America on Fire: Climate Change, Wildfires & Insuring Natural Catastrophes

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2020

America on Fire: Climate Change, Wild)res & Insuring Natural America on Fire: Climate Change, Wild)res & Insuring Natural

Catastrophes Catastrophes

Christopher French

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Part of the Insurance Law Commons

817

America on Fire: Climate Change,

Wildfires & Insuring Natural

Catastrophes

Christopher C. French

∗

America is on fire. The damage, destruction, and loss of life caused by

wildfires have exploded over the past few decades. Nine of the ten worst fire

seasons have occurred in the past fifteen years, with 2017 and 2018 being

the worst years ever. Despite spending approximately $3.7 billion annually

on fire suppression, more than 35,000 structures were lost to wildfires in

2017 and 2018, approximately $32 billion in property losses occurred, and

more than 100 people were killed. More than forty million homes worth

approximately $187 billion in the U.S. are currently at a high risk of

destruction due to wildfires. In response to this crisis, the insurance industry

has been dropping customers and refusing to insure homes that are

considered at high risk for wildfires, while also excluding coverage under

homeowners policies for other natural catastrophes such as floods and earth

movement. As a result, natural catastrophes are largely uninsured in

America today.

This Article discusses the causes of the wildfire crisis, including climate

change, and ways to mitigate the crisis. It also analyzes the current

insurance market for wildfires and other natural catastrophes in America.

In doing so, it explores how other developed countries, such as Australia,

Belgium, France, New Zealand, Norway, Spain, and Switzerland, insure

natural catastrophes. It concludes by seeking to transform the insurance

∗

of Practice at Penn State Law; J.D., Harvard Law School; B.A., Columbia University. The

author gratefully acknowledges the legal research contributions of Amber Morris and

Taylor Stark to this Article. The author also thanks Lara Fowler, Max Helveston, Rachel

Herder, Ben Johnson, Jud Mathews, Adam Muchmore, Anya Prince, Dara Purvis, Victor

Romero, Dan Schwarcz, Steve Ross, Jeff Stempel, Mark Storslee, Sam Thompson, and

Jeff Thomas, as well as the participants in the Insurance Law section of the 2020 annual

AALS conference, for providing thoughtful comments on earlier drafts of the Article.

The author is also grateful to Penn State Law for hosting a workshop in which a draft

of the article was discussed.

818 University of California, Davis [Vol. 54:817

market in America for natural catastrophes by proposing the creation of a

governmental insurance program that “bundles” coverages for natural

catastrophes together in a single policy. Bundling the coverages would solve

the correlated risk, adverse selection, and moral hazard problems that have

driven private insurers from the insurance market for natural catastrophes

and plague insurance programs that cover only a single catastrophic peril,

such as the National Flood Insurance Program.

ABLE OF CONTENTS

NTRODUCTION ................................................................................... 819

I. C

LIMATE CHANGE AND THE CAUSES OF THE WILDFIRE CRISIS

AMERICA .............................................................................. 826

A. Climate Change ................................................................. 826

B. The Other Causes of the Wildfire Crisis in America ........... 828

II. T

HE INSURANCE INDUSTRY’S RESPONSE TO THE WILDFIRE

CRISIS ....................................................................................... 831

A. Wildfires and Correlated Risks .......................................... 831

B. Insurers’ Reaction to the 2017 and 2018 Wildfires ............. 834

C. Reinsurance and Catastrophe Bonds as Alternative Risk

Transfer Mechanisms ........................................................ 839

III. W

AYS TO MINIMIZE WILDFIRE DAMAGE ................................... 841

A. Reverse Climate Change .................................................... 841

B. Reduce Wildfire Fuels ........................................................ 843

C. Reduce or Eliminate Construction in the Wildland Urban

Interface ............................................................................ 844

D. Reduce the Risk of Homes Burning Through Building

Codes ................................................................................ 845

IV. I

NSURING WILDFIRE LOSSES AND OTHER NATURAL

CATASTROPHES ......................................................................... 846

A. The Importance of Insurance ............................................. 846

B. The Case for a Governmental Insurance Program to

Cover Natural Catastrophes .............................................. 847

C. The Case for “Bundled” Insurance Instead of Standalone

Insurance for Specific Natural Catastrophes ...................... 854

D. The Case Against a Governmental Insurance Program for

Natural Catastrophes ........................................................ 858

E. Insurance for Natural Catastrophes in Other Countries ..... 869

1. Australia ...................................................................... 869

2. Belgium ....................................................................... 872

3. France ......................................................................... 874

4. New Zealand ............................................................... 877

5. Norway ....................................................................... 879

2020] America on Fire 819

6. Spain ........................................................................... 880

7. Switzerland ................................................................. 882

ONCLUSION....................................................................................... 885

NTRODUCTION

America is on fire. The damage, destruction, and loss of life caused by

wildfires have exploded over the past few decades. Nine of the ten worst

fire seasons have occurred in the past fifteen years with 2017 and 2018

being the worst years ever.

Despite spending approximately $3.7

billion annually on fire suppression, more than 35,000 structures were

lost to wildfires in 2017 and 2018, approximately $32 billion in

property losses occurred and more than 100 people were killed.

Over

nine million acres of land burned in 2017 alone.

Experts estimate that

more than forty million homes in the U.S., worth approximately $187

See Leigh Barton, Note, Let It Burn: An Argument for an Adaptive Resilience

Approach to Federal Wildfire Management in the Western United States, 30 G

EO. ENVTL. L.

REV. 695, 697 (2018); see also WILDFIRES AND CLIMATE CHANGE: CALIFORNIA’S ENERGY

FUTURE, A REPORT FROM GOVERNOR NEWSOM’S STRIKE FORCE 1 (2019),

https://www.gov.ca.gov/wp-content/uploads/2019/04/Wildfires-and-Climate-Change-

California%E2%80%99s-Energy-Future.pdf [https://perma.cc/EM9C-MC2V]

[hereinafter S

TRIKE FORCE REPORT] (“Fifteen of the 20 most destructive wildfires in the

state’s history have occurred since 2000; ten of the most destructive fires have occurred

since 2015.”).

See STEPHEN L. QUARLES & KELLY POHL, HEADWATERS ECON., BUILDING A WILDFIRE-

ESISTANT HOME: CODES AND COSTS 7 (2018), https://headwaterseconomics.org/wp-

content/uploads/building-costs-codes-report.pdf [https://perma.cc/2F25-YCXM]; A

M. PROP.

CAS. INS. ASS’N, THE RISK OF WILDFIRES IS GROWING 2 (2019), http://www.pciaa.net/

docs/default-source/industry-issues/8_wildfires.pdf [https://perma.cc/YG4W-5SLQ];

STRIKE

FORCE REPORT, supra note 1, at 5; Katherine Blunt & Russell Gold, PG&E Delayed Safety

Work on Power Line that Is Prime Suspect in California Wildfire, W

ALL ST. J. (Feb. 27, 2019,

1:42 PM), https://www.wsj.com/articles/pg-e-delayed-safety-work-on-power-line-that-

is-prime-suspect-in-california-wildfire-11551292977 [https://perma.cc/KKZ5-KT4T]

[hereinafter PG&E Delayed Safety Work]; Russell Gold & Katherine Blunt, Wildfires Drove

PG&E to Bankruptcy, Where Utility Must Change to Survive, W

ALL ST. J. (Jan. 29, 2019, 7:11

PM), https://www.wsj.com/articles/wildfires-drove-pg-e-to-bankruptcy-where-utility-must-

change-to-survive-11548807084 [https://perma.cc/JQ6L-MR95] [hereinafter Wildfires Drove

PG&E to Bankruptcy]; Mary W. Walsh, How Wildfires Are Making Some California Homes

Uninsurable, N.Y.

TIMES (Nov. 20, 2018), https://www.nytimes.com/2018/11/20/business/

california-fires-insurance.html [https://perma.cc/YL8T-33JN]; Facts + Statistics: Wildfires,

NS. INFO. INST., https://www.iii.org/fact-statistic/facts-statistics-wildfires (last visited Sept. 2,

2020) [https://perma.cc/XL6L-TH4L].

See Paige Blankenbuehler & Brooke Warren, Why Western Wildfires Are Getting

More Expensive, H

IGH COUNTRY NEWS (Dec. 11, 2017), https://www.hcn.org/issues/49.

21/infographic-why-western-wildfires-are-getting-more-expensive [https://perma.cc/

Q4QK-JC2W].

820 University of California, Davis [Vol. 54:817

billion, are currently at high risk of loss due to wildfires.

Those figures

do not even include the loss of business and tax revenues caused by

wildfires. Nor do they consider the costs associated with the diminished

air quality that accompanies wildfires.

The insurance industry’s response to the wildfire crisis has been to

refuse to renew policies for homeowners who are at high risk for

wildfire losses and to refuse to sell policies to new customers who are

at high risk.

The number of homeowners being dropped by their

insurers has reached “tens of thousands of homeowners across the state

[of California], and regulators expect more nonrenewals in the coming

months.”

Insurers already exclude coverage in homeowners policies

for other natural catastrophes such as floods, earthquakes, and

landslides.

By adding wildfires to the list of natural catastrophes that

See Sarah Kaplan & Frances Stead Sellers, How They Survived: Owners of the Few

Homes Left Standing Around Paradise, Calif., Took Critical Steps to Ward off Wildfires, W

ASH.

POST (Nov. 30, 2018, 3:15 PM), https://www.washingtonpost.com/national/how-they-

survived-owners-of-the-few-homes-left-standing-around-paradise-calif-took-critical-steps-

to-ward-off-wildfires/2018/11/30/db323782-f34b-11e8-80d0-f7e1948d55f4_story.html

[https://perma.cc/LR2D-G2VZ]; Facts + Statistics: Wildfires, supra note 2.

See STRIKE FORCE REPORT, supra note 1, at 5.

See Christopher Flavelle, As Wildfires Get Worse, Insurers Pull Back from Riskiest

Areas, N.Y. TIMES (Aug. 20, 2019), https://www.nytimes.com/2019/08/20/climate/fire-

insurance-renewal.html [https://perma.cc/M8WF-4F8A] (“Insurers are quietly

reducing their exposure to fire-prone regions across the Western United States . . . .”);

Nicole Friedman, California Homeowners Face Higher Prices for a Scarce Commodity:

Wildfire Insurance, W

ALL ST. J. (Feb. 10, 2019, 8:00 AM), https://www.wsj.com/

articles/california-homeowners-face-higher-prices-for-a-scarce-commodity-wildfire-

insurance-11549803600 [https://perma.cc/JRJ6-SP4H] [hereinafter Wildfire Insurance]

(noting insurers are refusing to sell insurance to some homeowners or asking for

substantial premium rate increases); Thomas Fuller & Ivan Penn, California, Wary of

More Wildfires, Is Paying for Them Already, N.Y.

TIMES (July 22, 2019),

https://www.nytimes.com/2019/07/22/us/california-wildfires-costs.html [https://perma.

cc/8TAT-Y5HE] (noting that a homeowner whose house was near a recent wildfire area

was dropped by his insurer and other “insurance companies want five times the $1,800

a year he currently pays”); Walsh, supra note 2 (“[S]ome [insurers] . . . have been

declining to renew homeowners’ policies in fire-prone areas.”).

Nicole Friedman, High Cost of Wildfire Insurance Hurts California Home Sales,

ALL ST. J. (Jan. 5, 2020, 5:30 AM), https://www.wsj.com/articles/high-cost-of-wildfire-

insurance-hurts-california-home-sales-11578220200 [https://perma.cc/7ULH-CT85]

[hereinafter High Cost].

See, e.g., Columbia Ins. Co. of Alexandria v. Lawrence, 35 U.S. 507, 518 (1836)

(noting the exclusion of coverage for earthquakes under a fire policy); Peters Twp. Sch.

Dist. v. Hartford Accident & Indem. Co., 833 F.2d 32, 35 (3d Cir. 1987) (“[T]he reason

for the insertion of the exclusionary clause . . . in all risk insurance policies is to relieve

the insurer from occasional major disasters which are almost impossible to predict and

thus to insure against. There are earthquakes or floods which cause a major catastrophe

and wreak damage to everyone in a large area rather than on individual policyholder.”

2020] America on Fire 821

private insurers refuse to insure, many types of natural catastrophes

losses are simply uninsured in America. In fact, Americans suffered

approximately $33 billion in uninsured natural catastrophe losses in

2018.

Much of the legal scholarship regarding the relationship between

climate change and insurance has focused on using insurance to

influence policyholders’ behavior to act to promote climate mitigation

or adaptation on their insured properties rather than addressing the lack

of insurance to cover natural catastrophe losses caused, in part, by

climate change.

This Article embraces many of the arguments made in

the existing scholarship regarding behavior modification, but it also

proposes a new approach to insuring natural catastrophes in America at

a time when the damage caused by natural catastrophes is dramatically

increasing.

Specifically, this Article proposes that coverage for natural

catastrophe perils, including wildfires, floods, landslides and

hurricanes, be “bundled” together in a single property insurance policy

sold by the government.

Such a program would provide a solution to

(quoting Wyatt v. Nw. Mut. Ins. Co., 304 F. Supp. 781, 782-83 (D. Minn. 1969)));

Powell v. Liberty Mut. Fire Ins. Co., 127 Nev. 156, 162-63 (2011) (“Earth movement

exclusions were historically included in insurance policies to protect insurance

companies from having to pay out on policies when a catastrophic event caused damage

to numerous policyholders.”); Warren Kriesel & Craig Landry, Participation in the

National Flood Insurance Program: An Empirical Analysis for Coastal Properties, 71 J.

RISK

& INS. 405, 405 (2004) (discussing how insurers have historically not provided

insurance for floods); Brian Mattis, Earth Movement Claims Under All Risk Insurance: The

Rules Have Changed in California, 31 S

ANTA CLARA L. REV. 29, 36 (1990) (citing State

Farm Fire & Cas. Co.’s Homeowners Policy Special Form 3, p. 7, Form FP-7103)

(discussing the history behind earthquake insurance).

See Facts + Statistics: U.S. Catastrophes, INS. INFO. INST., https://www.iii.org/fact-

statistic/facts-statistics-us-catastrophes (last visited Sept. 5, 2020) [https://perma.cc/

7RG6-5Q9G].

See, e.g., Sean B. Hecht, Climate Change and the Transformation of Risk: Insurance

Matters, 55 UCLA

L. REV. 1559, 1585 (2008) (discussing how insurance can influence

policyholders’ responses to climate change); Howard C. Kunreuther & Erwann O.

Michel-Kerjan, Climate Change, Insurability of Large-Scale Disasters, and the Emerging

Liability Challenge, 155 U.

PA. L. REV. 1795, 1836-40 (2007) (suggesting that insurers

can mitigate climate change injuries by providing incentives to change policyholders’

negative behaviors that are causing climate change).

Bundling insurance coverage for numerous risks together in a single insurance

policy is not new. For example, the Commercial General Liability (formerly known as

the Comprehensive General Liability) policy combines various liability coverages in a

single policy and has been sold in America since the 1940s. See, e.g., Jeffrey W.

Stempel, Rediscovering the Sawyer Solution: Bundling Risk for Protection and Profit, 11

UTGERS J.L. & PUB. POL’Y 170, 182-87 (2013) (explaining the reasoning behind the

development of the CGL policy).

822 University of California, Davis [Vol. 54:817

the problem of insuring natural catastrophes in America because it

would address the correlated risk, adverse selection, and moral hazard

problems associated with insuring natural catastrophes that have

resulted in private insurers simply refusing to insure them. Indeed, as

will be discussed in Part IV.E, many developed countries around the

world already insure natural catastrophe losses through some type of

governmental program. Bundling coverages for numerous types of

natural catastrophe perils together in a single policy sold by the

government would also solve the numerous problems that plague

insurance programs that cover only a single catastrophic peril (e.g.,

flooding), such as the National Flood Insurance Program.

So, what caused the wildfire crisis in America? The wildfire crisis was

created, in part, by a federal governmental policy in place between 1905

and the 1970s that treated all wildfires as bad and, thus, sought to

suppress them as quickly as possible.

The consequence of that policy

was the accumulation of wildfire fuel in the form of excess trees, shrubs,

and brush in forests across the country.

