The Crisis on Top of the Crisis

The catastrophic wildfires in Los Angeles represent a terrible human tragedy, and for many homeowners, it will become an awful financial tragedy as well, as thousands will discover that there’s a big gap between what their homes are worth and what they’ll actually get from insurance companies to rebuild on top of the ash.

And they’re not alone. A recent article in Bloomberg News says that an estimated 17 million U.S. homes—roughly 19% of total housing—are significantly underinsured against damage from floods and wildfires alone. The total gap between their market value and their insurance coverage, in aggregate, comes to $1.7 trillion.

And that number is rapidly growing, as the housing boom pushes home values higher. Moreover, those who have so far managed to avoid the floods and hurricanes in Florida, the wildfires across the Pacific Northwest or the thunderstorms in Oklahoma are facing huge increases in insurance costs that erode the value of their properties. From 2011 to 2021, the average U.S. home insurance premium rose 44%, and by some estimates it has exploded since. And that’s if coverage is available. Many insurers are pulling out of the hardest-hit areas, citing climate change-related increases in nature-related damage.

Adding fuel to the fire, so to speak, is the growing number of U.S. homes that have been built on what the U.S. Forest Service calls the wild land-urban interface (WUI), where wildfires are most likely. In 1990, the census showed roughly 30 million homes at risk; now the number is 44 million. The housing boom in Florida has put millions of additional homes at risk.

The article says there is no easy solution to the problem as climate-related disasters grow in number and intensity. It estimates that, in the future, the gap between home values and coverage will reach $2.7 trillion, and more homeowners will have to pay the difference or lose everything.

My recent homeowner’s insurance renewal in the Dallas area saw my premium more than double from my existing insurer, who has never received a claim from me. In speaking with my independent insurance broker, he lamented that every other quote he received was higher, and there is no relief in sight.