said. “But when they do and are told they don’t have coverage, or have very little coverage … it adds a financial and emotional burden to a wildfire disaster.”

Dylan Schaffer, an Oakland attorney who has sued the FAIR Plan and insurance companies on behalf of wildfire victims, said one client whose home suffered smoke damage was told by a FAIR Plan representative “to use a Swiffer” to clean up the mess.

“I’m not exagerating,” he said. “They are telling people, ‘Your house is not broken, it’s not damaged, so we’re not paying you anything.’ “

Based on a review of public filings required by the California Department of Insurance, the report identifies several violations of state law by homeowners insurance companies:

Limits on smoke damage recovery: Smoke is often the most common and costly result of wildfires. Insurance companies have adopted policy provisions that treat “smoke damage” as separate from “fire damage” and limit compensation for smoke damage to far less than the total policy coverage for fire.

Arbitrary loss-reporting triggers: State law only requires policyholders to report a loss in a timely manner. Instead of setting the timeframe to report based on the date of the loss, some insurance companies arbitrarily base the reporting trigger on another event, such as the “start date of the wildfire,” potentially resulting in the company denying a claim as late.

Sub-limits on recovery: California law requires fire insurance policies to cover “all loss by fire.” But some insurers limit compensation based on the type of fire loss, or if a homeowner misses a reporting deadline.

Coverage exclusions: These provisions say a policyholder has no coverage for wildfire losses that occur within a certain time after the policy was purchased — usually 72 hours.

Appraisal provisions preventing suit: Such provisions prevent a policyholder from suing an insurance company in court over a claim dispute without first going through a loss-appraisal process or after going through appraisal.

Consumer Watchdog says those provisions are unlawful under California law. The organization additionally claims that many insurers are unlawfully failing to notify policyholders of their legal rights after a government-declared wildfire disaster.

“I’m never surprised by what an insurance company will dare do,” Rosenfield said. “And it’s astonishing to me that the Department of Insurance has failed for some time in its duty to protect the public.”

Consumer Watchdog said Lara should investigate all claims denied by insurance companies during and after the historic 2017 wildfires to determine whether they were handled lawfully, with special attention paid to claims involving smoke damage.

They urge him to impose fines of $5,000 per violation against insurers that have violated consumers’ rights to fair claims and say that should be bumped to $10,000 if the violations were willful.