Returning forests to their

natural equilibrium will take time, but many of the ways to do it are

See, e.g., ROSS W. GORTE, CONG. RESEARCH SERV., RL33990, FEDERAL FUNDING FOR

WILDFIRE CONTROL AND MANAGEMENT 1 (2011) (discussing previous land management

policy); S

TEPHEN J. PYNE, PATRICIA L. ANDREWS & RICHARD D. LAVEN, INTRODUCTION TO

WILDLAND FIRE 248 (2d ed. 1996) (discussing the history of forest management and

wildfire suppression in America); Barton, supra note 1, at 698-99 (explaining how “U.S.

federal wildfire management was founded on the belief that fast, aggressive control was

the best, most effective management strategy”); Jamison E. Colburn, Retreat Alternatives

in NEPA: A Tool for the Perplexed, 33 J.

ENVTL. L. & LITIG. 3, 6 (2018) [hereinafter Retreat

Alternatives] (citing S

TEPHEN J. PYNE, FIRE IN AMERICA: A CULTURAL HISTORY OF WILDLAND

AND

RURAL FIRE 275-87 (1982)) (“For much of the twentieth century, the Forest Service

and Department of Interior land managers implemented what was known as the

‘10 A.M.’ policy: attacking any discovered wildfire on the lands they administer with the

goal of extinguishing it by mid-morning the next day.”); Garrett D. Trego, We Didn’t

Start the Fire . . . And We Won’t Pay to Stop It: Financing Wildfire Management in America’s

Wildland-Urban Interface, 36 W

M. & MARY ENVTL L. & POL’Y REV. 595, 598-99 (2012)

(discussing how the suppression policy was created “[o]ut of necessity and a sense of

obligation and pride”).

See, e.g., Barton, supra note 1, at 698-99 (“[F]ire suppression activities had

created a buildup of hazardous fuels and had changed the composition and arrangement

of these fuels.”); Jamison Colburn, The Fire Next Time: Land Use Planning in the

Wildland/Urban Interface, 28 J.

LAND RESOURCES & ENVTL. L. 223, 225-26 (2008)

[hereinafter Fire Next Time] (explaining how the longer fire is suppressed, “the more

likely it will return with a vengeance”); Debra L. Donahue, Agriculture and Forestry, in

HE LAW OF ADAPTATION TO CLIMATE CHANGE: U.S. AND INTERNATIONAL ASPECTS 351, 390

(Michael B. Gerrard & Katrina Fischer Kuh eds., 2012) (discussing the sources of

wildfire fuels); Trego, supra note 12, at 599-602 (discussing how the fire suppression

policy “created fuel buildup partially responsible for the recent increase in wildfire

activity”).

2020] America on Fire 823

known. Controlled burns and the reduction of wildfire fuels from

forests are two ways of doing so.

The federal government has been

attempting to implement both techniques for a few decades now, but

most of its time and money until recently had been spent fighting fires

instead of addressing the root causes of the fires.

Another cause of the wildfire crisis is climate change. Climate change

has resulted in a longer and drier wildfire season.

Addressing climate

change is a worldwide collective action problem that will require a

significant amount of time, effort, and worldwide cooperation.

Consequently, because climate change needs to be addressed on a

worldwide basis, as a practical matter, that means that the solution to

See Kimiko Barrett, Reducing Wildfire Risk in the Wildland-Urban Interface: Policy,

Trends, and Solutions, 55 I

DAHO L. REV. 3, 6 (2019); Barton, supra note 1, at 711; Allan

Kanner & Caitrin Reilly, Like a Phoenix Rising from the Ashes: Melding Wildfire Law into

a Comprehensive Statute, 33 J.

ENVTL. L. & LITIG. 47, 60 (2018); Kathryn Young, Chapter

638: Uniting to Fight Fire with Fire by Addressing California Forest Health in a Time of

Catastrophic Wildfire, 50 U.

PAC. L. REV 301, 305-07 (2019).

For example, in 2003, Congress passed the Healthy Forests Restoration Act

(“HFRA”), which sought to restore the ecological benefits of wildfires by establishing

programs of aggressive thinning, prescribed burning, and replanting to create open

conditions in forests. See Healthy Forests Restoration Act of 2003, Pub. L. No. 108-48,

§ 2, 117 Stat. 1887, 1888. In 2009, Congress enacted the Federal Land Assistance,

Management and Enhancement Act (“FLAME”), which sought “[t]o safely and

effectively extinguish fire, when needed; use fire where allowable; manage our natural

resources; and as a Nation, live with wildland fire.” U.S.

DEP’T OF THE INTERIOR & U.S.

DEP’T OF AGRIC., Building a Cohesive Strategy, FORESTS & RANGELANDS,

https://www.forestsandrangelands.gov/strategy/building.shtml (last visited Oct. 18,

2020) [https://perma.cc/Z6TD-A4V7]; see 43 U.S.C. § 1748b (2018); Brian Bona, The

Wildfire Crisis: How the Federal Government Has Tried to Stop the Burn, 6 A

RIZ. J. ENVTL.

L. & POL’Y 1081, 1084 (2016) (“The agencies cannot adequately minimize the wildfires

using fuel reduction techniques because all their funds go to emergency firefighting.

Since the agencies are unable to fully engage in preventative measures, the wildfires

become increasingly worse in subsequent years, which drives up the cost of fighting the

fires and forces the agencies to rely further on ‘fire-borrowing.’”). See generally U.S.

DEP’T OF THE INTERIOR & U.S. DEP’T OF AGRIC., supra (describing the National Cohesive

Wildland Fire Management Strategy that was designed “to allow for inclusiveness and

understanding of the complexities of managing wildfire risks across the country”).

See, e.g., QUARLES & POHL, supra note 2, at 7 (describing how “the average wildfire

season is nearly three months longer”); Barton, supra note 1, at 697 (noting how

“climate change is only worsening the threat of wildfires”); Trego, supra note 12, at 602

(noting “climate change in the United States has created longer fire seasons”).

See, e.g., Paul G. Harris, Collective Action on Climate Change: The Logic of Regime

Failure, 47 N

AT. RESOURCES J. 195, 196 (2007) (“Climate change is a collective action

problem par excellence.”); Jonathan B. Wiener, Think Globally, Act Globally: The Limits

of Local Climate Policies, 155 U.

PA. L. REV. 101, 102 (2007) (“[L]ocal action is not well

suited to regulating mobile global conduct yielding a global externality.”).

824 University of California, Davis [Vol. 54:817

the immediate wildfire crisis in America cannot depend upon the effects

of climate change being reversed in the short term.

The third cause of the wildfire crisis is urban sprawl — the

development of homes and neighborhoods on the edges of forests that

are prone to wildfires.

This phenomenon has been exacerbated by the

fact that many of the homes located in wildfire areas were not built to

resist wildfires.

Addressing this aspect of the problem is within the

power of Americans. Where and how people build can be regulated

through zoning ordinances and building codes.

The fourth cause of the wildfire crisis, which is the focus of the

primary scholarly contribution of this Article, is insurers’ recent refusal

to insure homes at high risk for wildfire losses. Fire is and was the

original peril that was covered by property insurance.

Unlike other

natural catastrophes, such as earthquakes and floods, fire losses

traditionally have not been viewed as correlated risks, so insurers

historically have covered them with little question. Correlated risks are

perils that cause numerous losses in the same area at approximately the

same time.

Because many types of natural catastrophes are considered

correlated risks, private insurers generally refuse to insure them. Private

insurers avoid insuring correlated risks because of insurers’ alleged

inability to accurately predict when and where losses associated with

correlated risks will occur, which in turn makes it difficult to establish

See, e.g., QUARLES & POHL, supra note 2, at 1 (describing how communities are

considering adopting new building codes due to wildfires and “the wildland-urban

interface”); Faith Berry, Lucian Deaton & Michele Steinberg, Firewise: The Value of

Voluntary Action and Standard Approaches to Reducing Wildfire Risk, 48 A

RIZ. ST. L.J. 181,

183 (2016) (identifying the risk “of homes in or near areas where the nature vegetation

is prone to burning from wildfire”); Colburn, Fire Next Time, supra note 13, at 240-42

(noting the consequences of “human migration toward forests”); Trego, supra note 12,

at 605-06 (articulating how urban sprawl has impacted “the frequency, intensity, and

cost of wildfire suppression in the United States”).

See Kaplan & Sellers, supra note 4.

See generally SONIA A. HIRT, ZONED IN THE USA: THE ORIGINS AND IMPLICATIONS OF

AMERICAN LAND-USE REGULATION (2014) (providing an overview of zoning and land use

planning).

See PETER J. KALIS, THOMAS M. REITER & JAMES R. SEGERDAHL, POLICYHOLDER’S

GUIDE TO THE LAW OF INSURANCE COVERAGE § 13.02[A][1] (1st ed. 1997 & Supp. 2019)

(citing R

ANDOLPH FIELDS, FINDING LOST TREASURE — HISTORICAL REVIEW OF FIRST PARTY

PROPERTY POLICIES 3 (1991)).

See Véronique Bruggeman, Michael Faure & Tobias Heldt, Insurance Against

Catastrophe: Government Stimulation of Insurance Markets for Catastrophic Events, 23

UKE ENVTL. L. & POL’Y F. 185, 187 (2012); J. David Cummins, Should the Government

Provide Insurance for Catastrophes?, 88 F

ED. RES. BANK ST. LOUIS REV. 337, 342-43

(2006); Adam F. Scales, A Nation of Policyholders: Governmental and Market Failure in

Flood Insurance, 26 M

ISS. C. L. REV. 3, 10-11 (2006).

2020] America on Fire 825

actuarially sound premiums and spread the risk across a large enough

pool of insureds with diverse risk profiles.

Consequently, many losses

due to natural catastrophes are either uninsured or underinsured in

America.

Unlike random house fires, the wildfires that now are occurring in

the West look and act like correlated risks. For example, the Camp Fire

that wiped out the entire town of Paradise, California in 2018 was a

correlated risk — there were numerous losses from the same peril in

the same geographic area at approximately the same time.

Property policies, such as homeowners insurance, however, do not

make a distinction between “regular” fires and wildfires. So, a house

that is burned to the ground by a fire is covered regardless of whether

the fire was caused by defective electrical wiring, an uncorrelated risk,

or a wildfire, a correlated risk. Instead of redrafting homeowners

policies to distinguish between correlated and uncorrelated risks of fire

loss, however, insurers simply have been refusing to renew policies for

homeowners in wildfire areas in recent years or attempting to increase

their premiums by dramatic amounts.

This Article addresses the wildfire crisis in four parts. Part One

provides a discussion regarding climate change and the other causes of

the wildfire crisis in America today. Part Two discusses the insurance

industry’s response to the current wildfire crisis. Part Three discusses

ways to mitigate the wildfire crisis. Part Four addresses insuring wildfire

and other natural catastrophe losses moving forward. In doing so, it

includes an analysis regarding how other developed countries, such as

Australia, Belgium, France, New Zealand, Norway, Spain, and

Switzerland, insure natural catastrophe losses. Part Four also discusses

the numerous problems with insuring natural catastrophes on a peril by

See Bruggeman et al., supra note 22, at 187.

See Facts + Statistics: U.S. Catastrophes, supra note 9 (noting that in 2018, there

were approximately $33 billion in uninsured losses caused by natural catastrophes).

See Katherine Blunt & Russell Gold, PG&E Says Its Equipment Was Probable

‘Ignition Point’ of Camp Fire, Takes $11.5 Billion in Charges, W

ALL ST. J. (Feb. 28,

2019, 6:24 PM), https://www.wsj.com/articles/pg-e-records-10-5-billion-charge-

related-to-camp-fire-11551363969 [https://perma.cc/V65R-WHVB] [hereinafter

Ignition Point]; Michael Brice-Saddler, PG&E Power Lines to Blame for California’s

Deadliest Wildfire Ever, Officials Say, W

ASH. POST (May 15, 2019, 6:25 PM),

https://www.washingtonpost.com/nation/2019/05/15/camp-fire-caused-by-electrical-

lines-owned-operated-by-pge-authorities-say/ [https://perma.cc/3QKP-Y46X]; Nicole

Friedman, The Bond That Could Be Wiped Out by California’s Wildfires, W

ALL ST. J. (Dec.

5, 2018, 5:30 AM), https://www.wsj.com/articles/the-bond-that-could-be-wiped-out-

by-californias-wildfires-1544005801 [https://perma.cc/6CF9-YMBR] [hereinafter Fire-

Bond].

See sources cited supra note 6.

826 University of California, Davis [Vol. 54:817

peril basis, using the National Flood Insurance Program as an example

of an insurance program for a single peril that is failing. Ultimately, the

Article concludes by offering the solution of covering natural

catastrophe risks, including wildfires, floods, landslides, and

hurricanes, under a bundled property insurance policy sold by a

governmental entity.

I. C

LIMATE CHANGE AND THE CAUSES OF THE WILDFIRE CRISIS IN

AMERICA

A. Climate Change

Climate change is playing a significant role in the increased intensity

of wildfires in America. Prior to the industrial revolution, atmospheric

carbon dioxide (“CO

”) ranged between 180 and 280 parts per million

(“ppm”) for the prior several hundred thousand years.

In recent years,

the CO

level has been measured at greater than 400 ppm.

Humans are

contributing to the increase in atmospheric CO

through the burning of

fossil fuels and deforestation.

The average air temperature in western

America has increased by approximately 2.34 degrees Fahrenheit since

1895 with most of that increase occurring since the 1970s.

Seventeen

of the eighteen warmest years on record have occurred since 2000.

Western America is projected to warm by another seven to twelve

degrees Fahrenheit by 2100 if no global climate policy is adopted.

The problem of global climate change is not a recent discovery.

Scientists have been warning the world about climate change since the

mid-1960s with increasingly dire messages each decade.

By 1990, the

Intergovernmental Panel on Climate Change (“IPCC”) had issued a

See F. Joos, The Atmospheric Carbon Dioxide Perturbation, 27 EUROPHYSICS NEWS

213, 217 (1996).

See C. Le Quéré et al., Global Carbon Budget 2015, 7 EARTH SYS. SCI. DATA 349,

351 (2015).

See id. at 377-79.

See John T. Abatzoglou & Lauren E. Parker, Climate Change and the American

West, 54 I

DAHO L. REV. 265, 270-71 (2018).

See DONALD J. WUEBBLES, DAVID W. FAHEY & KATHY A. HIBBARD, U.S. GLOB.

CHANGE RESEARCH PROGRAM, CLIMATE SCIENCE SPECIAL REPORT: FOURTH NATIONAL

CLIMATE ASSESSMENT 13 (2017), https://science2017.globalchange.gov [https://perma.

cc/8B9L-5PMU] (“Sixteen of the warmest years on record for the globe occurred in the

last 17 years.”); A. Sánchez-Lugo, C. Morice, P. Berrisford & A. Argüez, Global Surface

Temperatures, in S

TATE OF THE CLIMATE IN 2016, at 11, 11 (2017).

See Abatzoglou & Parker, supra note 30, at 273.

See Cale Jaffe, Melting the Polarization Around Climate Change Politics, 30 GEO.

ENVTL. L. REV. 455, 459-60 (2018).

2020] America on Fire 827

report that stated a scientific consensus had concluded that “emissions

resulting from human activities are substantially increasing the

atmospheric concentrations of the greenhouse gases . . . . These

increases will enhance the greenhouse effect, resulting on average in an

additional warming of the Earth’s surface.”

Since that initial report in 1990, each of the subsequent IPCC reports

has concluded that the problem is only getting worse. For example, in

2014, the IPCC’s fifth report stated:

Warming of the climate system is unequivocal, and since the

1950s, many of the observed changes are unprecedented over

decades to millennia. The atmosphere and ocean have warmed,

the amounts of snow and ice have diminished, sea level has

risen, and the concentrations of greenhouse gases have

increased . . . . Each of the last three decades has been

successively warmer at the Earth’s surface than any preceding

decade since 1850.

The consequences of climate change are alarming:

Thousands of studies conducted by researchers around the

world have documented changes in surface, atmospheric, and

oceanic temperatures; melting glaciers; diminishing snow

cover; shrinking sea ice; rising sea levels; ocean acidification;

and increasing atmospheric water vapor . . . . [G]lobal average

sea level has risen by about 7–8 inches since 1900, with almost

half (about 3 inches) of that rise occurring since 1993 . . . .

