Mandatory Wildfire Insurance in Nevada Goes Up in Smoke

Home insurers in Nevada no longer have to include wildfire coverage in homeowners policies under a new state law that took effect Jan. 1. Proponents of the law say it will lower home insurance costs. Detractors argue that it could leave homeowners financially devastated in the wake of a wildfire.

The law marks the first time a state has allowed insurers to sell home insurance coverage that doesn’t include wildfire protection. Insurers can sell individual wildfire-only protection policies.

Proponents hail the change as allowing for future innovation in the industry via more customized policy creation. They also say it’s a necessary change for areas like the Lake Tahoe region, where expensive homes face increasing wildfire risk and fewer insurers are willing to provide coverage.

Detractors say the change creates risk and will leave homeowners, who may not be aware of the change, defenseless in the face of a wildfire.

“If you’re a homeowner who doesn’t know much about insurance, which I argue most people don’t, we’re looking at folks assuming they had wildfire coverage and finding out they don’t,” Michele Steinberg, wildfire division director for the National Fire Protection Association, told E&E News. “It’s not a matter of ‘I lost the use of my kitchen for a month.’ You’re homeless.”

Bi-partisan support

The bill passed the Democratic-controlled Nevada state legislature unanimously last year, and Republican Gov. Joe Lombardo signed it into law. In addition to decoupling wildfire coverage from home insurance, the law also allows insurers to experiment with additional insurance coverage offerings and policy underwriting by temporarily waiving specific regulations.

But the success of such coverage in the market remains to be seen. Mortgage lenders routinely require homeowners to carry home insurance that includes wildfire coverage.

Replicating other disaster coverage

Nevada isn’t the first state to remove a form of elemental damage from common home insurance policies. Nineteen states along the Gulf and Atlantic coasts now commonly exclude windstorm coverage from home insurance policies. Instead, homeowners must buy specialized windstorm insurance.

And nationwide, home insurance policies typically don’t cover damage from earthquakes and flooding. Homeowners in high-risk areas usually have to purchase separate earthquake and flood insurance policies to fully protect their properties from those natural disasters.

Nevada’s wildfire risk is relatively low compared to the windstorm risk along the Atlantic and Gulf coasts. The state has received $25 million in wildfire support from FEMA since 1998. California, by contrast, has received $6.8 billion.

What’s next? Could other states follow Nevada?

The new law took effect at the start of this year, and so far, insurers in the state have yet to introduce a product with wildfire exclusions. But if the law proves successful, other states could follow suit, particularly those with insurance systems suffering from greater strain.

Nevada isn’t facing a home insurance crisis like California or Florida — both states with high exposures to multiple types of natural disasters. Nevada residents pay $1,296 per year, on average, for $300,000 in dwelling coverage, according to Insurify data. That’s almost half the national average of $2,544 and significantly below the rates paid in neighboring Arizona ($2,076) and California ($2,208).

California’s insurance industry, in particular, continues to recoil from the Palisades and Eaton wildfire damage that occurred last year.

Insurify Senior Economic Analyst Matt Brannon sees the removal of wildfire coverage in Nevada as the latest example of states, policyholders, and insurers trying to grapple with the economics of the insurance market.

“In certain pockets of the U.S., homeowners are increasingly facing insurance shrinkflation, where their premiums continue to climb, but their coverage doesn’t protect them against everything it used to,” said Brannon. “From an insurer’s perspective, catastrophic risk from severe weather is an increasing threat, and to offset that risk, they generally have to either raise premiums or pull back coverage.”

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