December 21, 2018

Rebuilding from California wildfires will lead to increase in construction-defect claims

Insurers should prepare for high volume and high cost over the next decade.

After devastating wildfires throughout California in recent years, a flurry of reconstruction will create an increase in construction-defect claims affecting the liability-insurance market for years to come.

In late 2018, the "Woolsey Fire" burned approximately 100,000 acres in Los Angeles and Ventura County, and the "Camp Fire"—which charred much of Butte County and destroyed the entire town of Paradise—burned more than 150,000 acres and became the most destructive wildfire in California history. It appears that California's 2018 wildfires will surpass the record damages suffered in 2017, which experts have estimated destroyed almost 1.4 million acres and cost $18 billion.

Rebuilding in this lucrative market is inevitable. Though housing in the United States has slumped, the housing market in California has continued its post-2008 boom, with major metropolitan areas exhibiting 10% annual price growth since 2012.

Contractors will also be tasked with partial reconstruction or new construction to replace destroyed property, and new construction—especially in a post-disaster environment—can lead to new construction-defect claims.

The inevitable cascade of claims arising from these wildfires will last a very long time. California's Right to Repair Act gives homeowners up to 10 years to file certain construction-defect claims. Since many homebuilders' liability policies provide coverage to homes that first close escrow or are first completed during the policy year, insurers won't see the last of the new post-wildfire construction-defect claims until 2028 or later. I would therefore encourage insurers issuing liability policies to homebuilders in California—and especially their local claim handlers—to be prepared for high volume and high costs as rebuilding commences.

You can read the rest of our insurance predictions here.