As we kick off the new year, it’s a great time to review and reassess essential aspects of your financial life—including your insurance policies. Natural disasters like California’s wildfires are becoming more frequent and intense, which is especially crucial for homeowners in high-risk areas. Whether you’re dealing with rising premiums, coverage limitations, or even losing your homeowners insurance entirely, staying informed and prepared is essential.
The Impact of California Wildfires on Insurance
Living in California, wildfires are an unfortunate reality that many of us have to contend with, even in winter. For years, the threat of fires was a summer concern, but recently, the impact has extended year-round, and it affects us all.
I’ve experienced the challenges of this tight insurance market. After a few minor water damage claims, our homeowner’s insurance company decided not to renew our policy. As a result, we had to shop for new insurance. However, fewer providers were willing to insure homes in fire-prone areas, so we were forced into the California Fair Plan. If you haven’t heard of it, the California Fair Plan is essentially a safety net for homeowners when traditional insurance companies won’t cover them, but it comes with significant limitations. In our case, the plan only covers catastrophic losses—wildfires, for example—and doesn’t include water damage, which we had previously claimed. We had to purchase a supplemental policy to make up for this gap.
The cost compounded the shock of the situation: our premium increased by over 300%. We went from paying about $1,500 a year to nearly $5,000. This sudden jump can be financially challenging for many homeowners, and it’s essential to be prepared for such changes.
The Rising Cost of Insurance in Fire-Prone Areas
The insurance market in California has been tightening for years. Major providers like State Farm have stopped writing policies altogether, drastically reducing the number of insurance options available. For homeowners in fire-prone areas, this means fewer choices and, often, higher premiums.
In our case, we had to accept the California Fair Plan’s terms, which, while providing some basic coverage, are far from ideal. The premium spike we experienced isn’t unique, highlighting the broader issue in California’s insurance market. For homeowners with tighter budgets, this could be an unwelcome surprise that requires serious financial adjustments.
Rebuilding Costs and Coverage Gaps
Beyond insurance availability, another crucial factor is the cost of rebuilding your home. Due to COVID-related disruptions and inflation, construction costs have skyrocketed. When we reviewed our policy, the broker informed us that the cost to rebuild our home would likely be $2 to $3 more per square foot than it was before. Our insurance coverage reflects a replacement cost of just under $500,000, but the actual cost to rebuild is now closer to $600,000 to $700,000.
Many homeowners don’t think about this kind of coverage gap until it’s too late. Your home may be worth more than your policy covers in case of a total loss. If you don’t adjust your coverage accordingly, you could be underinsured and face significant out-of-pocket expenses after a disaster. Review the cost to rebuild your home and update your coverage if necessary to ensure you’re fully protected.
What to Do if Your Home Insurance Drops You
Losing your home insurance can feel overwhelming, but it doesn’t have to leave you without options. If your current provider decides not to renew your policy—or if your premiums become unaffordable—alternatives are available.
For us, that alternative was the California Fair Plan, though it’s not a perfect solution. It’s essential to understand that the Fair Plan is designed to cover catastrophic damage, not everyday incidents like water damage. We opted for a supplemental policy through a broker to fill this gap. This added extra coverage for issues outside wildfires, such as water damage or liability claims.
In addition to the Fair Plan, consider other supplemental policies, such as umbrella insurance, which can help protect you from liability in various situations, including those not covered by your primary home insurance.
The Importance of Documentation in the Event of Loss
One piece of advice I can’t stress enough is to take inventory of your belongings. After experiencing water damage in our home—caused by a toilet tank overflow and a water heater mishap—we learned how difficult it can be to recall all the items you own when faced with a loss.
A friend who lived in an area affected by previous wildfires shared an invaluable tip: Take a video or photos of your home and possessions. This sounds like a lot of work, but it makes filing claims easier in a disaster. Instead of scrambling to remember everything you own, you’ll have a record of it. Consider making a digital inventory and storing it in a secure cloud location.
Additionally, organizing your important documents—wills, insurance policies, and other legal papers—is critical. In an emergency, you may not have time to look through every drawer for these important files. Keep them in a safe, easy-to-access place, or share the location of these items with a trusted neighbor or friend in case they need to retrieve them for you.
Evacuation Planning and Emergency Preparedness
Emergencies like wildfires are unpredictable, and if you’re ever forced to evacuate, time is often limited. Depending on the severity of the situation, you may have as little as 20 minutes to leave your home. It’s essential to have a plan in place so that you’re ready, no matter how much time you have.
Some tips to help you prepare:
- Create Evacuation Checklists: Know what you need to grab in an emergency. For example, if you have an hour to evacuate, you might focus on packing your family and pets, essential documents, and emergency kits. If you have just 20 minutes, prioritize irreplaceable items, such as photos, passports, and other legal documents.
- Store Important Documents Safely: Keep essential documents in a fireproof safe or digital cloud storage. This ensures that your essential records will be protected even if your home is lost.
- Partner with Trusted Neighbors: Make sure someone you trust knows where to find your emergency checklist, keys, and critical documents in case you can’t be home to evacuate yourself.
California’s wildfires, while devastating, serve as a reminder to review and update your insurance coverage regularly—especially as we enter a new year. Rising premiums, rebuilding costs, and the risk of losing your coverage are all important factors to consider. By documenting your belongings, assessing your coverage, and preparing for an emergency evacuation, you can ensure that you’re better protected and ready for whatever comes your way.
It’s not always easy to anticipate changes in the insurance landscape, but with a proactive approach, you can mitigate the impact of unexpected challenges. Working with a trusted insurance broker or financial planner can help you navigate these complexities and ensure you have the right coverage for your needs.