As wildfires continue to ravage Los Angeles County, California, attention now turns to how the tens of thousands of people directly affected by the disaster can recoup their losses and the potential insurance storm that awaits them.
Thousands of properties were damaged or destroyed, and owners were unsure whether insurance would cover them. The ongoing fires could become the most expensive in California history in terms of insured losses, with analysts estimating they could approach $20 billion.
Here's what you need to know.
At least 27 people died in the wildfires.
The first wildfire broke out in Pacific Palisades and has consumed 9,596 hectares (23,713 acres) of land, according to the California Department of Forestry and Fire Protection (Cal Fire). More than 12,300 homes and buildings were destroyed.
There are two active fires in Los Angeles County: Palisades at 27% containment and Eaton at 55% containment.
Analysts predict, based on preliminary estimates, that the Los Angeles wildfires could be California's costliest wildfire event in terms of insured losses, which could exceed $20 billion. An insured loss is a financial loss caused by an event covered by insurance.
Private forecaster AccuWeather estimates total damage and economic losses at between $250 billion and $275 billion, which would make the Los Angeles fires the costliest natural disaster in U.S. history, surpassing Hurricane Katrina in 2005.
By far the most expensive wildfire in terms of insured losses was the 2018 Camp Fire in Butte County, Northern California, with losses totaling $12.76 billion.
Historically, some of the most expensive natural disasters in terms of insured losses have been hurricanes and earthquakes in the United States. Insured losses from Hurricane Katrina totaled $105 billion.
Ahead of the fires, insurance companies like State Farm and Allstate began canceling home insurance in fire-prone areas.
As of 2022, Illinois-based State Farm is the largest insurance company in California.
In July 2024, the company surrendered about 1,600 policies for Pacific Palisades homeowners, meaning 69.4% of policies in the county were not renewed.
Between 2020 and 2022, insurance companies did not renew 2.8 million homeowners policies in California. More than 500,000 of them are in Los Angeles, according to the California Department of Insurance.
“There’s been a massive exodus of market titans from these parts of California,” Ben Case, a real estate and finance professor at the University of Pennsylvania’s Wharton School, said at a conference on Friday.
"We've seen a lot of non-renewals recently," he said.
David Flandro, head of industry analysis and strategic consulting at global reinsurance brokerage Howden Re, said the scale of the wildfires and scope of damage could be concerning.
"Unfortunately, maybe there's not the right coverage to cover everyone," he told Al Jazeera.
In May 2023, State Farm issued a statement that it would stop accepting new applications, including business and personal property and casualty insurance. This is due to "historic growth in construction costs outpacing inflation, rapidly increasing catastrophe risks and challenging reinsurance markets," the statement added.
Brooklyn reporter Jake Bittle told PBS Network that State Farm and other insurance companies have waived or limited policies in California because "California limits what insurance companies can charge customers."
In 1988, California passed a ballot measure in the general election called Proposition 103, or the Insurance Rate Reduction and Reform Act.
The proposal lowers insurance rates and establishes a prior approval system in which insurers must obtain approval from the California Insurance Commissioner before implementing property and casualty insurance rates.
However, these approvals take time. California's system has always been slow and getting slower. Between 2013 and 2019, it took an average of 157 days from the time a homeowner's insurance rate application was submitted until it was resolved. From 2020 to 2022, this number increased to an average of 293 days.
California law also requires insurers to justify their catastrophe-related loss rates based on the average losses from that catastrophe over the past 20 years.
Insurers argue that with California wildfires, future projections based on past losses will be inaccurate because fires are unpredictable and more destructive than in the past.
Between 2004 and 2013, wildfires in California destroyed an average of about 653 structures each year. However, between 2014 and 2023, wildfires in California destroyed an average of approximately 5,669 structures per year. Destructive fires in 2017, 2018 and 2020 drove up this average.
In 2017, the Thomas Fire burned 1,060 structures in Ventura and Santa Barbara, California. In July 2018, the Mendocino Complex Fire destroyed 280 structures in Mendocino, Lake, Colusa, and Glenn Counties, and in November 2018, the Camp Fire devastated Butte County in Northern California of nearly 19,000 buildings.
