Insurance against disasters

About insurance 

In the U.S., individuals and households are typically responsible for a significant portion of their own disaster recovery. They may use income, savings, loans, philanthropy, insurance, or some combination. Read more about the Stafford Act and the Federal role in disasters to understand FEMA’s role in disaster recovery funding.  

Insurance plays a critical role in recovery financing. For example, after Hurricane Harvey insurance made up 61% of total identified financial assistance, including Federal and private sources of funding. Insurance usually responds with greater certainty and speed than other forms of assistance and offers larger financial payouts.  

Insurance policies covering homes and personal property vary depending on whether or you are a renter or a homeowner. They also change depending on where you live and what risks your property may face. It’s important to learn what each policy will and will not cover. Most homeowner and business policies do not cover floods or earthquakes, which require separate coverage. The National Flood Insurance Program (NFIP) is managed by the Federal Emergency Management Agency (FEMA) and is delivered to the public by a network of approximately 60 insurance companies. The California Earthquake Authority is one of the largest providers of earthquake insurance. 

Policies do typically cover wildfires, but increasingly insurers are refusing to offer coverage to places that are considered “high risk,” especially given that the State of California regulates insurance prices. Proposition 103 from 1988 is set up to protect consumers from price shocks in insurance markets, requiring insurers to charge rates pre-approved by the Department of Insurance for most policies on the admitted market. State law also prohibits insurers from incorporating future climate projections into premium calculation, allowing only the use of historical data. Given the dramatic increase in highly destructive wildfires and other disasters, the insurance industry is worried about maintaining their business model while having to pay out recent and future losses. The California Department of Insurance has been issuing moratoriums on insurance policy non-renewals for residents living near a declared wildfire disaster. However, it’s unclear how long this will last and reflects a critical need to explore new ways of insuring against disasters. The California FAIR Plan is the “wildfire insurance of last resort” but it is expensive and out of reach for many low-income Californians. 

Impact on frontline communities  

While insurance is a powerful tool to recover and rebuild after a disaster, many people and small businesses are uninsured or underinsured across California. Neither homeowner nor renters' insurance is required by State law. However, many people do have homeowner’s insurance because it’s often required to get a mortgage. 

Insurance is an extra cost each month that many frontline communities cannot afford. Unfortunately, without insurance, households are more likely to have a harder time recovering if there is a disaster, perpetuating a cycle of financial stress.  

Actions to take 

For individuals and households 

• Use this guidance to document your property and understand insurance options. 

For community-based organizations and affordable housing providers 

• Use this Insurance Coverage Guide to understand the insurance you have and identify the insurance coverage you’ll need for your building and operations. 
• Use this Insurance Coverage Worksheet to have easy access to key information about your building’s insurance coverage. 
• Encourage your tenants to hold renter’s insurance.  Discuss with them how this might fit into their budget and the reasons why it is important. 

For local and State government 

• Work with State and local agencies, hazard experts, planners, and community organizations to explore and consider new options that allow for the  balance in understanding future risk of climate change in our insurance premiums, protecting people from unaffordable premiums, and allowing for mitigation actions to reduce risk (and premiums).  
• Explore new models of insurance such as Community-Based Catastrophe Insurance. 

For philanthropy  

• Create funding programs to help households pay for insurance. 
• Fill in the gaps left by deductibles, a suggestion from the Center for Disaster Philanthropy. 
• Encourage your grantees to secure insurance, and your grantees to encourage their clients to secure insurance.