[T]he incidence of daily tidal flooding is accelerating in more

than 25 Atlantic and Gulf Coast cities. Global average sea levels

are expected to continue to rise . . . [and a] rise of as much as 8

feet by 2100 cannot be ruled out . . . . Heavy rainfall is

increasing in intensity and frequency across the United States

. . . . Heatwaves have become more frequent in the United States

since the 1960s . . . . Annual trends toward earlier spring melt

and reduced snowpack are already affecting water resources in

the western United States and these trends are expected to

continue . . . . [C]hronic, long-duration hydrological drought is

increasingly possible before the end of this century . . . . The

Id. at 462 (quoting CLIMATE CHANGE: THE IPCC SCIENTIFIC ASSESSMENT, at xi (J.T.

Houghton et al. eds., 1990)).

Cinnamon Carlarne, Delinking International Environmental Law & Climate

Change, 4 M

ICH. J. ENVTL. & ADMIN. L. 1, 7 (2014) (quoting INTERGOVERNMENTAL PANEL

CLIMATE CHANGE, CLIMATE CHANGE 2014 SYNTHESIS REPORT 2 (2015)).

828 University of California, Davis [Vol. 54:817

incidence of large forest fires in the western United States and

Alaska has increased since the early 1980s and is projected to

further increase in those regions . . . .

The rising temperatures have shortened the snow cover season and

created a much longer fire season with drier conditions.

In western

America, the fire season has increased from 200 days in 1980 to 300

days in 2013, while Texas’s and Oklahoma’s fire season increased from

less than 100 days to 300 days.

This longer, drier fire season due to

climate change has contributed to an increase in the number and

severity of wildfires. As discussed in the next part, however, climate

change is only one of the causes of the wildfire crisis in America.

B. The Other Causes of the Wildfire Crisis in America

In addition to climate change contributing to the problem, wildfires

are more common and catastrophic today than they were in the past

because of forest management practices over the past century and the

encroachment of civilization into wildlands over the past three

decades.

By the early 1900s, wildfires were considered a bane to civilization,

in part, because forests were viewed as a timber resource.

Consequently, the Bureau of Forestry, the predecessor to the U.S. Forest

See WUEBBLES ET AL., supra note 31, at 10-11.

See sources cited supra note 16.

U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-17-357, WILDLAND FIRE RISK

REDUCTION: MULTIPLE FACTORS AFFECT FEDERAL-NONFEDERAL COLLABORATION, BUT

ACTION COULD BE TAKEN TO BETTER MEASURE PROGRESS 8 (2017),

https://www.gao.gov/assets/690/684545.pdf [https://perma.cc/7MML-G46T] [hereinafter

GAO-17-357

REPORT].

See, e.g., LLOYD DIXON, FLAVIA TSANG & GARY FITTS, CALIFORNIA NAT. RES. AGENCY,

HE IMPACT OF CHANGING WILDFIRE RISK ON CALIFORNIA’S RESIDENTIAL INSURANCE

MARKET 69 (2018), https://www.energy.ca.gov/sites/default/files/2019-12/Forests_

CCCA4-CNRA-2018-008_ada.pdf [https://perma.cc/7YCT-ZNHW] [hereinafter T

IMPACT OF CHANGING WILDFIRE RISK] (noting the importance of fuel control to wildfire

risk management); GAO-17-357

REPORT, supra note 38, at 8 (noting specific forest

management practices that have led to more severe wildfires); Berry et al., supra note

18, at 183-84 (describing the way urban sprawl has led to “the potential for more

damaging wildfires than in past decades”); Donahue, supra note 13, at 388 (describing

the ways human activity has contributed to catastrophic wildfires); Trego, supra note

12, at 602, 605 (describing the way urban sprawl and the wildfire/urban interface has

contributed to the catastrophic risk associated with wildfires).

See Barrett, supra note 14, at 7; Colburn, Retreat Alternatives, supra note 12, at 30

(“Before it was the WUI locking the federal and state governments into an assault on

fire, timber and taxes did so.”).

2020] America on Fire 829

Service, was created in 1905 to fight wildfires.

Over the next seventy

years, the U.S. Forest Service spent a lot of time and money fighting

fires, and it was very effective in suppressing fires.

By the 1970s, however, the U. S. Forest Service had learned that fire

suppression was unnatural because certain aspects of the environment

depend on fires, and fire suppression actually has some previously

unrecognized negative environmental consequences.

These negative

consequences include the overgrowth of forests with thick, dead

underbrush that is easy to ignite and, in turn, cause more intense fires

when fires inevitably occur.

Wildfires occur naturally and are part of a healthy ecosystem. In fact,

some species of trees need fire to regenerate, as fire is needed to trigger

seedling regeneration.

Other species need the heat from fire to crack

the seed’s coating to allow for germination.

Wildfires also restore

minerals to the soil, which aids future vegetation growth.

See PYNE ET AL., supra note 12, at 246-47 (describing the history of forest

management in America); Trego, supra note 12, at 598 (describing the origins of the

Bureau of Forestry and the agency’s purpose).

See, e.g., GORTE, supra note 12, at 1 (“Efforts to control wildfires were founded

on a belief that fast, aggressive control was efficient.”);

PYNE ET AL., supra note 12, at 248

(describing the history of forest management in America); Barton, supra note 1, at 698-

99 (describing a U.S. Forest Service policy that aimed “to control fires exceeding ten

acres in size before 10:00 a.m. the next day”); Colburn, Retreat Alternatives, supra note

12, at 6 (citing S

TEPHEN J. PYNE, FIRE IN AMERICA: A CULTURAL HISTORY OF WILDLAND AND

RURAL FIRE 275-87 (1982)) (“For much of the twentieth century, the Forest Service and

Department of Interior land managers implemented what was known as the ‘10 A.M.’

policy: attacking any discovered wildfire on the lands they administer with the goal of

extinguishing it by mid-morning the next day.”); Trego, supra note 12, at 599 (“With

an overwhelming amount of resources, the Forest Service was extremely successful in

suppressing fire for many years.”).

See, e.g., Barton, supra note 1, at 698-99 (describing how fire suppression led to

“catastrophic and extremely difficult (and expensive) [fires] to control”); Colburn, Fire

Next Time, supra note 13, at 226-27 (noting “most professionals knew that the policy of

wide scale fire suppression had been a serious mistake”); Donahue, supra note 13, at

390 (describing the consequences of wildfire suppression); Trego, supra note 12, at 599-

602 (“A change in policy came in the 1970s.”).

See sources cited supra note 43.

See GAO-17-357 REPORT, supra note 38, at 8.

See Trego, supra note 12, at 600.

Id. at 600-01.

830 University of California, Davis [Vol. 54:817

The immediate triggering cause of a wildfire is either lightning or

humans.

In recent years, the vast majority of wildfires have been

caused by humans.

Controlled fires are one means of attempting to address the buildup

of fire fuels in forests that historically was used by Native Americans

and early European settlers.

Such fires, however, sometimes get out of

control and the smoke from the fires lowers air quality.

Controlled

fires also can impact the natural habitats of certain types of wildlife.

Because of these negative side effects, controlled burns have not been

used widely enough in western America to mimic naturally occurring

wildfires.

Encroachment by civilization on the wilderness also has played a

significant role in increasing the costs and damages associated with

wildfires.

Most new houses today are being built in an area known as

the Wildland Urban Interface (“WUI”).

Indeed, since 1960, there has

See, e.g., Berry et al., supra note 18, at 185 (noting “[o]n average, 57% of the

wildfires were human caused, while 43% were lightning caused”); Trego, supra note 12,

at 600 (“Historically, wildfires in the United States occurred naturally by lightning

strike, but as our population has grown, the number of human-caused wildfires has

increased extraordinarily.”).

See, e.g., GAO-17-357 REPORT, supra note 38, at 15 (“From 2001 through 2011,

approximately 85 percent of wildfires in the United States were human-caused,

according to the National Interagency Fire Center.”); Colburn, Retreat Alternatives,

supra note 12, at 13 (citing Jennifer Balch et al., Human-Started Wildfires Expand the Fire

Niche Across the United States, 114 P

ROC. NAT’L ACAD. SCI. 2946, 2946 (2017)) (“An

exhaustive study of records from 1992 to 2012 by Balch and her colleagues found that

about 84% of all wildfires and almost half of the total area burned stemmed from human

ignitions, adding an average of 40,000 more wildfires per year.”).

See Barrett, supra note 14, at 6-7; Barton, supra note 1, at 711; Kanner & Reilly,

supra note 14, at 60.

See sources cited supra note 50.

See Kanner & Reilly, supra note 14, at 60; Young, supra note 14, at 306-07.

See, e.g., QUARLES & POHL, supra note 2, at 1 (noting the number of homes lost to

wildfires in the last decade); Berry et al., supra note 18, at 182-83 (explaining the growth

of the “wildland/urban interface (WUI)”); Colburn, Fire Next Time, supra note 13, at

240-41 (describing human migration toward forests); Trego, supra note 12, at 605

(describing the WUI as the area “where combustible homes meet combustible

vegetation”).

See, e.g., GAO-17-357 REPORT, supra note 38, at 11 (“According to the 2014

Quadrennial Fire Review, 60 percent of new homes built in the United States since 1990

were built in the WUI, which contains 46 million single-family homes, representing

about 40 percent of single-family homes in the United States.”); Berry et al., supra note

18, at 182-83 (noting how “new development has taken place and continues to flourish

in areas of historic fire occurrence and within ecosystems in which plant and animal

species are fire-adapted or fire-dependent”); Colburn, Fire Next Time, supra note 13, at

240-41 (describing the “fastest growing category of real estate in America”); Donahue,

2020] America on Fire 831

been a 720 percent increase in the number of people living in the WUI.

People like to live on the edge of the wilderness because of the natural

scenery, access to public lands, privacy, and a rural lifestyle.

In some

parts of the country, such as California, the lack of affordable housing

in urban areas has also been driving people to move to the WUI.

Yet,

with more homes being built on the edge of dry, combustible forests

comes a greater risk of catastrophic wildfires because more homes are

located in high-risk danger areas.

II. T

HE INSURANCE INDUSTRY’S RESPONSE TO THE WILDFIRE CRISIS

The insurance industry’s response to the wildfire crisis has been both

similar and dissimilar to its historical responses to insuring other

natural catastrophes. This is because wildfire losses now appear to be

correlated risks, yet historically insurers have always covered fire losses

under property insurance.

A. Wildfires and Correlated Risks

Insurers historically have avoided insuring natural catastrophe losses

that are viewed as correlated risks, and wildfires now appear to be

correlated risks.

Correlated risks are situations where numerous

people in concentrated areas have essentially the same risk of the same

type of loss occurring at approximately the same time.

Correlated risk

concerns are greatest when an insurer sells insurance only in a limited

geographic area because the pool of insureds is limited, and all of the

insureds in the same area are likely to face the same natural hazards at

the same time. For example, people who live in the same neighborhood

generally face similar risks of natural catastrophes such as flooding and

earthquakes, which are classic examples of correlated risks.

Insurers

generally attempt to avoid insuring correlated risks due to actuarial and

capitalization concerns. They contend they cannot accurately predict

the frequency or severity of such losses or collect enough premiums to

spread the risk of loss across a large enough pool of insureds to cover

supra note 13, at 391 (discussing development in the WUI); Trego, supra note 12, at

605 (“The WUI is ‘the fastest growing category of real estate in America.’”).

Barton, supra note 1, at 709.

See, e.g., QUARLES & POHL, supra note 2, at 7.

See STRIKE FORCE REPORT, supra note 1, at 14.

See supra notes 22, 25 and accompanying text.

See supra note 22 and accompanying text.

See Correlated Risks, WORLD FIN. (June 30, 2010), http://www.worldfinance.com/

home/risk-encyclopaedia/correlated-risks [https://perma.cc/CQ3D-865A].

832 University of California, Davis [Vol. 54:817

the losses when they occur.

Consequently, natural catastrophes that

are viewed as correlated risks typically are excluded from coverage

under “all risk”

homeowners and “all risk” commercial property

insurance policies.

In 2018, for example, there were approximately

$225 billion in losses associated with natural catastrophes worldwide,

but insurance only covered $90 billion, which means sixty percent of

the losses were uninsured.

Wildfires appear to be correlated risks because property owners in the

same geographic areas would appear to have similar risks of losing their

homes to wildfires. Yet, insurers historically have not excluded wildfires

from coverage under all risk homeowners and commercial property

policies. There are a couple of explanations for this.

First, one person’s risk of losing her home to a wildfire is not

completely correlated to a neighbor’s risk of losing her home to a

wildfire because, as is discussed in Part III, a homeowner can take steps

to dramatically lower the risk of wildfire damage even if a neighboring

property owner does not take similar preventative steps. Consequently,

fire resistant homes located in a neighborhood engulfed by a wildfire

may suffer little or no damage.

Second, fire is the oldest and original peril covered by property

policies, with the first fire insurance policies being sold in England in

the 1660s.

So, instead of attempting to distinguish between regular fire

losses and wildfires losses and then attempting to exclude coverage for

the latter, some insurers are now simply refusing to sell property

insurance to people at high risk of wildfires or dropping existing high-

risk customers.

Insurers’ conduct in this regard is an example of a phenomenon

known as “reverse adverse selection.” Adverse selection is “the

disproportionate tendency of those who are more likely to suffer losses

to seek insurance against those losses.”

The individual mandate under

See Bruggeman et al., supra note 22, at 187; Cummins, supra note 22, at 342-44.

“All risk” property insurance covers all risks of loss except for perils specifically

excluded. See K

ALIS ET AL., supra note 21, § 13.02[B].

See sources cited supra note 8.

See Insurance Covered $90B of Natural Disaster Losses in 2018, Leaving 60%

Protection Gap, I

NS. J. (Jan. 22, 2019), https://www.insurancejournal.com/news/

international/2019/01/22/515420.htm [https://perma.cc/Z5XL-88AJ] (citing A

ON,

EATHER, CLIMATE & CATASTROPHE INSIGHT – 2018 INSIGHT REPORT 2 (2018)).

See ROBERT H. JERRY, II & DOUGLAS R. RICHMOND, UNDERSTANDING INSURANCE LAW

17 (5th ed. 2012).

See supra notes 6, 7.

Kenneth S. Abraham & Lance Liebman, Private Insurance, Social Insurance, and

Tort Reform: Toward a New Vision of Compensation for Illness and Injury, 93 C

OLUM. L.

2020] America on Fire 833

the Affordable Care Act that required everyone to have health insurance

or pay a penalty is an example of adverse selection at work.

Insurers

were concerned that only old and sick people would buy health

insurance if buying health insurance were not required.

Reverse adverse selection, on the other hand, arises when insurers use

claims and risk data to create a risk profile for each prospective insured

and then charge much higher premiums to high-risk insureds or refuse

to insure them entirely.

Indeed, if not for laws prohibiting it, insurers

would refuse, for example, to sell life, health, and disability insurance

to victims of domestic abuse because they are more likely to suffer

injuries or death and thus, they are viewed as unprofitable, bad risks

from an insurance underwriting perspective.

Insurers also would use

genetic profiling to avoid insuring certain people deemed to be at

unacceptably high risks of disease or death if it were not prohibited by

law.

As things currently stand, in most states, insurers are allowed to

drop a policyholder as a customer for many risks and lines of insurance

if the policyholder is viewed as a high-risk customer.

And, as

discussed in the next part, until the recent passage of a new law

REV. 75, 102 n.82 (1993); see also Tom Baker, Containing the Promise of Insurance:

Adverse Selection and Risk Classification, 9

CONN. INS. L.J. 371, 373-75 (2003).

See, e.g., 42 U.S.C. § 18091(2)(I) (2018) (intending to “broaden the health

insurance risk pool to include healthy individuals, which will lower health insurance

premiums”); Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 548 (2012) (“[T]he

mandate forces into the insurance risk pool more healthy individuals, whose premiums

on average will be higher than their health care expenses. This allows insurers to

subsidize the costs of covering the unhealthy individuals the reforms require them to

accept.”); K

ENNETH S. ABRAHAM & DANIEL SCHWARCZ, INSURANCE LAW AND REGULATION

360 (6th ed. 2015).

See source cited supra note 68.

