Piles of ash line the streets of Paradise, California, marking the foundations of family homes which stood just a few weeks ago. Today, there's little left to the NorCal neighborhood other than the scorched husks of pine trees that remained standing after the deadly Camp Fire swept through last month.
More than 14,000 homes were destroyed in the Camp Fire, and for some homeowners, their trouble is only beginning. Earlier in the week, the Insurance Commissioner of the State of California issued a liquidation order for Merced Property & Casualty, a homeowners insurance company in the region, meaning upwards of 10,000 families might not get all the money they need to rebuild their homes.
What happens when an insurance company goes under?
"Insurer insolvencies are very rare," said Michael Barry, a spokesperson for the Insurance Information Institute. The overwhelming majority of insurance companies maintain assets large enough to cover their liabilities. But with catastrophic fires and hurricanes becoming more common—and an increasing number of homes being built in high-risk zones—some smaller insurance companies are struggling to cope.
For this reason, insurance companies are required to participate in state guaranty associations, which can help sustain a company in the event it can't keep up with its claims. "If you write insurance in California, you have to set aside some money for the guarantee fund, so there are resources in the event you or one of your competitors become insolvent," said Barry.
"There have been instances where companies go into what's known as 'rehabilitation' and re-emerge as a solvent company again," he added. These companies fall back on the aid of the state guaranty until they can re-establish themselves. But that is not likely when a company is ruled insolvent and is liquidated, as is the case with Merced.
So where does that leave Merced policyholders? They'll be reimbursed, Barry said, "but it may be cents on the dollar." After the liquidation of all of Merced's assets, the California Insurance Guarantee Association (CIGA) will begin processing Merced claims filed after the Camp Fire. The association will cover property insurance claims up to $500,000, which should, in theory, be enough to rebuild most homes in the region. The median home price in Paradise is $257,400, according to Zillow. But property owners with claims above this limit will need to contact CIGA and ask to be reimbursed out of Merced's liquidated assets, and there likely won't be enough to go around. As of Monday, Merced had just $23 million in assets, enough to cover 46 $500,000 claims.
Finding a new insurance company
If you were a Merced policyholder, your policy will be cut off 30 days from the date of the company's liquidation. This gives you about a month to find a new homeowners insurance policy. Unfortunately, this isn’t an easy task.
Responding to the increasing risk of underwriting homes in California, some insurance companies, such as Liberty Mutual, are choosing not to accept or renew some policies in the region.
Still, it’s not hopeless for homeowners. "You have a very competitive insurance market in California—the risk is spread across nearly 40 million people," said Barry. "So while the wildfires of the past two years have been extraordinary, Californians do have options."
Barry added that homeowners who can’t get coverage through the standard market may need to go through the 'Surplus and Excess Lines' market, which provides coverage for higher-risk properties. And if you're still unable to find coverage, there’s one last resort: the California FAIR plan.
The role of the California Fair Access to Insurance Requirements (FAIR) program is to provide basic insurance coverage to people who wouldn't otherwise be able to obtain it. That said, a FAIR plan is more limited than other policies—meaning it's worth shopping around to find coverage elsewhere. But in the meantime, it will secure you against total loss of your home if another fire sweeps through your neighborhood.
Next steps to take for Merced policyholders
CIGA plans to begin processing claims on Dec. 10. But complicating matters is the fact that the association is only able to mail out physical checks. So if your home was damaged, you’ll need to provide them with up-to-date contact information and begin the claim filing process as soon as possible.
You can contact the association at the following address:
- California Insurance Guarantee Association
- P O Box 29066
- Glendale, CA 91209-9066
- 818.844.4300 (office) 818.291.1863 (fax)
- [email protected]