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California is factoring climate change into insurance policies

On Behalf of | Oct 6, 2023 | Insurance Law

California is known for its diverse landscapes and climate extremes. Here, if your property is located in high-risk areas, especially those susceptible to wildfires, you will likely pay substantially more for insurance coverage.

Unfortunately, these policies frequently offer limited coverage. Thus, it may leave you, the homeowner, to pay more for less protection. This financial strain can already be challenging in a state with a high cost of living. But then the state also faces a unique challenge with the expanding FAIR plan, or Fair Access to Insurance Requirements plan.

Wildfire risk and concentration

California’s ever-present wildfire risk adds another layer of complexity to the FAIR plan problem. As the state grapples with increasingly destructive wildfire seasons, more homes are categorized as high-risk under the FAIR plan. This concentration of high-risk properties intensifies the financial burden on policyholders.

And since catastrophic wildfires can strain the FAIR plan’s resources, it also poses a substantial risk to the insurance industry.  So yes, this means you may find yourself, among other homeowners, without the necessary support in the aftermath of a disaster.

California’s new approach

The good news is that California is taking bold steps to address the challenges posed by climate change and wildfires. State leaders have recently announced a significant policy shift that allows insurance companies to consider climate change when offering policies.

Insurance companies will prioritize those who protect their properties from disasters like wildfires and floods. This is a unique regulation. Hopefully, by December 2024, 85% of new policies will cover wildfire-prone areas. This should help people move away from the FAIR plan, making insurance more affordable.

This development is part of a broader mandate that requires insurers to offer coverage in wildfire-prone areas. It aims to bridge that gap by providing peace of mind to residents while promoting responsible development in these areas.

Acknowledging climate change

If there’s one thing that California’s experience with the expanding FAIR plan underscores, it is the need for a comprehensive approach to address insurance challenges in the face of natural disasters.

By allowing insurance companies to factor climate change into their policies, they are acknowledging the evolving risks posed by a warming climate. This move aligns with the need for insurers to assess and adapt to changing environmental conditions.