See, e.g., JAY M. FEINMAN, DELAY, DENY, DEFEND: WHY INSURANCE COMPANIES DON’T

PAY CLAIMS AND WHAT YOU CAN DO ABOUT IT 14 (2010) (explaining how insurers use

claims data); Baker, supra note 67, at 380-81 (describing an alternative approach where

risk-based pricing and underwriting would be limited or prohibited and the purchase

of insurance would not be required); Omri Ben-Shahar & Kyle D. Logue, Outsourcing

Regulation: How Insurance Reduces Moral Hazard, 111 M

ICH. L. REV. 197, 206, 209-11

(2012) [hereinafter Outsourcing Regulation] (examining how insurers gain information

during the underwriting process and insurers’ informational advantages); Peter

Siegelman, Adverse Selection in Insurance Markets: An Exaggerated Threat, 113 Y

ALE L.J.

1223, 1245, 1248-49, 1251-52, 1263 (2004) (discussing the sources of informational

asymmetry between insurers and insureds).

See Baker, supra note 67, at 392.

See id. at 394 n.53.

In some states, such as California, however, insurers are not allowed to drop a

policyholder as a customer for two years after the policyholder has suffered a fire loss.

See Walsh, supra note 2.

834 University of California, Davis [Vol. 54:817

temporarily prohibiting it, insurers in California had been dropping

their customers in areas at high risk for wildfires in increasing numbers

in response to the wildfire crisis.

B. Insurers’ Reaction to the 2017 and 2018 Wildfires

Insurers’ refusal to sell insurance for correlated risks and the use of

reverse adverse selection to avoid insuring high-risk customers is not

irrational. Indeed, if an insurance company is not well capitalized and

is exposed to correlated risks because its pool of insureds is located in

a non-diverse geographic footprint, then the insurer is at risk for

insolvency in the event of a natural catastrophe. Following Hurricane

Andrew in Florida in 1992, for example, numerous insurers became

insolvent.

And, at least one California insurer already has become

insolvent due to the 2018 Camp Fire because it primarily insured

property owners in Paradise, California, which lost over 90 percent of

its houses as a result of the wildfire.

Some states, such as California, have laws designed to counter

insurers’ attempts to dramatically raise premium rates or refuse to

renew policies for homeowners whose properties have been damaged

by wildfires. Under one law, premium rates must be based on the prior

twenty years of claims data, as opposed to future loss projections; thus,

insurers cannot dramatically raise premium rates the year after

catastrophic wildfires strike like the ones that occurred in 2017 and

2018.

California uses historical loss data rather than risk models to

See Christopher Flavelle & Brad Plumer, California Bans Insurers from Dropping

Policies Made Riskier by Climate Change, N.Y. T

IMES (Dec. 5, 2019),

https://www.nytimes.com/2019/12/05/climate/california-fire-insurance-climate.html

[https://perma.cc/Z7XJ-B39V].

See LYNNE MCCHRISTIAN, INS. INFO. INST., HURRICANE ANDREW AND INSURANCE: THE

ENDURING IMPACT OF AN HISTORIC STORM 4-5 (2012), https://www.iii.org/sites/default/

files/paper_HurricaneAndrew_final.pdf [https://perma.cc/ET3K-ET7C]; Cassandra R.

Cole, David A. Macpherson, Patrick F. Maroney, Kathleen A. McCullough, James W.

Newman, Jr. & Charles Nyce, The Use of Postloss Financing of Catastrophic Risk, 14 R

ISK

MGMT. & INS. REV. 265, 266 (2011).

See Dale Kasler & Michael Finch II, Insurer Goes Bust from Camp Fire with Millions in

Claims Unpaid. How Will It Affect Paradise Homeowners?, S

ACRAMENTO BEE (Dec. 3, 2018,

12:00 PM), https://www.sacbee.com/news/state/california/fires/article222563185.html

[https://perma.cc/7K58-3B9B]; Kristin Lam, Northern California Town of Paradise Lost 90%

of Its Population After Camp Fire, Data Shows, USA

TODAY (July 11, 2019, 11:14 PM),

https://www.usatoday.com/story/news/nation/2019/07/11/paradise-california-population-

camp-fire-california-wildfire-fund/1710525001/ [https://perma.cc/KHU5-G77G].

See CAL. CODE REGS. tit. 10, § 2644.5 (2020) (“In those insurance lines and

coverages where catastrophes occur, the catastrophic losses of any one accident year in

the recorded period are replaced by a loading based on a multi-year, long-term average

2020] America on Fire 835

establish premium rates because insurance regulators are skeptical of

the accuracy of forecast models and insurers tend to err on the side of

requesting unnecessarily high premium rates when making loss

forecasts.

Nonetheless, many major insurers have sought to raise

premium rates since they incurred catastrophic wildfire losses of

approximately $24 billion in 2017 and 2018.

Under another law, insurers are not permitted to drop policyholders

as insureds for two years after a “covered disaster.”

That law does not,

however, protect many policyholders who live in high-risk areas but

were lucky enough not to be hit by the wildfires in 2017 or 2018,

because insurers have been dropping them as customers in an attempt

to avoid future losses by continuing to insure homes in high-risk

areas.

Indeed, Allstate Insurance Company has reduced the number of

homeowners policies it sells in California by 50 percent over the past

decade due to wildfire risk concerns.

The difficulty of obtaining

homeowners insurance in some parts of California is so great that it is

also impacting homeowners’ ability to sell their houses because buyers

do not think they can obtain insurance for the houses at an affordable

price.

If a homeowner is unable to purchase property insurance from an

insurer that is licensed and “admitted” to do business in the state, then

the homeowner can seek insurance from a “surplus” insurer.

Surplus

insurers are not regulated with the same rigor as admitted insurers.

For example, surplus insurers are not subject to state premium rate

of catastrophe claims. The number of years over which the average shall be calculated

shall be at least 20 years for homeowners multiple peril fire . . . .”).

See Flavelle & Plumer, supra note 74.

See Friedman, High Cost, supra note 7.

Walsh, supra note 2.

See Flavelle, supra note 6; Friedman, High Cost, supra note 7.

See Flavelle, supra note 6; Friedman, Wildfire Insurance, supra note 6.

See Friedman, High Cost, supra note 7.

See DIXON ET AL., THE IMPACT OF CHANGING WILDFIRE RISK, supra note 39, at 32.

See, e.g., JOHN F. DOBBYN & CHRISTOPHER C. FRENCH, INSURANCE LAW IN A

NUTSHELL 517 (5th ed. 2016) (“‘[S]urplus line’ insurers . . . are not licensed in the state

. . . . [T]he premium rates charged by surplus line insurers are unregulated, the policy

provisions are not reviewed and approved by state regulators, insolvency assurances are

not provided, and guaranty fund protections are unavailable.”); R

AYMOND A. GUENTER

& ELISABETH DITOMASSI, FUNDAMENTALS OF INSURANCE REGULATION: THE RULES AND THE

RATIONALE 295 (2017) (“The activities of non-admitted insurers take place outside the

jurisdiction in which the insured resides. They are shielded to a significant degree from

the application of the state’s insurance laws by Constitutional due process

restrictions.”).

836 University of California, Davis [Vol. 54:817

regulation, so they generally charge higher premium rates.

Surplus

insurers also are not covered by the state’s insurance guarantee program

in the event the insurer becomes insolvent, so policyholders bear the

full risk of insurer insolvency.

Between 2018 and 2019, the number of

homeowners in California being forced to purchase insurance from

surplus insurers nearly doubled.

If a homeowner cannot purchase insurance from either an admitted

or a surplus insurer in California, for example, then the homeowner can

get insurance from the Fair Access to Insurance Requirements (“FAIR”)

Plan, which is a fire insurance pool comprised of all of the admitted

insurers in the state.

A FAIR Plan policy provides much more limited

coverage than a standard homeowners insurance policy because it does

not include liability coverage or coverage for other common perils

typically covered, such as water damage and theft.

Since 2015, the

number of homeowners procuring FAIR Plan policies in California has

increased by 177 percent in high-risk areas.

And, in 2019, the FAIR

Plan increased its premium rates by twenty percent.

Despite the existence of the FAIR Plan and surplus insurers, the

number of admitted insurers that are dropping existing customers and

refusing to enroll new customers in high-risk areas has been so

significant that California recently passed a statute that prevents

insurers, for one year, from dropping any customers who live in or

alongside ZIP codes struck by recent wildfires.

This response by

legislators to insurers’ refusal to sell insurance in areas recently

devastated by a natural catastrophe is not unprecedented. Following

Hurricane Andrew in 1992, insurers similarly attempted to exit

See DIXON ET AL., THE IMPACT OF CHANGING WILDFIRE RISK, supra note 39, at 33.

Id. at 32.

See California’s Homeowners’ Insurance Market: A Report by the FAIR Plan,

Informational Hearing Before the Assembly Comm. on Ins., 2019-20 Leg. Sess. 2 (Cal.

2019) (testimony of Cliston Brown, Vice President of Comms. & Gov’t Relations,

Surplus Line Ass’n of Cal.), https://ains.assembly.ca.gov/sites/ains.assembly.ca.gov/files/

hearings/Hearing%20Materials_082119.pdf [https:perma.cc/J59W-3GY7] [hereinafter

FAIR Plan Report].

See DIXON ET AL., THE IMPACT OF CHANGING WILDFIRE RISK, supra note 39, at 33;

Friedman, Wildfire Insurance, supra note 6.

See DIXON ET AL., THE IMPACT OF CHANGING WILDFIRE RISK, supra note 39, at 33.

See Flavelle, supra note 6; Natalie Orenstein, Insurance Firms Drop Berkeley Hills

Homeowners, Citing Wildfire Risk, B

ERKELEYSIDE (Sept. 9, 2019, 7:00 AM),

https://www.berkeleyside.com/2019/09/09/insurance-companies-give-the-boot-to-

berkeley-hills-homeowners-citing-fire-risk [https://perma.cc/265D-GHPB].

See FAIR Plan Report, supra note 88, at 6.

See Flavelle & Plumer, supra note 74.

2020] America on Fire 837

Florida’s homeowners insurance market and the Florida state legislators

similarly passed a law temporarily prohibiting them from doing so.

Unfortunately, for homeowners who are fortunate enough to have

insurance to cover wildfire losses, most of them are grossly

underinsured such that their insurance is not adequate to replace their

lost homes.

Indeed, it is estimated that at least two thirds of insured

homeowners suffering wildfire losses are underinsured.

This is

primarily because homeowners policies do not provide “guaranteed

replacement coverage” and consumers are uninformed regarding the

cost to replace their homes if their homes are completely destroyed by

a wildfire or another natural catastrophe. Consequently, most

homeowners purchase an inadequate amount of coverage.

Homeowners, however, are not the only entities uninsured or

underinsured with respect to wildfires. Consider, for example, Pacific

Gas & Electric Corporation’s (“PG&E”) current plight. PG&E provides

gas and electricity to sixteen million customers across a 70,000 square-

mile territory.

Fire investigators have determined that PG&E was

responsible for starting at least eighteen wildfires in California in 2017

that killed twenty-two people.

PG&E also has admitted that its

equipment started the most devastating wildfire in California’s history

in 2018 — the Camp Fire — that destroyed more than 18,800 structures

and killed at least eighty-five people.

100

California is one of two states

See 1993 Fla. Laws, ch. 93-401; Jonathan Brennan Butler, Insurers Under Fire:

Assessing the Constitutionality of Florida’s Residential Property Insurance Moratorium

After Hurricane Andrew, 22 F

LA. ST. U. L. REV. 731, 734-35 (1995); Dwight M. Jaffee &

Thomas Russell, Catastrophe Insurance, Capital Markets, and Uninsurable Risks, 64 J.

RISK & INS. 205, 206 (1997).

See Liam Denning, Wildfire Took Your Home? Don’t Count on Insurance Rebuilding

It, B

LOOMBERG NEWS (Apr. 11, 2019), https://www.bnnbloomberg.ca/wildfire-took-

your-home-don-t-count-on-insurance-rebuilding-it-1.1242941 [https://perma.cc/8WXG-

55CY].

Id.

Id. See generally Kenneth S. Klein, Minding the Protection Gap: Resolving

Unintended, Pervasive, Profound Homeowner Underinsurance, 25 C

ONN. INS. L.J. 34

(2018) (discussing the problem of homeowner underinsurance and the legal

protections for insurers).

Ivan Penn, Thomas Fuller & Lisa Friedman, PG&E Bankruptcy Tests Who Will

Pay for California Wildfires, N.Y.

TIMES (Jan. 14, 2019), https://www.nytimes.com/

2019/01/14/business/energy-environment/pge-bankruptcy-california.html [https://perma.

cc/JTH4-DPC6] [hereinafter Who Will Pay]; see also Blunt & Gold, PG&E Delayed Safety

Work, supra note 2.

See Gold & Blunt, Wildfires Drove PG&E to Bankruptcy, supra note 2.

100

See Blunt & Gold, PG&E Delayed Safety Work, supra note 2; Brice-Saddler, supra

note 25; Friedman, Fire-Bond, supra note 25.

838 University of California, Davis [Vol. 54:817

that hold utilities strictly liable for fires started by their equipment, so

PG&E has little in the way of defenses to liability.

101

PG&E estimates

that it only has approximately $1.4 billion in insurance to cover its

liabilities.

102

Yet, PG&E’s wildfire liabilities were estimated at more than

$30 billion when PG&E filed for bankruptcy on January 29, 2019, and

it recorded a $10.5 billion charge for its potential Camp Fire

liabilities.

103

PG&E’s attorneys estimate “there are between 70,000 and

100,000 people [who are] eligible to file wildfire claims against the

company.”

104

Because PG&E provides gas and electricity to sixteen million

customers, it is too big and important to simply allow it to fail as a going

concern.

105

Consequently, on July 12, 2019, California enacted a law

that creates a $21 billion fund to pay for future wildfire damage caused

by utilities such as PG&E.

106

Also, beginning in the fall of 2019, PG&E

began cutting power to millions of its customers on windy days in an

attempt to prevent its equipment from causing additional wildfires.

107

In December 2019, PG&E settled with its past victims for a total of

$13.5 billion, with some of that money going to government agencies

and attorneys.

108

Of course, only paying $13.5 billion on a $30 billion

liability means a lot of people will not be made whole.

101

Taylor Telford & Steven Mufson, PG&E, The Nation’s Biggest Utility Company,

Files for Bankruptcy After California Wildfires, W

ASH. POST (Jan. 29, 2019, 4:56 AM),

https://www.washingtonpost.com/business/2019/01/29/pge-nations-biggest-utility-

company-files-bankruptcy-after-california-wildfires/ [https://perma.cc/L3NQ-AA8N].

102

See Friedman, Fire-Bond, supra note 25.

103

See Blunt & Gold, Ignition Point, supra note 25; Penn et al., Who Will Pay, supra

note 98.

104

Peg Brickley & Gretchen Morgenson, Fire Victims Confront PG&E Bankruptcy:

Chapter 11 Rules Essentially Put a Lid on Compensation to California Wildfire Payouts,

ALL ST. J. (Nov. 9, 2019), https://www.wsj.com/articles/pg-e-bankruptcy-protections-

could-mean-less-money-for-wildfire-victims-11573252033 [https://perma.cc/KN89-

3B4T].

105

See Blunt & Gold, PG&E Delayed Safety Work, supra note 2; Penn et al., Who Will

Pay, supra note 98.

106

See Lam, supra note 76; Alejandro Lazo & Katherine Blunt, California Legislature

Approves Multibillion-Dollar Wildfire Fund, W

ALL ST. J. (July 11, 2019),

https://www.wsj.com/articles/california-legislature-approves-multibillion-dollar-wildfire-

fund-11562870591 [https://perma.cc/NG5E-8LJB].

107

See Russell Gold & Katherine Blunt, PG&E Had Systemic Problems with Power

Line Maintenance, California Probe Finds, W

ALL ST. J. (Dec. 3, 2019),

https://www.wsj.com/articles/pg-e-had-systemic-problems-with-power-line-maintenance-

california-probe-finds-11575338873 [https://perma.cc/C2CG-CAF9].

108

Ivan Penn, Lauren Hepler & Peter Eavis, PG&E Reaches $13.5 Billion Deal with

Wildfire Victims, N.Y.