Ray Lehmann, a senior fellow at the independent research institute the Center for International Law and Economics, told Al Jazeera that Proposition 103 “exacerbates the challenges facing California’s insurance market.”
The most notable of these challenges, Lehmann said, is that the proposal "has historically not allowed insurers to consider reinsurance costs or the output of forward-looking catastrophe models when submitting rates."
“What this effectively means is that the state is not allowing insurance companies to consider the effects of climate change, or that future losses could be much worse than past losses.”
Bittle told PBS that insurers had "lost decades of underwriting profits" amid the devastation and were "convinced they could not make money or make enough money doing business in California." It also prompted companies to pull out of California, he explained.
Some homeowners choose an insurance program set up by the state called the California Fair Plan (Fair Access to Insurance Requirements), which was established in 1968 to provide coverage for those who for a variety of reasons cannot get standard homeowners insurance. .
The FAIR program, funded by private companies rather than taxpayer dollars, was originally conceived to offer a limited number of policies to people without standard insurance. As of 2024, 452,000 people in California are covered by the FAIR plan. However, the program only provides basic coverage, up to $3 million, which may not be enough to completely rebuild some homes.
According to data from the U.S. Census Bureau website, as of July 2023, there were nearly 15 million housing units in California, and as of July 2024, California had a population of nearly 40 million.
FAIR plans are also more expensive than standard insurance. A December 2024 report from New York-based financial services firm Bankrate said the average annual cost of a FAIR Plan policy in California is about $3,200.
By comparison, in California, the average home insurance cost for a $300,000 residential policy is $1,480, according to Bankrate.
The result: Hundreds of thousands of homeowners in California have no property insurance.
A report released Jan. 9 by online marketplace LendingTree estimated that 806,651 of California's 7.6 million households were uninsured. LendingTree estimates that 154,108 of 1.5 million households in Los Angeles are uninsured, meaning one in 10 households in the county is uninsured.
Still, as private insurance companies pull out of California, "the state's insurance company of last resort, FAIR Plan, has grown exponentially," Lyman said.
In fact, as private insurers exit, the FAIR program's exposure has grown dramatically, rising 61.3% from September 2023 to September 2024, to $458 billion. FAIR's exposure to Pacific Palisades is $5.9 billion.
Wildfires are one of the environmental disasters that will be exacerbated by global climate change.
A report from the U.S. Environmental Protection Agency (EPA) says climate change is leading to increases in the frequency, length of seasons and areas burned by wildfires. While wildfires in California were previously limited to specific months, the state's governor, Gavin Newsom, recently talked about it no longer being fire "season" in California.
“It’s like this all year long in California,” Newsom said in a video posted to his X account on Jan. 8.
Research shows the insurance community is not fully prepared to bear the costs of the climate crisis.
In 2024, a report by the Securing Our Future campaign found that one-third of global weather-related insured losses over the past 20 years were caused by climate change.
“The California Department of Insurance has taken some steps in the right direction by issuing new rules that allow for consideration of catastrophic models and reinsurance costs for insurers that agree to write substantial business in areas affected by wildfires,” Lehmann said.
He added that "to ensure California remains insured for the future," state leaders need to consider investing heavily in wildfire mitigation. This could mean "changes in building codes that allow utilities to invest in underground transmission lines, or a rethinking of land use planning and zoning at the wildland-urban interface."
Despite the high cost of the damage, experts believe insurance companies should have no problem compensating customers.
“In general, insurance companies that write homeowners insurance in California are financially strong and should not face any serious concerns about solvency,” Lyman said.
According to a report by Standard & Poor's, insurance companies will have ample reserves starting in 2025 due to strong financial performance over the past two years.
As things stand, JPMorgan analysts believe they expect "the vast majority of losses from wildfires to be concentrated in homeowners insurance," while business losses and personal auto losses "will be much smaller."
However, Lehmann added, "The Palisades fires did disproportionately impact very expensive properties, many of which may have been insured through high-net-worth individuals."