Afterburn: The Impacts of the California Wildfires on Insurance
In January 2025, fourteen different wildfires caused extensive damage across Southern California. While wildfires are not uncommon in this region, the severity, frequency, and proximity to the second-largest metropolitan area in the country have made these blazes a topic of nationwide conversation. The insurance industry is at the forefront of the discussion, and we’ve put together our thoughts on the impact of the fires on insurance premiums and coverage availability in this Chartwell bulletin.
The Path of Destruction
While fourteen fires were officially identified between January 7th and 31st, two were responsible for the majority of the damages: the Palisades and Eaton fires. Between the two, nearly 30,000 acres of land was burned, over 16,000 structures destroyed, and twenty-nine people were killed. Only the Camp fire in 2018 was more destructive, and the results of the January fires are still under review. The January fires affected areas with significantly denser population, including the Pacific Palisades, where the median home value is $2,000,000. This included a stretch of Malibu ocean-front property known as “Billionaire’s Beach” which included David Geffen’s former home recently sold for $85 million, and a $27 million home under construction by a real estate investor which was insured for only $3 million – something we’ll address shortly. CoreLogic, a property data and analytics firm, estimates the Palisades and Eaton fires will result in $35 to $45 billion in insurance payouts to homeowners and businesses – which is still lower than Hurricane Katrina in 2005, to date the most expensive US natural disaster with an inflation-adjusted toll of roughly $200 billion. According to UCLA’s Anderson School of Management, these fires will be the most damaging in California’s history as it relates to property damage.
An Unseasonable Disaster
Anyone familiar with California’s “fire season” will know that these wildfires were an anomaly. While it expands in both directions every year, California’s fire season traditionally takes place between June and October. Unfortunately, a summer of high temperatures and minimal rainfall, combined with uncommonly strong and dry Santa Ana winds led to the perfect conditions for extremely destructive fires.
Unfortunately, this anomaly is less likely to be a standalone incident, and instead is a harbinger of a trend in climate conditions. Fire activity has been climbing across the planet, and rising global temperatures and extreme droughts leave vegetation dry and flammable. While there are many benefits to discussing the usage of prescribed burns in the area, experts have noted that the strengths of the wind made the clearing of brush less relevant.
California Coverage and the FAIR Plan
As the fires subsided, homeowners look to their insurance companies. The news and social media are flooded with stories of people with little or no coverage, and those attacking their insurance company for non-renewing their policies. The truth is that the writing has been on the wall for California for years, and insurance companies have been taking steps to minimize their exposure and price for the risk. When state regulators refuse to grant the rate the increases that California insurers need to be profitable, they leave the insurers no choice but to reduce their exposure or exit the market completely. Homeowners are left with only the minimal coverage provided by the FAIR Plan, an insurance pool supported by contributions from all insurers licensed to issue property and casualty in the state of California, which provides limited coverage when the private market will not. The number of homes deemed ineligible for coverage will likely increase as the market contracts further. The $27 million dollar home that was only insured for $3 million that we mentioned above is a perfect example – the builder acknowledged that they were unable to source any coverage other than the $3 million afforded by the California FAIR Plan.
The latest estimates are that some 22% of the structures in the Pacific Palisades Fire and about 12% of the structures destroyed by the Eaton Fire are covered by the FAIR Plan. The FAIR Plan has a potential exposure of more than $4 billion from the Pacific Palisades Fire, and a potential exposure of more than $775 million from the Eaton Fire. With only $377 million in reserves and a possible $2.6 billion recoverable from reinsurance there is a clear and serious shortfall in FAIR Plan assets. In late February, the Plan announced that they would make a $1 billion call for funds to the insurance companies who issue policies in California, assessed on a pro-rata basis according to each company’s market share. State regulations allow insurers to pass along as much as half the cost of the assessment to their policyholders, spread over the next ten years, which will probably appear in the form of a tax or a line item on policies to make it clear to the consumers how much they are paying for the Plan deficit.
In late January Chubb reported losses of $1.5 billion from the wildfires and Chubb shares traded 3% higher on the day of the announcement. This may seem counterintuitive, but over the past several years, Chubb has strategically reduced its exposure in the impacted areas by about 50%, so their losses could have been far worse. To put the loss in perspective, Chubb’s first quarter net income in 2024 was $2.14 billion. The $1.5 billion of wildfire losses in the first quarter of 2025 will likely be offset by other underwriting gain; Chubb is well-reserved for this event and the stock market agreed. Our other core markets are similarly well-situated.
Is Your Insurance Premium Subsidizing Losses in California?
Premium increases are widespread at the moment, but unless you live in California, these wildfires are not to blame. Insurance is regulated separately by each state, and rates are filed in each state, based solely upon the loss experience in that state. For example, in Chartwell’s home state of Illinois, insurers overall have been profitable for only three of the past seven years. There have been nine separate billion-dollar weather events which impacted Illinois and other neighboring states. These larger losses comprised mostly thunderstorm and hail events, rather than wildfires or tornadoes, and these storms were very costly for insurers. Higher rates in Illinois are a reaction to Illinois loss experience; few states have been immune from climate related events specific to their state, reducing profitability for insurers and leading to rate increases.
Building to Survive Wildfire
Wildfire does not necessarily mean complete property destruction; certain construction materials have evolved to withstand most wildfires. Additionally, the insurance companies that are willing to insure homes wildfire prone areas have specific requirements for construction, defensible space, and property maintenance, which we recommend all homeowners in the West consider.
Some homeowners are installing a system of exterior fire sprinklers controlled by a mobile application that activates when a fire is detected nearby. Class A firefighting foam is formulated to make water more effective for preventing fire; “surfactants” significantly reduce water’s surface tension and when mixed with air it surrounds fuel with a thick layer of water. This creates a barrier between the fuel and fire, making the water more effective and reducing the amount of water needed to battle the fire.
Despite the risk of wildfire, the natural beauty of the West will continue to attract homeowners. If you’re considering building or buying in a fire-prone area, we’ve collected four examples of successful fire-proof construction for inspiration:
- Among the homes that survived the Palisades fire is a mansion on the aforementioned “Billionaires Beach”, standing in stark contrast to the surrounding rubble.While luck and wind direction are a factor, the home is made of fire-resistant building materials and had minimal foliage exposure.
- Actor Tom Hanks’ home was also unscathed, thanks to the reinforced concrete structure, fire-resistant roof and clearly established defensive space around the home. Neighbors on both sides suffered significant damages.
- A newly-built home by architect Greg Chasen survived completely unscathed. The architect explains the construction choices in a thread on Twitter summarized here.
- The Wall Street Journal covered a home that survived the Woolesey Fire in 2018 here.
Our emphatic, evergreen recommendation for anyone looking at building or buying in the West is, as always: contact your Chartwellian first. We remain committed to advising our clients and serving as a resource to navigate the ever-changing insurance field. While the recent Los Angeles wildfires were devastating to property and tragically fatal, homeowners can implement loss containment and prevention measures. These options are not inexpensive, but homeowners who take a proactive approach to mitigating these risks will be more likely to secure coverage with an insurance company that remains well-equipped to provide excellent claims service.
Chartwell Bulletins are produced by Chartwell Insurance Services, an insurance brokerage specializing in the personal asset protection of discerning individuals. Chartwell Insurance Services is not affiliated with any of the vendors mentioned in the article and does not accept compensation for referrals to them
A representative of Chartwell Insurance Services will be pleased to discuss all aspects of your personal insurance.
Contact Rebecca Korach Woan at 312-645-1200 or rwoan@chartwellins.com