TIMES (Dec. 6, 2019), https://www.nytimes.com/2019/12/

2020] America on Fire 839

C. Reinsurance and Catastrophe Bonds as Alternative Risk Transfer

Mechanisms

There are a couple of risk transferring tools that undermine insurers’

claims that they cannot insure correlated risks and thus, they should be

permitted to exclude coverage for natural catastrophes or drop high-

risk customers — reinsurance and catastrophe bonds. These two risk

transfer mechanisms diminish the financial impact of catastrophic

losses on individual insurers and therefore, they belie insurers’ claims

that they cannot insure high-risk people or correlated risks.

Reinsurance is a worldwide business wherein global reinsurers insure

all of or portions of another insurer’s portfolio of business.

109

Most

reinsurance is sold by European and Bermuda companies.

110

Two of the

three largest reinsurers in the world, Swiss Re and Munich Re, for

example, are European companies.

111

In fact, reinsurance paid sixty

percent of the insured losses related to the 9/11 terrorist attacks, sixty-

06/business/energy-environment/pge-wildfire-victims-deal.html [https://perma.cc/XL6Q-

EXVE].

109

Christopher C. French, The Role of the Profit Imperative in Risk Management, 17

PA. J. BUS. L. 1081, 1109 (2015). See generally BARRY R. OSTRAGER & THOMAS R.

NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES § 15.01[a], [b] (Elisa Alcabes &

Karen Cestari eds., 19th ed. 2019) (discussing reinsurance).

110

See, e.g., GUENTER & DITOMASSI, supra note 85, at 10 (“[Reinsurance] is also an

international business dominated by non-U.S. companies.”); F

ED. INS. OFFICE, THE

BREADTH AND SCOPE OF THE GLOBAL REINSURANCE MARKET AND THE CRITICAL ROLE SUCH

MARKET PLAYS IN SUPPORTING INSURANCE IN THE UNITED STATES 5 (2014) (“[I]n 2013

approximately $46 billion in total (P/C) reinsurance premiums were ceded by U.S.-

based insurers to unaffiliated reinsurers; of this amount, approximately $28.4 billion of

premiums were ceded to non-U.S. reinsurers and approximately $17.6 billion of

premiums were ceded to U.S. professional reinsurers.”); U.S.

GOV’T ACCOUNTABILITY

OFFICE, GAO/GDD-90-82, INSURANCE REGULATION: STATE REINSURANCE OVERSIGHT

INCREASED, BUT PROBLEMS REMAIN 3 (1990) (“An individual state has no direct authority

to regulate reinsurers in other states or countries who are not licensed in that state.”);

Daniel Schwarcz & Steven L. Schwarcz, Regulating Systemic Risk in Insurance, 81 U.

CHI.

L. REV. 1569, 1615 (2014) [hereinafter Regulating Systemic Risk] (“[R]einsurance is an

international business−the largest companies are located in Europe and Bermuda.”);

Sebastian von Dahlen & Goetz von Peter, Natural Catastrophes and Global Reinsurance

− Exploring Linkages, C

TR. FOR INS. POL’Y & RES. NEWSL., Jan. 2013, at 20, 22 n.2,

http://www.naic.org/cipr_newsletter_archive/vol6_nat_cat_global_re.pdf [https://perma.

cc/8XQ8-H8TF] (“US insurers cede (transfer) nearly twice as much in premium volume

to European reinsurers than European insurers cede to US reinsurers.”); Top 25 Non-

Life Reinsurers: Swiss Re Leads, Berkshire Drops in A.M. Best’s 2016 Ranking, I

NS. J. (Sept.

12, 2016), https://www.insurancejournal.com/news/international/2016/09/12/426023.htm

[https://perma.cc/R9Z7-SPRP] (showing that most of the world’s largest reinsurers are

European companies).

111

See Schwarcz & Schwarcz, Regulating Systemic Risk, supra note 110.

840 University of California, Davis [Vol. 54:817

five percent of the insured Hurricanes Katrina, Rita, and Wilma losses,

and forty percent of the insured Hurricane Sandy losses.

112

By transferring some of the risk of losses to reinsurers, insurers can

spread the risk of wildfires losses in, for example, California throughout

the world. Thus, by purchasing reinsurance, wildfire losses in western

America are not correlated with the risk of losses of the entire pool of

insureds because the pool of insureds is worldwide instead of

geographically isolated.

Catastrophe bonds are bonds that are issued for specific types of

catastrophes, such as wildfires, and sold to institutional investors.

113

Catastrophe bonds emerged in the 1990s as a new way to diversify

insurers’ risks with respect to catastrophic events following Hurricane

Andrew in Florida and the Northridge Earthquake in California.

114

Typically, the investors receive interest payments on the bonds and the

return of their principal at the end of the bond term unless the specified

catastrophe occurs, in which case the investors forfeit their rights to the

return of the principal and any additional interest payments.

115

The

retained money is then available to pay the insured losses, which means

the true risk of loss is transferred from the insurer to the institutional

bond holders. As of 2020, approximately $41 billion in catastrophe

bonds covering a variety of perils were outstanding.

116

Purchasers of California wildfire catastrophe bonds likely took huge

losses for the 2017 and 2018 wildfires. For example, in August 2018,

PG&E sold $200 million in catastrophe bonds.

117

Three months later

the devastating Camp Fire occurred, for which PG&E booked a $10.5

billion loss.

118

In total, it has been estimated that approximately $4.6

billion in outstanding catastrophe bonds have exposure to California

wildfire risks.

119

Of course, with the massive wildfire losses in recent

years, one would expect that investors’ appetites for wildfire catastrophe

bonds may be somewhat sated. Nonetheless, catastrophe bonds are

another way that insurers can continue to cover high-risk homeowners

112

See FED. INS. OFFICE, supra note 110, at 15.

113

See Friedman, Fire-Bond, supra note 25.

114

U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-02-941, CATASTROPHE INSURANCE RISKS:

THE ROLE OF RISK-LINKED SECURITIES AND FACTORS AFFECTING THEIR USE 15-16 (2002).

115

See Scales supra note 22, at 46.

116

See Catastrophe Bonds & ILS Risk Capital Issued & Outstanding by Year, ARTEMIS,

https://www.artemis.bm/dashboard/catastrophe-bonds-ils-issued-and-outstanding-by-

year/ (last visited Aug. 26, 2020) [https://perma.cc/7UCF-39YF].

117

See Friedman, Fire-Bond, supra note 25.

118

See Blunt & Gold, Ignition Point, supra note 25 (describing PG&E’s economic

losses following major California fires such as the 2018 Camp Fire).

119

See Friedman, Fire-Bond, supra note 25.

2020] America on Fire 841

while spreading the risk of loss, rather than simply refusing to insure

people who live in high-risk areas.

III. W

AYS TO MINIMIZE WILDFIRE DAMAGE

Wildfires currently present a $187 billion property risk problem,

annually cause billions in unquantified business interruption losses,

and cause the deaths of numerous people each year. Until the past few

years, the insurance industry generally had stayed the course by

continuing to cover wildfire losses, but that has changed as insurers

have been refusing to renew policies for high-risk properties and are

seeking premium hikes in dramatic amounts.

120

One can expect that

trend to continue because the wildfire crisis is only getting worse due

to climate change, past fire suppression measures, and increased

property development in the WUI. Because private insurers are in the

business of making money, they will not voluntarily continue to insure

wildfire losses if the losses in 2017 and 2018 portend the future.

Consequently, in this Part of the Article, some ways to reduce and

mitigate wildfire risks are discussed.

A. Reverse Climate Change

Reversing climate change would help address the wildfire crisis. As

the U.S. Global Change Research Program has stated:

The magnitude of climate change beyond the next few decades

will depend primarily on the amount of greenhouse gases

(especially carbon dioxide) emitted globally. Without major

reductions in emissions, the increase in annual average global

temperature relative to preindustrial times could reach 9°F

(5°C) or more by the end of this century. With significant

reductions in emissions, the increase in annual average global

temperature could be limited to 3.6°F (2°C) or less.

121

Thus, with the limited technologies that currently are available to

capture and eliminate atmospheric CO

, reducing global CO

emissions

appears to be the primary means of reversing climate change.

122

120

See supra Part II.B.

121

WUEBBLES ET AL., supra note 31, at 11.

122

See, e.g., SCI. ADVICE FOR POLICY BY EUROPEAN ACADS. CONSORTIUM, NOVEL CARBON

CAPTURE AND UTILISATION TECHNOLOGIES: RESEARCH AND CLIMATE ASPECTS 8 (2018),

https://www.sapea.info/wp-content/uploads/CCU-report-proof3-for-23-May.pdf

[https://perma.cc/4R9N-BLWM] (indicating that new technologies, such as carbon

capture and sequestration and direct air capture, are being developed and used to

842 University of California, Davis [Vol. 54:817

Reducing global emissions, however, presents a classic collective

action problem on a global scale because reducing emissions in only a

single state or country will not address this global problem.

123

Although

it is in all countries’ collective interest to reduce global emissions due

to climate change, it would be in each country’s individual self-interest

to have other countries reduce their emissions to accomplish this goal

without having to reduce their own emissions because of the perceived

negative economic consequences associated with reducing emissions.

124

Indeed, the free rider effect associated with collective action problems

arguably is the biggest impediment to achieving a global solution to

climate change. Thus, addressing climate change currently is more of a

political issue than a scientific one.

At the center of the debate are concerns that emission reductions

means energy cost hikes, negative economic growth, job losses,

bureaucratic bloat, and governmental involvement in picking winners

and losers among energy technologies.

125

Of course, these economic

arguments against reducing CO

emissions ignore the economic costs

of failing to do so — the price tag associated with increasing flood

damage, violent storms, droughts, wildfires, etc.

126

These short term

economic concerns, however, have resulted in the United States balking

since 1990 at formally entering any of the global treaties designed to

address climate change — the United Nations Framework Convention

of Climate Change (“UNFCCC”), the Kyoto Protocol, and even the

Paris Agreement.

127

The primary American argument against entering

the Paris Agreement (which President Obama agreed to enter without

Congressional ratification and from which President Trump withdrew)

is that it required emission reductions from the United States while

simultaneously allowing China, the United States’ largest economic

competitor and the world’s largest CO

emitter, to continue increasing

the amount of its CO

emissions until 2030.

128

remove CO

from the atmosphere, but they currently are not removing the amounts of

necessary to reverse climate change).

123

See supra note 17 and accompanying text.

124

See, e.g., Andreas Duit, Patterns of Environmental Collective Action: Some Cross-

National Findings, 59 P

OL. STUD. 900 (2010) (investigating the effect of institutional

structures and social capital on large-scale environmental collective action).

125

See, e.g., Robert Sussman, Designing the New Green Deal: Where’s the Sweet Spot?,

49 E

NVTL. L. REP. 10428, 10430, 10437-40 (2019) (describing the various obstacles to

durable consensus-based climate policies).

126

See id. at 10438.

127

See id. at 10435-36.

128

Id. at 10440.

2020] America on Fire 843

When and if there is enough political will for all of the world’s

primary CO

emitters to agree to reduce emissions, there are numerous

ways a country can do so depending upon the source of the emissions

at issue. In America, the primary sources of CO

emissions are coal fired

electrical power plants, vehicles, manufacturing operations, residential

and commercial buildings, and the agricultural industry.

129

The best

way to deal with each of these sources is different. For example, cap and

trade, where a specific amount of emissions is permitted for an industry

as a whole, is an efficient means of reducing emissions associated with

power plants.

130

Carbon based power plants using coal and natural gas

also can be, and have been, replaced with renewable energy sources

such as wind, solar, and hydro.

131

To encourage the use of renewable

energy for emission sources such as vehicles, on the other hand, tailpipe

emission standards and tax credits toward the purchase of emission free

vehicles successfully reduces vehicle emissions.

132

These are only

examples of ways to reduce emissions, and it is beyond the scope of this

Article to attempt to suggest a comprehensive solution to climate

change for each of the various sources of emissions.

The focus of this Article is on the wildfire crisis in America and

climate change is only one aspect of that crisis. Indeed, once there is a

global will to do so, it will still take decades for climate change to be

halted or reversed.

133

The American wildfire crisis, however, is

occurring now. Consequently, America cannot wait for climate change

solutions or global commitments from other countries in order to

respond to the wildfire crisis. It must be addressed now and by

American means.

B. Reduce Wildfire Fuels

One way of reducing the risk that catastrophic wildfires present is by

reducing the chances of catastrophic wildfires occurring. Reducing fire

fuel sources reduces the risk of catastrophic wildfires occurring. Fire

129

Id. at 10441-43.

130

Id. at 10445, 10449.

131

See id. at 10441.

132

See id. at 10445.

133

E.g., Is It Too Late to Prevent Climate Change?, NASA, https://climate.nasa.gov/

faq/16/is-it-too-late-to-prevent-climate-change/ (last visited Oct. 18, 2020)

[https://perma.cc/2BBZ-7TVU] (“Even if we stopped emitting greenhouse gases today,

global warming would continue to happen for at least several more decades, if not

centuries. That’s because it takes a while for the planet (for example, the oceans) to

respond, and because carbon dioxide — the predominant heat-trapping gas — lingers

in the atmosphere for hundreds of years.”).

844 University of California, Davis [Vol. 54:817

fuel sources used to be reduced naturally by recurring low intensity

fires.

134

For example, in the California Sierra Forest, about 500,000

acres of the forest used to burn annually due to lightning strike fires two

hundred years ago, but under U.S. Forestry control since the early

1900s, only about 33,000 acres have been burned annually.

135

That

needs to change. In recognition of this, reducing fire fuels has become

a focus of the U.S. Forest Service and Congress in recent years.

136

The

U.S. Forest Services has been instructed to increase by threefold the

amount of fire fuel it clears annually through controlled burns and

selectively cutting down trees, as well as increasing timber

production.

137

In the past, the U.S. Forest Services had been forced to

spend a lot of its budgetary money fighting wildfires instead of reducing

the risk of wildfires.

138

C. Reduce or Eliminate Construction in the Wildland Urban Interface

One of the reasons the property losses caused by wildfires in recent

years have been catastrophic is because millions of people have been

building and buying homes in the WUI where the risk of wildfire

damage is the highest.

139

So, another way of reducing property losses

caused by wildfires is to reduce the number of homes being built in the

WUI. State laws or local zoning ordinances can be used to address this

issue. Such laws could prohibit people from building homes in areas at

high risk for wildfires. Alternatively, as discussed in the next part, if that

solution if not politically feasible due to the high cost of property in

urban areas and the highly valued principle of individual freedom of

choice regarding where to live, then state or local building codes could

require that homes built in the WUI be fire resistant.

140

134

See, e.g., Donahue, supra note 13, at 388.

135

See STRIKE FORCE REPORT, supra note 1, at 8; Scott Wilson, Wet California Winter Is a

Boon for Skiers and Water Supply. But It Brings a Threat: Wildfires., W

ASH. POST (June 17,

2019, 10:02 AM), https://www.washingtonpost.com/national/wet-california-winter-is-a-

boon-for-skiers-and-water-supply-but-it-brings-a-threat-wildfires/2019/06/17/444acaa6-

8bb6-11e9-b08e-cfd89bd36d4e_story.html [https://perma.cc/4JJF-JABG].

136

See supra note 15.

137

See supra note 15.

138

See Bona, supra note 15, at 1084.

139

See Barton, supra note 1, at 708-09 and accompanying text.

140

See, e.g., GAO-17-357 REPORT, supra note 38, at 45 (“A 2013 Forest Service study

found that 91 percent of WUI residents interviewed in California, where defensible

space ordinances are in place, have lowered fire risk by removing flammable vegetation

from their properties.”).

2020] America on Fire 845

D. Reduce the Risk of Homes Burning Through Building Codes

The risk of homes burning in high-risk areas can be dramatically

reduced if the homes are built to fire resistant standards.

141

Fire resistant

homes do not have flammable roofs or siding.

142

They also have

perimeters of 100 feet or more of non-flammable landscaping and

outdoor spaces, which means no wooden fences, wooden decks, or

other fire sources near the homes. In the dry and windy conditions often

associated with wildfires, burning embers can travel long distances

through the air, so vents also need to be covered to prevent burning

embers from entering homes.

143

Indeed, two-thirds of home losses are

due to flying embers or low-intensity fires, as opposed to conflagrations

overtaking the homes.

144

Consequently, houses need a lengthy

perimeter of fire resistant materials. So, for example, instead of using

mulch around a house for landscaping, rock placed on top of landscape

fabric can be used.

