Property and casualty insurers operating in the state of California have been told they have a duty to cover property damage claims resulting from the recent mudslides and debris flows, if the events are determined to be linked to the recent major wildfires.
The formal notice from California Insurance Commissioner Dave Jones makes it clear that where a link can be established between the wildfires and the mudslides any claims must be covered under homeowner insurance policies.
It’s typical that these policies exclude claims from mudslides, debris flows, flooding and other similar events. But they do cover wildfire claims and they are said to have a duty to pay claims where losses are caused by the wildfires, a covered peril, were the efficient proximate cause of any mudflow, mudslides, debris flow, landslide, or other similar event.
“Californians have suffered greatly with all of the devastating losses from wildfires that struck the state in the last three months of 2017,” explained Commissioner Jones.
“Preliminary indications are that the Thomas Fire burned vegetation which would otherwise have absorbed rainfall and held soils in place, which in turn resulted in the mudflows, mudslides, debris flows or landslides. If the evidence shows the Thomas Fire or another peril covered by a homeowner’s insurance policy was the efficient proximate cause of mudflow damage, I expect insurance companies to step up and cover these financial losses,” he explained.
As a result, affected residents and business owners are being encouraged by the regulator to file claims related to the mudslides and debris flows.
California insurance code section 530 states:
An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.
The regulator said that, “Based on preliminary information evaluated by the Department, there is a substantial basis to indicate that the Thomas fire was the efficient proximate cause of the flooding, mudflow, debris flow, mudslide, landslide, and other similar events in Santa Barbara County following the Thomas fire.
“If it is established that the Thomas fire or another peril covered by the applicable policy was the efficient proximate cause of the damage resulting from these mud slides and other similar events in Santa Barbara following the fire, such damage is covered by the policy regardless of any exclusion in the applicable policy.”
The burden then falls on the insurers to prove that a claim should be excluded, if they dispute that the wildfires constituted an efficient proximate cause of the mudslide events.
The wildfires stripped hillsides in the region of much of their vegetation and ground cover, which exacerbated the potential for the mudslides after days of torrential rainfall hit the region.
So this notice to insurers could increase the losses they face under the wildfires, which in turn means insurers may be passing on higher levels of losses to their reinsurance providers.
Whether this will impact alternative reinsurance capital remains unclear, but the southern California wildfires are another loss event which is adding to aggregates and therefore has the potential to increase the reinsurance industry losses from recent events.
Of course many aggregate coverages are annual, thus typically start and end at the beginning of the year. The mudslides occurred in early January so these claims would likely fall into a new reinsurance risk period, we’d imagine which could minimise the impact to contracts that had already faced losses from 2017 catastrophes.