The next battle for wildfire victims: Insurance

Consumers could get stiffed on reimbursement for razed homes, and even get dropped by their insurance companies, consumer advocates warn.

By David Ellis, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Right now, thousands of dislocated Southern California homeowners are fretting about the fate of their residences, but the biggest headaches could come months after the wildfires ravaging the area are extinguished.

Consumer advocates warn that insurance firms could take a hard line with their policyholders in the wake of the wildfire disaster, by skimping on claim payments or going so far as to refuse to write new policies altogether.

"It's possible," said Robert Hunter, the director of insurance for the Consumer Federation of America. "We have to wait and see what the statistics are."

Estimates about the extent of the damage inflicted by the wildfires to homes, cars and other personal property remain scant.

But as firefighting efforts appeared to be no match for the 16 blazes that have so far scorched 361,000 acres, clearly the toll will be severe.

California Gov. Arnold Schwarzenegger placed the damages in the ballpark of "hundreds of millions of dollars" during a televised interview Tuesday. And the Insurance Information Institute estimated late Tuesday that, given the uncontrolled nature of the fire, the amount of insured losses from the wildfires could top $500 million.

While California has long been a nexus for catastrophes, including wildfires and earthquakes, it has also been a gold mine for the insurance business.

Insurance companies brought in a combined $6.6 billion in homeowner insurance premiums statewide during 2006, according to the Insurance Information Institute. During that same period, total California premiums for auto insurance reached an eye-popping $19.8 billion.

But what experts like Doug Heller, executive director for Foundation for Taxpayer and Consumer Rights, worry about is how much money will be available when it comes time for customers to rebuild their homes.

"That's the real concern for me at least," said Heller. "Will they actually fulfill their advertisements?"

One of the biggest controversies erupted in 2003, when fires ravaged San Diego and San Bernardino counties. Consumers found themselves underinsured because their policy limits were not raised to reflect their home values, said Heller. That meant homeowners had to pay the difference.

"I think there is a question as to whether insurance companies learned from 2003 and have made sure that policyholders have enough coverage," said Heller.

As lucrative as the California homeowner insurance market is, there is also a lingering concern that insurance companies may ditch customers after the smoke clears, claiming it is too costly to insure the catastrophe-prone areas.

Earlier this summer, Northbrook, Ill.-based Allstate (Charts, Fortune 500) said it would no longer write new homeowner policies in California as part of an effort to "manage the risk" of offering property insurance in the state. (see correction)

Consumer advocates like Hunter from the Consumer Federation of America warn that other insurers could follow as they look to trim their loss exposure nationwide amid major disasters in recent years, such as Hurricane Katrina.

"Insurers have been very skittish about major losses," said Hunter.

The leading home insurers in California are State Farm, which covers about 22 percent of homes in the state, and Farmer's, which covers about one-sixth of residents. If the latest catastrophe were to cause either of those companies to contract their California businesses, smaller firms could follow suit.

"This is a follow-the-leader industry," said Hunter. "If those two hold their position by staying and writing business, then I think it's a good chance [other departures] won't happen."

Calls made to Farmers were not returned. A spokesman for State Farm said the company had no plans to pull out of the region, saying it was "too early to tell."

"A year from now, who knows," said Mike Rossman, the State Farm spokesman. "We are here to provide as much service as possible."

At least for now, most consumers should not fear getting dropped by their insurance company. Under California law, insurance companies are required to renew their homeowner policies at least once if they live in a declared federal disaster area. After that term expires, insurers may then drop their clients.

Earlier Tuesday, President Bush declared seven California counties disaster areas.

In the end, some consumers may get dropped, warns Amy Bach, executive director of the California-based consumer group United Policyholders, which deals primarily with the insurance industry.

But, she added, even if some firms cut back in California, others may well step in. "Hopefully the market will [eventually] stabilize," said Bach.

Correction: An earlier version of the story suggested incorrectly that Allstate's decision to stop writing new policies was in response to state regulators, who rejected a proposal by Allstate to raise premiums within the state. A ruling on the rate increase is still pending. CNNMoney.com regrets the error. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.