In addition to being fire resistant, rock lasts longer than mulch and

thus, it also would reduce maintenance costs and efforts. Indeed, studies

have shown that the cost of building a “firewise” house is actually

slightly lower than the cost of building a typical house.

145

For homes

already built, the cost of retrofitting the homes to firewise standards can

be prohibitive for many homeowners,

146

but homeowners can still

reduce the risk of wildfires destroying their homes by removing as many

flammable materials as possible from the perimeter of their homes.

Numerous communities, such as San Diego, California and Flagstaff,

Arizona, have recognized that making homes fire resistant is part of the

solution to the wildfire crisis by adopting building codes that require

the use of fire resistant materials on homes.

147

And, since 2008,

141

See, e.g., id. at 33 (“Firewise, which encourages homeowners to take

responsibility for their own properties by using fire resistant building materials and

establishing defensible space, has helped reduce risk through community education.”).

142

See Barrett, supra note 14, at 21-22.

143

See QUARLES & POHL, supra note 2, at 8, 17, 21; GAO-17-357 REPORT, supra note

38, at 12 (“Even structures not immediately adjacent to wildland vegetation can be

vulnerable because wind can transport embers and ignite homes more than a mile from

a fire.”).

144

QUARLES & POHL, supra note 2, at 8.

145

See id. at 2; see also Kaplan & Sellers, supra note 4.

146

See Kaplan & Sellers, supra note 4.

147

See Barrett, supra note 14, at 22-23.

846 University of California, Davis [Vol. 54:817

California is one of only a few states to adopt laws mandating the use of

fire resistant building materials in the WUI on a statewide basis.

148

Using building codes to require homeowners to build homes to resist

natural disasters that impact the community has been proven to work

in other contexts as well. For example, since Hurricane Andrew in 1992,

Florida’s revised building codes have reduced losses from hurricanes by

seventy-two percent.

149

IV. I

NSURING WILDFIRE LOSSES AND OTHER NATURAL CATASTROPHES

A. The Importance of Insurance

Private insurers should not be allowed to refuse to insure existing

high-risk properties in the absence of an alternative insurance option

because insurance plays a socially and financially critical role in

developed countries such as America. Due to its critical social function

of protecting the limited assets of individuals by spreading the risk of

losses of individuals to large groups of people, insurance can be viewed

as something more akin to a public financial instrument than a

traditional contract between private parties.

150

148

See QUARLES & POHL, supra note 2, at 7 (“Most states have not adopted a building

code on a state-wide level, but rather have left local jurisdictions to decide whether and

how to adopt such model codes as regulations. California is a notable exception, having

adopted Materials and Construction Methods for Exterior Wildfire Exposure as Chapter 7A

of the state building code in 2008.”); S

TRIKE FORCE REPORT, supra note 1, at 14;

Donahue, supra note 13, at 392 (“Only California, Colorado, and Oregon have statewide

wildland-urban fire regulatory codes.”).

149

QUARLES & POHL, supra note 2, at 11.

150

See, e.g., Kenneth S. Abraham, Four Conceptions of Insurance, 161 U. PA. L. REV.

653, 657 (2013) (describing the four conceptions of insurance, including the concept

of insurance as a public utility/regulated industry); Christopher C. French,

Understanding Insurance Policies as Non-Contracts: An Alternative Approach to Drafting

and Construing These Unique Financial Instruments, 89 T

EMP. L. REV. 535, 567-68 (2017)

[hereinafter Understanding Insurance Policies] (arguing that the public policies

insurance advances in ensuring compensation to victims and in transferring the risk of

devastating losses from individuals to insurers are two of several reasons why insurance

policies should not be treated as just contracts); Jeffrey W. Stempel, The Insurance Policy

as Social Instrument and Social Institution, 51 W

M. & MARY L. REV. 1489, 1495-1513

(2010) [hereinafter Social Instrument] (emphasizing the socially important role that

insurance plays); Deborah A. Stone, Beyond Moral Hazard: Insurance As Moral

Opportunity, 6 C

ONN. INS. L.J. 11, 26-29 (1999) (“Because virtually every adult citizen

participates in various forms of mandatory insurance, from automobile liability

insurance to unemployment insurance, old-age pensions and disability insurance,

everyone is exposed to two of the moral assumptions of these programs: collective

responsibility for the well-being of individuals and individual responsibility for the well-

being of others.”).

2020] America on Fire 847

Homeowners insurance’s critical function today in developed

countries is even more pronounced when one considers that

homeowners insurance is effectively mandatory for most homeowners

because anyone who needs to borrow money from a bank to purchase a

house is required to have homeowners insurance as a prerequisite to

obtaining a mortgage.

151

Thus, because the majority of homeowners

need to borrow money in order to purchase a house, homeowners

insurance is effectively mandatory for most homeowners. If it is

mandatory, then it needs to be available at an affordable cost because

homeownership is a significant aspect of the American Dream.

152

Yet,

when left to the private insurance market, homeowners insurance is not

available at an affordable price, or any price, for many natural

catastrophes, including wildfires.

153

B. The Case for a Governmental Insurance Program to Cover Natural

Catastrophes

Through the risk-transferring mechanisms of reinsurance and

catastrophe bonds, as well as the risk reduction techniques that

homeowners and towns can take to minimize the chances of wildfires

destroying homes and towns, one can argue that wildfires losses are not

really correlated risks in the way that earthquakes and floods are such

that private insurers cannot insure wildfire losses. Indeed, since

property insurance first became available in America over 250 years ago

for the very purpose of covering fire losses, private insurers have

covered fire losses — whether caused by regular fires or wildfires.

154

Yet, wildfires do share many of the correlated risk characteristics that

are associated with other natural catastrophes. If wildfires losses are

treated as correlated risks and insurers do not have adequate insurance

pool risk diversity, reinsurance, or catastrophe bond cover, then this

151

See MARTIN F. GRACE, ROBERT W. KLEIN, PAUL R. KLEINDORFER & MICHAEL R.

MURRAY, CATASTROPHE INSURANCE: CONSUMER DEMAND, MARKETS AND REGULATION 83

(2003) (“[H]omeowners insurance . . . is essentially mandatory . . . .”); Stempel, Social

Instrument, supra note 150, at 1497.

152

Alcynna Lloyd, NAR: American Dream of Homeownership Is Still Alive, HOUSING

WIRE (Jan. 14, 2019, 1:30 PM), https://www.housingwire.com/articles/47907-nar-

american-dream-of-homeownership-is-still-alive/ [https://perma.cc/QEG7-6PGW]

(“[A]pproximately 75% of non-homeowners and 90% of current homeowners said

homeownership was essential to the American Dream.”).

153

See supra Part II.B.

154

See, e.g., FEINMAN, supra note 70, at 21 (describing how the oldest extant

insurance company in the United States was used to compensate fire destruction losses);

ERRY & RICHMOND, supra note 65, at 18 (describing the first development of accident

and life insurance in early America).

848 University of California, Davis [Vol. 54:817

raises the specter of insurer insolvencies when wildfires occur such as

the insurer insolvency that recently occurred in connection with the

Camp Fire.

155

This weighs against private insurers covering the risk of

wildfires.

Another factor that weighs against the current regime of private

insurers covering wildfires is the fact that there generally has been

market failure when it comes to private companies insuring natural

catastrophes. Natural catastrophes currently are significantly

underinsured in America. In 2018, for example, there were

approximately $82 billion in losses caused by natural catastrophes,

including $25.4 billion attributed to wildfires, heat waves and drought,

but approximately 40 percent of those losses were not covered by

insurance.

156

That means there is a significant underinsurance problem

in America for natural catastrophes. This is unsurprising when one

considers that flood damage is excluded under homeowners insurance

sold by private insurers and only approximately five million of the

seventy two million homeowners in America have purchased

standalone flood insurance that is underwritten by the federal

government.

157

It also is unsurprising when one consider the prevalence

of underinsured homes in wildfire risk areas.

158

One solution to the

market failure problem associated with insuring natural catastrophes

would be for the federal government or state governments to assume

the primary role of insuring natural catastrophe losses, including

wildfire losses.

159

155

See supra note 76 and accompanying text.

156

See Facts + Statistics: U.S. Catastrophes, supra note 9.

157

See, e.g., CONG. BUDGET OFFICE, THE NATIONAL FLOOD INSURANCE PROGRAM:

FINANCIAL SOUNDNESS AND AFFORDABILITY 1 (2017), https://www.cbo.gov/system/files/

115th-congress-2017-2018/reports/53028-nfipreport2.pdf [https://perma.cc/A592-NR8S]

(analyzing the five million insurance policies that cover flooding); Sample Homeowners

Policy, Section I — Exclusions, § A.3, in K

ENNETH S. ABRAHAM, INSURANCE LAW AND

REGULATION 206 (5th ed. 2010) (reproducing the policy containing the flood

exclusion); Christopher C. French, Insuring Floods: The Most Common and Devastating

Natural Catastrophes in America, 60 V

ILL. L. REV. 53, 71 (2015) [hereinafter Insuring

Floods] (explaining that only 5.5 million of the seventy-two million homeowners in

America in 2012 had flood insurance).

158

See supra Part II.B.

159

Ideally, the federal government would sponsor the natural catastrophe insurance

program contemplated in this Article because it would allow for the pool of insureds to

span the entire country. This would allow for the largest pool of insureds possible in

America with the most diverse risk profiles. Although some states, such as Texas, are

large enough and face a variety of natural catastrophe perils, such as flooding,

hurricanes and wildfires, to allow for a robust pool of insureds with diverse risk profiles,

in many states that would not be the case. Consequently, the risk of substantial

2020] America on Fire 849

A governmental entity arguably is better able to insure natural

catastrophes than private insurance companies. First, the managers of

private insurance companies often cannot take a long-term view

regarding profitability because they are owned by shareholders who

demand quarterly and annual profits. This can be a problem when it

comes to insuring correlated natural catastrophe risks because private

insurers almost inevitably incur short term losses following a natural

catastrophe.

160

Second, the tax laws effectively discourage private

insurance companies from accumulating the large amounts of cash

necessary to pay catastrophic losses in the future because the income

generated by cash that is set aside to pay future losses is taxed.

161

Third,

companies with large amounts of accumulated cash, which an insurer

must have in order to pay losses associated with correlated natural

catastrophe losses, become attractive takeover targets for investors

because many people believe that idle cash can and should be deployed

for more financially rewarding purposes.

162

Fourth, insurers ironically

are not permitted under the current accounting rules to create reserves

for the payment of future claims if the events giving rise to the claims

(e.g., the actual wildfires) have not yet occurred.

163

Consequently, these

laws collectively discourage private insurance companies from retaining

the large amounts of cash necessary to cover correlated natural

catastrophe losses that occur infrequently, but require large cash outlays

when they do occur.

164

premium subsidization by low-risk insureds of high-risk insureds could be a problem if

the state sponsored a natural catastrophe program in such states. See, e.g., Omri Ben-

Shahar & Kyle D. Logue, The Perverse Effects of Subsidized Weather Insurance, 68 S

TAN.

L. REV. 571, 596 (2016) [hereinafter Subsidized Weather Insurance] (finding that the

premiums charged to coastal properties are subsidized by inland properties).

160

See, e.g., FAIR Plan Report, supra note 88, at 10 (“The underwriting experience

between 2001 and 2017 illustrates that an extended period of underwriting profits can

be wiped out by a very large wildfire or other catastrophic event (a fire following an

earthquake, for example). Underwriting profits in the Homeowners Multiple Peril and

Fire lines totaled $12.1 billion from 2001 through 2016 combined, and were almost

completely wiped out by the results for 2017.” (quoting D

IXON ET AL., THE IMPACT OF

CHANGING WILDFIRE RISK, supra note 39, at 55)).

161

See Cummins, supra note 22, at 371-72; Jaffee & Russell, supra note 94, at 212.

162

See Jaffee & Russell, supra note 94, at 212-13.

163

Cummins, supra note 22, at 371-72; Jaffee & Russell, supra note 94, at 209

(discussing Financial Accounting Standards Board (“FASB”) Statement No. 5

Accounting for Contingencies, which precludes an insurance company from

earmarking capital surplus to pay for future catastrophic losses that have not yet

occurred).

164

See Jaffee & Russell, supra note 94, at 212.

850 University of California, Davis [Vol. 54:817

A governmental insurance program, on the other hand, would not be

incentivized to be undercapitalized. First, it would not be required to

be subject to the same tax and accounting laws as private companies, so

it would be in a better position to hold the large amount of idle cash

needed to cover infrequent natural catastrophe losses.

165

Second, a

governmental insurance program would not have shareholders

demanding a return on their investments in the form of dividends or

stock repurchases every quarter. Third, a governmental insurance

program would not be a takeover target for private investors because, as

a government program, it would not be available for purchase. Fourth,

unlike private companies that would need to sell more shares of stock

or issue bonds if it becomes necessary to raise additional capital to pay

losses related to correlated natural catastrophe losses, the government

has access to additional capital post-loss through its taxing power.

166

short, many of the reasons that private insurers currently are poorly

suited to insuring natural catastrophe risks would not apply to a

governmental insurance program.

Another option for addressing the market failure that currently exists

regarding insuring natural catastrophes would be for the government to

act as a reinsurer for private insurers for losses that exceed a certain

stated amount for any individual insurer. An advantage to that approach

would be that it keeps private insurers as participants in the insurance

market and it would allow for a competitive market for natural

catastrophe insurance.

Of course, for the government as reinsurer approach to work,

coverage for natural catastrophes would either need to be mandatory

under property policies or the reinsurance attachment point would need

to be low enough to induce private insurers to offer the coverage. This

is exactly what the federal government has done with respect to

coverage for terrorism losses. Since insurers attempted to exclude

coverage for terrorism losses following 9/11, the federal government

stepped into the void and has been providing reinsurance to private

insurers for terrorism losses and requiring insurers to at least offer

165

Government insurance programs are subject to whatever accounting rules and

laws the legislators creating the programs designate. As an example of a government

insurance program that is not subject to the same tax laws as private insurance

companies, the Florida Hurricane Catastrophe Fund is exempt from federal income tax.

Cole et al., supra note 75, at 268 n.3.

166

See id. at 267-68.

2020] America on Fire 851

coverage for such losses.

167

The federal government, or state

governments, could do so for natural catastrophe losses as well. Of

course, with respect to the risk of wildfire losses, the devil would be in

the details with respect to defining the difference between a wildfire loss

that would be covered by natural catastrophe insurance and a regular

fire loss that would be covered by traditional homeowners insurance.

A governmental insurance program that covers natural catastrophes

also would be a logical extension of the government’s current role with

respect to insurance. The insurance industry already is highly regulated

because of public policy and social concerns regarding the protection of

powerless consumers and to ensure that innocent victims are

compensated for their injuries. For example, insurers currently are

regulated by the states with respect to the policy language contained in

their policy forms, the premium rates they can charge, and the amounts

of capital surplus they must maintain.

168

States also already manage

guarantee associations that cover insurance claims submitted to

insolvent insurers, and states already have residual risk insurance

programs for automobile drivers who private insurers refuse to accept

as customers.

169

Some states, such as California, also have similar

residual risk insurance plans — e.g., the FAIR Plan — for property

owners who cannot obtain homeowners insurance from private

insurers.

170

There are numerous reasons the insurance industry is already heavily

regulated. One, the purchase of some lines of insurance, such as

automobile and homeowners, are essentially mandatory, yet insureds

play no role in the creation of the terms and conditions of insurance

policies. To the contrary, insurance policies are complex,

incomprehensible documents created by insurers and then sold on a

take it or leave it basis to consumers who are required to purchase the

167

See Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322

(codified as amended in scattered sections of 15 U.S.C.); see also Michelle E. Boardman,

Known Unknowns: The Illusion of Terrorism Insurance, 93 G

EO. L.J. 783, 787-89 (2005).

168

See ABRAHAM & SCHWARCZ, supra note 68, at 119, 126-28, 142-46; JERRY &

RICHMOND, supra note 65, at 89-94.

169

See ABRAHAM, supra note 157, at 771; ABRAHAM & SCHWARCZ, supra note 68, at

122-23; see also Spencer L. Kimball & Noreen J. Parrett, Creation of the Guaranty

Association System, 19

J. INS. REG. 259, 262 (2000).

170

See supra Part II.

