California Insurers Cutting Hundreds of Policies Over Historic Risk

California Insurers Cutting Hundreds of Policies Over Historic Risk

Californians are facing a worsening home insurance crisis as providers cut back on policies, citing the risk of earthquake-induced fires.

When the devastating magnitude 7.9 earthquake struck San Francisco in 1906, more than 80 percent of the city was destroyed and over 3,000 people were killed. It remains the deadliest earthquake in U.S. history, and the greatest loss of life from a natural disaster in California.

While the earthquake caused widespread damage to buildings and infrastructure, the fires that engulfed the city in the days that followed caused much greater damage. The three-day blaze accounted for about 80 percent property loss, with more than 28,000 buildings destroyed in total, according to a 1972 federal report.

More than a century later, the impact of the disaster appears to have come back to the forefront as two major insurance providers, State Farm and Safeco (owned by Liberty Mutual), have cited the risk of earthquake-induced fires as a reason for cutting back on policies in California. The issue was first covered by the San Francisco Chronicle.

California fires
Firefighters battle to contain a wildfire in Upper Lake, California, in 2018. Californians are facing a worsening home insurance crisis as providers cut back on policies, citing the risk of earthquake-induced fires.MARK RALSTON/AFP/Getty Images

In March, State Farm announced that it would not renew about 30,000 homeowners, rental dwelling and other property insurance policies. It added that it would withdraw from offering commercial apartment policies and would not renew roughly 42,000 of these plans.

Announcing the decision, State Farm said: “This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations. State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

State Farm wrote in state filings this year that “Personal Lines Homeowners and Dwelling Fire Insurance policies that present the most substantial wildfire or fire following earthquake hazards, or are in areas of significant concentration are no longer eligible.”

The company said that the non-renewals would occur on a rolling basis over the next year, beginning on July 3 for homeowners, rental dwelling, residential community association and business owners policies, and on August 20 for commercial apartment policies. Overall, it said that the non-renewals represent 2 percent of State Farm’s policy count in California.

While home insurance does not typically cover damage caused by earthquakes, it does normally cover losses caused by losses following the event.

Meanwhile, Safeco also announced in state filings that it would not renew nearly 1,000 homeowners policies in San Francisco and East Bay to reduce its exposure to fire risk following earthquakes.

A Liberty Mutual spokesperson told The San Francisco Standard last year that due to the Bay Area’s “significant earthquake risk and the resulting home fires they cause, and our high concentration of insurance exposure, we have taken the difficult but necessary step to further reduce our overall book of business through underwriting decision on new and renewal homeowner policies.

“This decision impacts approximately 1 percent of our California homeowners business.”

San Francisco Fire
Ruins in San Francisco after the 1906 earthquakeUniversal History Archive/Universal Images Group via Getty Images

The decision to cancel home insurance policies because of earthquake-induced fire risk comes despite significant safety improvements in San Francisco since 1906, reducing the risk of serious widespread fires.

Authorities have invested in replacing cast iron water mains with more flexible materials, reducing the chance of cracking during earthquakes. The San Francisco Public Utilities Commission invested in a pipeline with a highly engineered set of joints where it crosses a fault line to allow it to move up to seven feet without cracking.

Dozens of about 70,000-gallon cisterns have been installed across the city to act as back-up water sources for firefighters in case of a major fire and damage to regular mains.

The city also bought three Rosenbauer hose tenders last year, allowing it to pump large quantities of water directly from the bay or lakes to extinguish fires rapidly.

Meanwhile, Pacific Gas and Electric Co. announced in 2015 that it had eliminated all of the old cast iron pipes from its natural gas distribution system, reducing the chance of gas leaks.

Newsweek has contacted State Farm and Safeco for comment outside of normal working hours.

Updated on 04/30/2024 at 10:16 a.m. ET with reference to reporting by the San Francisco Chronicle

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