The risk of fire in California has long made it difficult to find affordable insurance coverage. | Photo: Shutterstock.
Firefighters are still battling flames in Los Angeles in what is expected to be one of the costliest natural disasters in the city’s history. Restaurant operators, meanwhile, are bracing for another battle: with their insurance providers.
At least 16 people have died in the fires, which continued to burn through the weekend. The acreage burned has grown larger than the entire city of San Francisco, and damage estimates have ranged between $135 billion and $150 billion.
Even before the fires broke out last week, getting business insurance coverage in Los Angeles was an expensive and complex endeavor, given California’s history of earthquakes, floods, riots, heat and drought and, of course wildfire. Business owners say their premiums have been climbing at a dramatic rate, and it has become increasingly difficult to get coverage at all.
Climate change has become a significant contributor to that trend, with insurance rates skyrocketing in light of the growing number of intense weather-related events, from hurricanes and floods to ice storms and tornadoes. But fire risk, in particular, has prompted some insurers to abandon the drought-ridden Golden State entirely, a trend that insurance regulators have been struggling to prevent.
The state has a FAIR Plan, which insurance carriers in the state are required to pay into, that has become the last resort for home owners in high-risk areas. But it’s just for residential insurance.
But for insurers like Tim Smith, senior vice president, national hospitality practice director for the insurance company IMA Financial Group, it’s the changes in the political climate that have sent insurance companies running.
“When it comes to California, the climate for insurers is just difficult,” said Smith. “There have been mandates to hold rates at unprofitable levels. That’s where insurance companies say, okay, we can’t do business.
“There’s a perception that insurance companies make all these gazillions of dollars, but they don’t exit areas or regions or states for no reason,” Smith continued. “When its adverse climate politically makes it difficult to operate, that narrows the options, and it spirals from there.”
California Insurance Commissioner Ricardo Lara, for example, last week issued a one-year moratorium to prevent insurance companies from canceling or refusing to renew residential insurance policies for wildfire risk in certain impacted neighborhoods. It’s not clear whether that moratorium would also apply to business insurance renewals, but Smith sees the move as another example of how the state is making it harder for insurance companies to operate.
For restaurant operators in Los Angeles, the impact of the ongoing blazes will go far beyond the loss of physical property.
For many, operations have been paused, or sales slowed, by mandatory evacuation orders, power and internet outages, the lack of access to clean water, heavy smoke or curfews in evacuated neighborhoods. Some restaurants have closed temporarily because their workers were dealing with the crisis.
Those are things that could be covered in a well-written policy that covers business interruption, Smith said, but it just depends on the policy. He urged business owners to work with a broker or insurance coverage attorney who could argue on their behalf to get compensated.
Jessica Gopiao, senior associate in the Insurance Recovery Group at law firm Reed Smith in Orange County, California, is one of those coverage attorneys.
The first step for business operators is to take a look at their policies to see what’s covered, she said.
The industry learned the hard way from Covid that some factors that can interrupt business—like a deadly virus, for example—may not be covered. In that case, insurers argued the virus did not cause physical damage.
But it will likely be easier to make the case for factors related to fire, Gopiao said, especially with the declarations of emergency and actions by civil authorities, like mandatory evacuations and curfews.
She recommended that business owners impacted in any way by the fires notify insurance companies about physical damage as soon as possible. Because this is an ongoing crisis, keep a diary of other ongoing problems, like workers not showing up, for example, she said.
Collect documentation for things like evacuation orders, curfews or other official acts that could fortify your claim, she said.
And, when the crisis is over, Smith recommended thinking ahead for the next crisis.
His company is still operating in California. IMF has developed a national program to “spread the risk,” allowing subsets of clients who are considered “good risk managers” to be in a category along with policy holders in lower-risk geographic areas, like Utah and Montana, he said.
Smith recommended working with a specialist who understands the nuances and nature of the restaurant insurance business.
Fire risk is not likely to go away.
“This will add to the challenging marketplace for restaurants, which are already challenged,” said Smith. “Wildfire, convective hurricane/storms, all these elevated weather-driven claims continue to be on the rise. So when events like this happens, it puts more of a microscope … on underwriters.”
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