852 University of California, Davis [Vol. 54:817

product.

171

Consequently, states need to provide regulatory oversight to

prevent insurers from abusing their dominant position.

172

Two, insurers also commonly use the same policy forms, so there is

an anticompetitive aspect to the insurance industry.

173

Yet, the industry

is exempted from federal antitrust laws.

174

Consequently, the

government needs to police the language in the policy forms to ensure

that it is not unreasonably one-sided in favor of insurers.

175

Three, when a person buys an insurance policy, in exchange for the

payment of a premium, the purchaser receives nothing except a promise

by the insurer to pay in the future in the event of a loss. Consumers

need some governmental assurance that an insurer that takes their

money today in exchange for a promise to pay in the distant future will

be solvent when the time comes for the insurer to make good on its

promise.

176

Four, public policy and social concerns regarding the compensation

of innocent victims are also significant factors with respect to insurance

matters. In the liability context, for example, most injuries caused by

other people would go uncompensated in the absence of insurance

171

See, e.g., 1 JEFFREY W. STEMPEL & ERIK S. KNUTSEN, STEMPEL AND KNUTSEN ON

INSURANCE COVERAGE § 4.06[b] (Wolters Kluwer 4th ed. 2020); Michelle Boardman,

Insuring Understanding: The Tested Language Defense, 95 I

OWA L. REV. 1075, 1091 (2010)

(describing the “hyperstandardization” of insurance policies); James M. Fischer, Why

Are Insurance Contracts Subject to Special Rules of Interpretation?: Text Versus Context, 24

RIZ. ST. L.J. 995, 996 (1992) (“[T]here is little, if any, freedom to negotiate the

standardized language of the insurance contract that determines the scope of

coverage.”); Susan Randall, Freedom of Contract in Insurance, 14 C

ONN. INS. L.J. 107, 125

(2007) (“[I]n some lines of insurance, all insurance companies provide identical

coverage on the same take-it-or-leave-it basis.”); Daniel Schwarcz, Reevaluating

Standardized Insurance Policies, 78 U.

CHI. L. REV. 1263, 1270-73 (2011) (discussing the

history of standardized insurance policies); Kent D. Syverud, The Duty to Settle, 76 V

L. REV. 1113, 1153 (1990) (“[P]roperty owner’s liability insurance contracts are

standardized across insurers in a form few insureds have the power or experience to

bargain around.”).

172

See French, Understanding Insurance Policies, supra note 150, at 552.

173

See, e.g., Randall, supra note 171, at 125 (“[I]n some lines of insurance, all

insurance companies provide identical coverage on the same take-it-or-leave-it basis.”).

174

E.g., Abraham, supra note 150, at 669; Eugene R. Anderson & James J. Fournier,

Why Courts Enforce Insurance Policyholders’ Objectively Reasonable Expectations of

Insurance Coverage, 5 C

ONN. INS. L.J. 335, 401 (1998); see 15 U.S.C. §§ 1011-1015

(2018); Fischer, supra note 171, at 1054-55; Jeffrey W. Stempel, Reassessing the

“Sophisticated” Policyholder Defense in Insurance Coverage Litigation, 42 D

RAKE L. REV.

807, 826 (1993).

175

See, e.g., French, Understanding Insurance Policies, supra note 150, at 552.

176

See id.

2020] America on Fire 853

because most people in America are judgment proof.

177

That, of course,

means that, in the absence of insurance, many injured people would not

be able to pay their medical bills or recover lost wages. These are the

primary reasons that automobile insurance is mandatory — to ensure

that automobile accident victims’ losses are paid.

178

These same

concerns apply with respect to catastrophic property losses that private

insurers refuse to insure. In the absence of a governmental insurance

program or a government bailout, most homeowners are financially

devastated when an uninsured natural catastrophe destroys their

homes.

179

Having a governmental insurance program for natural catastrophes

also would be a more transparent, less ad hoc system for government

payments to individuals for natural catastrophe losses. Currently,

without any established rules or policy terms, the federal government

de facto plays the role of insurer of last resort with respect to natural

catastrophes for some people due to government bailouts. For example,

through ad hoc legislation, the federal government has paid

approximately $300 billion for the natural catastrophe losses associated

with Hurricanes Katrina, Sandy, and Harvey.

180

Creating a formal

177

See, e.g., Stephen G. Gilles, The Judgment-Proof Society, 63 WASH. & LEE L. REV.

603, 606 (2006) (discussing the reasons why judgments against most people are

uncollectible); Kyle D. Logue, Solving the Judgment-Proof Problem, 72 T

EX. L. REV. 1375,

1375-76 (1994) (discussing the impact insurance has on the judgment-proof problem);

S. Shavell, The Judgment Proof Problem, 6 I

NT’L REV. L. & ECON. 45, 47-52, 55 n.1 (1986)

(analyzing the problems that result from judgment-proof individuals).

178

See, e.g., JERRY & RICHMOND, supra note 65, at 924-25 (stating that the obvious

purpose of mandatory auto insurance is to provide victims of automobile accidents with

access to funds to cover their losses); Stempel, Social Instrument, supra note 150, at

1497-98 (noting that every state effectively requires auto insurance in order to license

a car).

179

See, e.g., Sanjay Bhatt, Slide Erased Their Homes, but Maybe Not Their Loans,

EATTLE TIMES (Apr. 1, 2014, 9:29 PM), http://seattletimes.com/html/latestnews/

2023278858_mudslidefinancialxml.html [https://perma.cc/XR8Z-546R] (“If [the Oso

Landslide victims] can’t get adequate relief on their mortgages . . . they may pursue

bankruptcy to get rid of the debt.”); Becky Johnson, Landslide Hazard Maps Axed by

State: Risky Slopes in Jackson, Haywood to Remain a Mystery for Now, S

MOKY MOUNTAIN

NEWS (June 29, 2011), http://www.smokymountainnews.com/news/item/4292-

landslide-hazard-maps-axed-by-state-risky-slopes-in-jackson-haywood-to-remain-a-

mystery-for-now [https://perma.cc/9ZHT-CUJX] (“Regular homeowners insurance

doesn’t cover landslides. Homeowners are out of luck — whether a home is totally

flattened or the foundation destabilized due to shifting soil. They can’t sell their home,

nor will insurance compensate them. Meanwhile, they have to keep paying the mortgage

on a house they can’t live in. Often, bankruptcy and foreclosure become the only

option.”).

180

See Sami Sparber, Trump Signs Off on Nearly $90 Billion of Disaster Funding that

Will Help Harvey Victims, D

AILY TEXAN (Feb. 16, 2018, 12:15 AM),

854 University of California, Davis [Vol. 54:817

governmental insurance program would make the process regarding

how natural catastrophe losses are funded and paid more transparent.

For the victims of natural catastrophes, such a program also would

make it more predictable whether their losses will be paid and would

require less political maneuvering regarding the passage of bailout bills

when natural catastrophes occur.

Finally, although the creation of a governmental insurance program

for natural catastrophes may sound revolutionary, it really is just

evolutionary. There already are numerous other governmental

insurance programs in America, including social security disability

insurance, unemployment insurance, and Medicare/Medicaid. The

natural catastrophe insurance contemplated in this Article would

simply be another governmental line of insurance that would be sold

separate from traditional homeowners policies and it is not intended to

replace traditional homeowners policies or to cover the non-correlated

risks that currently are covered by homeowners insurance.

C. The Case for “Bundled” Insurance Instead of Standalone Insurance

for Specific Natural Catastrophes

Although a governmental insurance program to cover wildfires

conceptually may be sound, how such a program is structured could be

the difference between a successful program and an unsuccessful one.

Creating a governmental insurance program that sells a standalone

policy that covers just wildfire losses would be a mistake. A better

approach would be to insure wildfires as part of bundled coverage

because of the numerous problems associated with standalone

insurance that only covers a single natural catastrophe peril.

Three of the biggest problems with standalone insurance programs

that cover only a single natural catastrophe peril are: (1) adverse

selection, (2) high premiums, and (3) low take up rates. The first two

problems are closely related, and all three problems can be addressed

by bundling the perils covered by the insurance into a single policy.

Adverse selection theory posits that a person who thinks his house

may be damaged by a wildfire because he lives near a dry forest in

California, Washington, Oregon, or Colorado is more likely to want to

https://www.dailytexanonline.com/2018/02/16/trump-signs-off-on-nearly-90-billion-

of-disaster-funding-that-will-help-harvey-victims [https://perma.cc/EX92-RWCQ];

Ryan Sruyk, What Past Federal Hurricane Aid Tells Us About Money for Harvey Recovery,

CNN

POL. (Sept. 7, 2017, 11:13 AM), https://www.cnn.com/2017/08/31/politics/

hurricane-harvey-recovery-money/index.html [https://perma.cc/XZ6E-QEJR] (noting

that more than $200 billion in federal aid was paid for recovery from Hurricanes Katrina

and Sandy).

2020] America on Fire 855

purchase wildfire insurance than someone who lives in Pittsburgh,

Pennsylvania, which gets some type of precipitation at least twice a

week year round.

181

Consequently, adverse selection is a serious

concern with respect to standalone insurance. Only the people at the

highest risk will likely buy it.

The risk of adverse selection diminishes, however, if coverage for all

the most common types of natural catastrophes are bundled together in

the same policy. For example, if policies for natural catastrophes were

to cover losses for the various natural catastrophes such as wildfires,

flooding, hurricanes, and landslides, then a person who lives in

California, Washington, Oregon, or Colorado and is concerned about

wildfires would not have a greater incentive to purchase the policy than

a person who lives in Pittsburgh and is more concerned about flooding

and landslides. Thus, if the policyholder wants to, or is required to, have

insurance to cover any of the potential losses covered under a bundled

natural catastrophe policy, then she would buy the policy regardless of

whether she thinks she needs coverage for all of the perils covered by

the policy. This, in turn, means the program would have a diverse pool

of insureds who are not all exposed to the same types and level of risk

(i.e., the insureds’ risks would not be correlated).

The second problem with standalone insurance — high premium

prices — is also due to adverse selection. Because the people most likely

to buy standalone insurance are also the people most likely to suffer

losses, the premiums charged to those people necessarily need to be

higher than for an average risk person in order for the premium rates

for the program to be actuarially sound. Consequently, if only the

highest risk people buy the insurance, then high premiums must be

charged.

To illustrate the problems with standalone insurance for a single

natural catastrophe peril, consider the National Flood Insurance

Program (“NFIP”). It is as an example of a failing insurance program.

The NFIP is a federally backed insurance program that was created in

the 1960s when private insurers generally began excluding coverage in

property policies for flood losses because flood losses are viewed as

correlated risks.

182

181

See, e.g., Pittsburgh, Pennsylvania, BESTPLACES, https://www.bestplaces.net/

climate/city/pennsylvania/pittsburgh (last visited Sept. 5, 2019) [https://perma.cc/YR2S-

DCNC] (providing information on rain weather patterns in Pittsburgh, Pennsylvania).

182

See, e.g., French, Insuring Floods, supra note 157, at 61 (explaining how insurers

decided they did not want to cover flood losses); Kriesel & Landry, supra note 8, at 405

(providing further explanation about the National Flood Insurance Program).

856 University of California, Davis [Vol. 54:817

NFIP policies are expensive even though many of them are sold at

subsidized premium rates. As of August 31, 2016, the high end of the

median premium range for an NFIP policy that covers only flood losses

was $1,330.

183

The insurance industry, however, has projected that the

premium rates would be twice that amount if the NFIP were actuarially

sound and the insurance were sold by private insurers.

184

The premium

rates need to be high in order for the program to be actuarially sound

because many of the properties being insured are the ones at the highest

risk for flood losses.

185

In 2012, in an attempt to make the program

fiscally sound, the program was amended under the Biggert-Waters

Flood Insurance Reform Act to require property owners to pay

actuarially sound premium rates, but the amendments were never fully

implemented due to the subsequent political resistance from states

frequently impacted by flooding because the actuarially sound premium

rates were viewed as unaffordable for many people.

186

Consequently,

subsidized, but high, premium rates have continued and the NFIP has

been bankrupt for many years with periodic capital infusions from

taxpayers to keep it going.

187

The program currently is running a deficit

of more than $20 billion.

188

And, in exchange for an expensive but still subsidized premium, little

insurance coverage is provided by a NFIP policy. Personal property is

covered at “actual cash” value instead of replacement cost, which means

property owners receive pennies on the dollar for destroyed personal

property.

189

Further, most items in a house’s basement are not covered,

and the maximum coverage provided for the entire house is capped at

183

CONG. BUDGET OFFICE, supra note 157, at 2.

184

See Vivien Lee & David Wessel, The Hutchins Center Explains: National Flood

Insurance Program, B

ROOKINGS (Oct. 10, 2017), https://www.brookings.edu/blog/up-

front/2017/10/10/the-hutchins-center-explains-national-flood-insurance-program/

[https://perma.cc/79C2-UTBH].

185

See id.

186

See id.; John McAneney, Delphine McAneney, Rade Musulin, George Walker &

Ryan Crompton, Government-Sponsored Natural Disaster Insurance Pools: A View from

Down-Under, 15

INT’L J. DISASTER RISK REDUCTION 1, 6 (2016).

187

See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-19-157SP, HIGH-RISK SERIES:

SUBSTANTIAL EFFORTS NEEDED TO ACHIEVE GREATER PROGRESS ON HIGH-RISK AREAS 272

(2019), https://www.gao.gov/assets/700/697245.pdf [https://perma.cc/8854-UFX7]

(“As of September 2018, FEMA’s debt stood at $20.5 billion despite Congress having

canceled $16 billion in debt in October 2017. Without reforms, the financial condition

of NFIP could continue to worsen.”).

188

See id.

189

See 42 U.S.C. § 4013(b)(2)-(3) (2018); see also U.S. DEP’T OF HOMELAND SEC.,

FEMA

F–679, NATIONAL FLOOD INSURANCE PROGRAM: SUMMARY OF COVERAGE 3 (2012).

2020] America on Fire 857

$250,000, which does not cover the cost to replace many homes in

America.

190

The third problem with standalone policies, such as NFIP policies, is

that very few people actually buy them, either due to ignorance

regarding the risk they are facing or because the premium rates are

unaffordable.

191

Only about ten percent of the victims of Hurricane

Katrina and a little over fifty percent of Hurricane Sandy victims had

flood insurance even though people who live in areas surrounded by

water, like New Orleans and New York City, are people who obviously

should be concerned about flooding.

192

In fact, of the approximately

seventy-two million homeowners in America, only about five million

have flood insurance.

193

If they are not required by their banks to

purchase flood insurance, very few people purchase it.

194

So, offering

standalone insurance for specific natural catastrophes simply does not

work very well on a nationwide basis.

In contrast, by including coverage for natural catastrophes in a

bundled policy, the pool of insureds would be much more diverse with

different risk levels for each of the various perils they face. This, in turn,

could allow for more affordable premium rates because the rates would

be based upon the risk for all the covered perils, not just the single peril

the homeowner is at the highest risk of facing.

In addition, the take up rates by homeowners would be much higher

(e.g., much closer to seventy million than five million) because

homeowners insurance already is effectively mandatory for most people

due to the banking requirements previously discussed.

195

Thus, the

number of uninsured people who would need a government bailout

following a natural catastrophe should be dramatically reduced. And,

instead of simply receiving a government handout after a loss,

homeowners affected by natural catastrophes would be paying

premiums to at least partially offset their loss payments, as insureds do

under all other types of insurance programs.

190

See 42 U.S.C. § 4013(b)(2)-(3); U.S. DEP’T OF HOMELAND SEC., supra note 189, at

U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-14-297R, OVERVIEW OF GAO’S PAST WORK

ON THE

NATIONAL FLOOD INSURANCE PROGRAM 3 (2014) [hereinafter GAO-14-297R

REPORT]; French, Insuring Floods, supra note 157, at 67.

191

See, e.g., French, Insuring Floods, supra note 157, at 70-71.

192

Id. at 53.

193

E.g., id. at 71; see, e.g., CONG. BUDGET OFFICE, supra note 157, at 3.

194

See, e.g., Ben-Shahar & Logue, Subsidized Weather Insurance, supra note 159, at

619 (“[O]nly twenty-one percent of homeowners in high-flood-risk areas in New York

City who are not subject to a flood insurance mandate under their mortgage contract

actually purchase flood insurance, even at subsidized rates.”).

