The Smell of Money Burning – Official Figure on Insured Losses Reaches $9 Billion and Lenders Have Not Even Started Counting.

December 24, 2018 by Paul J. Sievers, Esq.

Last year, California saw some of the most destructive wildfires in its history. Between the Camp Fire in Northern California and the Woolsey and Hill fires of Southern California, 42 people lost their lives, and over 1,000 homes were destroyed.

California Insurance Commissioner Dave Jones released the official tally for insured losses from 2018’s California wildfires, and so far, it has reached $9.05 billion.

Up until now, estimates for insured losses was prepared by third-party catastrophe modelers, with most saying the fire damage could be between $9 billion to $13 billion.  In early December, Jones held a press conference to differentiate between those third-party figures and that which is provided by the California Department of Insurance.

“These are hard, actual insured loss figures based on claims that have been filed,” Jones said.

However, Jones cautioned that these numbers are preliminary and that the figures are expected to rise as more people gain access to their properties, assess damage and file claims.

The numbers Jones provided from both the NorCal and SoCal fires includes 17,955 partial residence losses, 10,564 total residential losses, 1,648 partial commercial losses, 350 total commercial losses, and 9,457 auto and non-residential losses, which includes ocean marine, inland marine, aircraft, boiler, and machinery.

The Department of Insurance reported that the most significant portion of losses stemmed from the Camp Fire in Northern California, with over $7 billion in damages, while the Woosely and Hill fires combined to reach $2 billion in losses.

Information provided by SNL and Moody’s shows that the majority of losses for fire areas are concentrated between six major California insurers, including State Farm, CSAA, Farmers, Auto Club, Liberty Mutual, and Allstate.

Farmers issued a statement saying it expected its total losses from the California wildfires to be roughly $2.1 billion, with much of those losses being covered by reinsurers.

At least one insurer so far, Merced Property & Casualty Co., a small insurer holding at least 200 policies in the area of the Camp Fire, was forced into insolvency by the fire that started Nov. 8, destroying the town of Paradise.

Jones contrasted the losses from 2018 to those in 2017, which saw fewer properties lost but resulted in higher insured losses due to higher median property values.  The median home price in Santa Rosa, a place stricken by fires in 2017, was $500,000, compared with a median price of $250,000 in the mountain town of Paradise and the surrounding areas.

Total losses from the 2017 fires and resulting mudslides totaled more than $13.8 billion.

Jones reiterated that the losses reported so far by the CDI are expected to grow, and that “they could ultimately exceed the losses for the Northern California wildfires.”

In contrast to losses suffered by homeowners and insurance carriers, the losses suffered by lenders (conventional and non-conventional) defy estimation.  Lenders (and, in particular, non-conventional lenders) rely primarily (if not exclusively) upon the real property securing their loans (including improvements) for repayment.  Between lost interest payments, initially reduced property values, internal time expended dealing with insurance issues and rebuilding abandoned property, lenders face significant losses.

Considering the importance of real property to repayment in a secured lending transaction, it is paradoxical that many lenders pay little to no attention to the insurance protecting this most crucial part of the lending transaction.  Escrow, per the lender’s instructions, simply confirms that coverage of some sort is in place prior to closing the loan.  In 90% of transactions, no further review or analysis takes place.

Are the monetary limits of the insurance policy sufficient to rebuild the collateral or pay-off the loan balance?  Does the insurer chosen by the borrower posses sufficient assets and reserves to pay out on all claims, or will it enter insolvency in the event of a catastrophic loss, like Merced Property and Casualty?  Is the lender identified, by endorsement, as the loss payee on the policy secured by the borrower?  Does the policy secured by borrower provide sufficient coverage in a high-risk fire area?  Are necessary code upgrades covered?

In light of what occurred in 2017and 2018, as related by the Department of Insurance, every lender ought to be asking these questions just as a start.  Are you asking these questions and getting acceptable answers?  What you don’t know can burn you!