195

See supra Part IV.A.

858 University of California, Davis [Vol. 54:817

D. The Case Against a Governmental Insurance Program for Natural

Catastrophes

Although there are many arguments in favor of governmental

insurance programs for natural catastrophes, there are, of course, also

several arguments against governmental insurance programs. One

problem with a government insurance program is that some lower risk

insureds inevitably will subsidize higher risk insureds unless each

insured is charged an actuarially sound premium.

196

And, if everyone is

charged an actuarially sound premium, then some, or even many, high-

risk insureds might not be able to afford the insurance, which is one of

the problems the NFIP faces. The response to that criticism is that all

insurance programs, including “private insurance pools[,] involve some

cross-subsidization from the less risky to the more risky.”

197

Some

subsidization of premium rates is simply an aspect of insurance pools

because risks can only be measured with approximate levels of

accuracy. Moreover, when it comes to insuring natural catastrophe

losses in developed countries, a certain amount of solidarity among

citizens is simply an aspect of citizenship. With that said, the intention

is that the insurance program as a whole would be actuarially sound so

taxpayers would no longer need to fund natural catastrophe losses for

the uninsured or underinsured in the form of government bailouts.

Government bailouts are financed by all taxpayers, not just

homeowners, so bailouts result in some people who pay taxes, but

cannot afford to own a home, subsidizing wealthier homeowners’ losses.

Consequently, under a natural catastrophe insurance program,

because the premium-paying pool of insureds would be limited to

homeowners, poorer non-homeowners would not be subsidizing

wealthier homeowners. And, the amount of premium subsidization of

high-risk insureds by lower risk insureds should be quite modest

because the amounts are being spread across such a large number of

insureds with diverse risk profiles spread across the country.

198

Further,

196

Many people may not realize that they already are subsidizing flood losses even

though they do not have flood insurance. The NFIP currently is receiving billions of

dollars of taxpayer subsidies even though most people do not have flood insurance. See

Extreme Weather Events: Limiting Federal Fiscal Exposure and Increasing the Nation’s

Resilience: Hearing Before the S. Comm. on Homeland Sec. & Governmental Affairs, 113th

Cong. 3-4 (2014) (statement of Mark Gaffigan, Managing Director, Nat Res. & Env’t),

https://www.gao.gov/assets/670/660860.pdf [https://perma.cc/TVY7-Q8QE]. Further,

each government bailout of property owners in areas devastated by natural catastrophes

such as Hurricanes Katrina, Sandy and Harvey are another form of public subsidization

of individuals’ losses.

197

Ben-Shahar & Logue, Subsidized Weather Insurance, supra note 159, at 593.

198

See supra Part IV.

2020] America on Fire 859

the premium rates largely would be based upon home values, so

wealthier people would pay higher premium rates.

In 2018, for example, there were approximately $82 billion in natural

catastrophe losses in America.

199

If that loss were spread equally across

seventy million homeowners without taking into account home values,

then the loss per home would be approximately $1171. If home values

were factored into the premium rates, then the owners of more

expensive homes effectively would bear much more of the losses than

the owners of average or low-priced homes because the wealthier

homeowners would be paying higher premium rates based upon the

higher values of their homes.

Another problem with a government insurance program is that there

inevitably would be political opposition by certain segments of society

to the creation of such a program because government sponsored

insurance could be characterized as a form of socialism by anyone who

is paying more than an actuarially sound premium rate. The reality, of

course, is that America already has several governmental insurance

programs that have socialist aspects to them. For example, Social

Security Disability Insurance has been a federal insurance program

since 1956.

200

The program provides financial assistance to people who

are unable to work due to a long-term mental or physical disability, and

over ten million Americans annually receive benefits under the program

regardless of whether they paid actuarially sound amounts into the

program.

201

The program primarily is funded through payroll and self-

employment taxes.

202

Another example of an existing governmental insurance program

where lower risk insureds subsidize higher risk insureds’ insurance

premium rates can be found in Florida. A significant provider of

homeowners insurance in Florida is Citizens Property Insurance

Corporation (“Citizens”), a state-sponsored program.

203

Under the

program, the premium rates charged to coastal residents are subsidized

by inland residents to some extent.

204

Citizens historically also has sold

199

See Facts + Statistics: U.S. Catastrophes, supra note 9.

200

See 42 U.S.C. § 423 (2018).

201

See Damian Paletta & Dionne Searcey, Jobless Tap Disability Fund, WALL ST. J.

(Dec. 28, 2011), https://www.wsj.com/articles/SB1000142405297020429680457712

1392750460030 [https://perma.cc/P9UK-GHK9].

202

See 42 U.S.C. § 401 (2018).

203

See Cole et al., supra note 75, at 269.

204

See id. at 280. Ben-Shahar and Logue are critical of Citizens because the premium

subsidization is a regressive redistribution of wealth in that affluent homeowners’

premium rates for coastal homes are being subsidized by less affluent inland

homeowners’ premium rates. See Ben-Shahar & Logue, Subsidized Weather Insurance,

860 University of California, Davis [Vol. 54:817

property insurance to many homeowners in Florida to cover hurricane

damage at premium rates significantly lower than private insurers.

205

has been able to do so for many of the reasons discussed in Part IV.B of

this Article: (1) it does not need to provide adequate quarterly and

annual returns to investors; (2) it is tax exempt; (3) it does not need to

raise excessive capital to pre-fund losses because it has the ability to do

post-loss assessments; and (4) it is reinsured by a state-sponsored

reinsurer, the Florida Hurricane Catastrophe Fund.

206

Although some

scholars are critical of Citizens due to the subsidized premium rates for

coastal properties,

207

because of the existence of Citizens, homeowners

in Florida have been able to procure property insurance and remain

homeowners despite private insurers fleeing the state after devastating

hurricanes caused insurer losses.

208

With that said, under the nationwide bundled natural catastrophe

insurance program that is being proposed in this Article, the cross

subsidization of higher risk insureds, such as coastal properties, by

lower risk insureds should be far less than what has occurred in Florida

because of the much larger, more diverse risk pool of insureds and the

premium rates primarily would be based upon home values. Thus,

expensive homes would be charged higher premium rates than less

expensive homes. Moreover, even if there were a minor free rider effect

by affluent homeowners, that negative consequence would not

outweigh the positive effect of providing homeowners insurance for

natural catastrophes to millions of homeowners who otherwise would

be uninsured, as they currently are, due to the unavailability of

insurance — either private or government-sponsored — for natural

catastrophes.

supra note 159, at 596, 608. Regressive redistribution of wealth through premium

subsidization should not be a significant problem under the natural catastrophe

insurance program proposed in this Article because the insurance pool would include

a larger number of insureds with diverse risk profiles and premiums would be primarily

based upon the insured homes’ values. Consequently, affluent homeowners would be

charged much higher premium rates than poorer people.

205

See Cole et al., supra note 75, at 269.

206

See id. at 267-71.

207

See, e.g., Ben-Shahar & Logue, Subsidized Weather Insurance, supra note 159, at

608 (stating that people who live in wealthier zip codes receive larger subsidies); Martin

Grace & Robert Klein, The Perfect Storm: Hurricanes, Insurance, and Regulation, 12 R

ISK

MGMT. & INS. REV. 81, 113 (2009) (noting that the shortfalls are covered by assessments

on insurance consumers and state general funds).

208

See 1993 Fla. Laws 2881 (law temporarily barred insurers from exiting the

Florida property insurance market following Hurricane Andrew in 1992); Butler, supra

note 94, at 769-70 (discussing Florida’s statute banning private insurers from the

property insurance market).

2020] America on Fire 861

Other people will also argue that America needs less governmental

involvement with private industries, not more. That argument,

however, is not very strong when it comes to the insurance industry.

The insurance industry already is heavily regulated for the public policy

and social reasons discussed in Parts IV.A and IV.B.

209

The insurance

industry needs to be regulated due to the nature of its business and the

critical importance it plays.

Other people will argue that covering natural catastrophe losses

under a governmental insurance program would create a moral hazard

problem for homeowners. Moral hazard theory posits that: (1) a person

who has insurance may be incentivized to destroy the insured property

in order to collect the insurance proceeds, and/or (2) a person will take

less care to avoid losses if the losses are insured.

210

Applied in the

context of wildfires, the theory hypothesizes that the existence of

insurance would encourage people to build homes and live in areas

prone to wildfires. And, because they have insurance, homeowners

209

See supra Parts IV.A, IV.B; see also NAT’L ASS’N OF INS. COMM’RS, STATE INSURANCE

REGULATION 2 (2011), https://www.naic.org/documents/topics_white_paper_hist_ins_

reg.pdf [https://perma.cc/6EKT-T88K] (“Insurance is more heavily regulated than other

types of business because of the complexity of the insurance contracts, the lack of

sufficient information for insurance consumers to adequately shop for prices and

adequacy of coverage and because insurance contracts are generally contracts of

adhesion.”).

210

See, e.g., W. Cas. & Sur. Co. v. W. World Ins. Co., 769 F.2d 381, 385 (7th Cir.

1985) (“Once a person has insurance, he will take more risks than before because he

bears less of the cost of his conduct.”); M

ARK S. DORFMAN, INTRODUCTION TO RISK

MANAGEMENT AND INSURANCE 480 (8th ed. 2005) (The term “moral hazard” also

generally encompasses situations where “[a] person . . . deliberately causes a loss . . .

[or] exaggerates the size of a claim to defraud an insurer.”); J

ERRY & RICHMOND, supra

note 65, at 12 (“[T]he existence of insurance can have the perverse effect of increasing

the probability of loss. . . . This phenomenon is called moral hazard.”); Scott E.

Harrington, Prices and Profits in the Liability Insurance Market, in F

OUNDATIONS OF

INSURANCE ECONOMICS: READINGS IN ECONOMICS AND FINANCE 626, 631 (George Dionne

& Scott Harrington eds., 1992) (“Moral hazard is the tendency for the presence and

characteristics of insurance coverage to produce inefficient changes in buyers’ loss

prevention activities, including carelessness and fraud . . . .”); George L. Priest, The

Current Insurance Crisis and Modern Tort Law, 96 Y

ALE L.J. 1521, 1547 (1987) (“Moral

hazard refers to the effect of the existence of insurance itself on the level of insurance

claims made by the insured. . . . Ex ante moral hazard is the reduction in precautions

taken by the insured to prevent the loss, because of the existence of insurance.”); Adam

F. Scales, The Chicken and the Egg: Kenneth S. Abraham’s “The Liability Century,” 94 V

L. REV. 1259, 1263 (2008) (Moral hazard is the term used to describe the phenomenon

that a person will have a “tendency to take fewer precautions in the presence of

insurance.”); Gary T. Schwartz, The Ethics and the Economics of Tort Liability Insurance,

75 C

ORNELL L. REV. 313, 338 n.117 (1990) (“‘Moral hazard’ is sometimes distinguished

from ‘morale hazard,’ the former referring to deliberate acts like arson, the latter to the

mere relaxation of the defendant’s discipline of carefulness.”).

862 University of California, Davis [Vol. 54:817

would not bother to take steps, such as creating a fire-resistant zone

around their houses, to minimize the risk of their homes being burned

to the ground. Some scholars have made this same argument in the

context of hurricanes, arguing that the existence of homeowners

insurance at subsidized premium rates encourages people to build in

dangerous coastal areas largely to the benefit of the affluent at the

expense of poorer people.

211

These moral hazard arguments have theoretical appeal and may

impact buying decisions of homeowners on the margins if the premium

prices are unaffordable or insurance is completely unavailable, but

moral hazard arguments are counterintuitive in the context of wildfires.

Such arguments also have been proven to be empirically false in other

natural catastrophe contexts as well.

212

Intuition suggests that most people would prefer to avoid the

inconvenience of becoming homeless and having all their worldly

possessions destroyed in a fire even if an insurer ultimately will pay for

most of the loss months later. Insurance proceeds also cannot replace

sentimental items, such as family heirlooms and old photos.

Further, the moral hazard argument is based upon the false premise

that affluent people build in beautiful areas prone to natural

catastrophes because of the availability of subsidized insurance and that

the availability of this insurance benefits the affluent more than poorer

people. The people who would most benefit from natural catastrophe

insurance are the less affluent regardless of whether some affluent

homeowners also would receive some nominal premium subsidization

from lower risk insureds. There at least three reasons for this: (1)

natural catastrophes impact many more poor people than affluent

people because poorer people tend to live in areas more prone to natural

catastrophes and their homes are not built as well to withstand

damage,

213

(2) poorer people cannot move away from dangerous areas

211

See, e.g., Ben-Shahar & Logue, Subsidized Weather Insurance, supra note 159, at

616 (arguing homeowners have been attracted to live in high-risk coastal areas due, in

part, to subsidized premium rates under the NFIP). The article does not cite any

empirical evidence to support this argument beyond the fact that population growth

and development along the coast has continued since the NFIP was created in the 1960s.

This is a classic example of mistaking correlation for causation. Population growth and

development has occurred across the country, in flood risk areas and in non-flood risk

areas. How many fewer, if any, properties would have been built along the coast in the

absence of NFIP insurance is unknown.

212

See infra note 221 and accompanying text.

213

See Eleanor Krause & Richard V. Reeves, Hurricanes Hit the Poor the Hardest,

ROOKINGS (Sept. 18, 2017), https://www.brookings.edu/blog/social-mobility-memos/2017/

09/18/hurricanes-hit-the-poor-the-hardest/ [https://perma.cc/MJ56-S5PJ] (“Low-income

2020] America on Fire 863

as easily as wealthier people,

214

and (3) most poor people currently are

completely uninsured for natural catastrophes.

215

So, the benefit to

poorer people of having insurance, as opposed to being uninsured,

when a natural catastrophe strikes is obvious regardless of whether the

affluent also would be aided by the insurance or receive some nominal

premium subsidization from less risky homeowners.

People have been living in areas that are now prone to natural

catastrophes long before the areas became prone to natural catastrophes

and without regard to whether the areas would be considered attractive

areas to live by the affluent. That is one of the consequences of climate

change — the areas impacted by natural catastrophes have increased

and the severity of the natural catastrophes has increased regardless of

whether the areas are considered beautiful or how affluent the

homeowners living there are.

216

and minority communities are more vulnerable to the risks of natural disasters, and they also

struggle most to recover. . . . [L]ower income Americans are more likely to live in

neighborhoods or buildings more susceptible to storm shocks.”); Annie Lowrey, What the

Camp Fire Revealed, A

TLANTIC (Jan. 21, 2019), https://www.theatlantic.com/ideas/

archive/2019/01/why-natural-disasters-are-worse-poor/580846/ [https://perma.cc/Z9KE-

YSE2] (“In California, the extremely high cost of housing has encouraged building in and

migration to certain fire-prone areas. This is to say: The country’s built landscape means that

lower-income families are often the most vulnerable to disasters.”); Susan Milligan, The

Forecast for Recovery, U.S.

NEWS & WORLD REP. (Sept. 21, 2018, 6:00 AM),

https://www.usnews.com/news/the-report/articles/2018-09-21/hurricanes-hit-everyone-

but-the-poor-have-the-hardest-time-recovering?context=amp [https://perma.cc/WS6M-

YMPR] (“[W]hen it comes to escaping, surviving and recovering from a natural disaster, it’s

the poor who suffer the most, experts say. . . . Cheaper houses are also less safe, without the

strong foundations or reinforcements that can make the difference between a blown-away

home and one with some window damage. . . . In the Carolinas, where 39 people have died

already from Florence, the damage is disproportionately affecting the poor and will continue

to do so during the recovery . . . .”).

214

Leah Platt Boustan, Maria Lucia Yanguas, Matthew Kahn & Paul W. Rhode,

Natural Disasters by Location: Rich Leave and Poor Get Poorer, S

CI. AM. (July 2, 2017),

https://www.scientificamerican.com/article/natural-disasters-by-location-rich-leave-

and-poor-get-poorer/ [https://perma.cc/EZE8-4G5A] (“[T]he rich move away from

disaster-prone areas, while the poor are left behind.”); Krause & Reeves, supra note 213

(“[M]ore affluent people can more easily relocate to safer areas, as a recent NBER

working paper by Leah Platt Boustan, Matthew E. Kahn, Paul W. Rhode and Maria Lucia

Yanguas shows.”).

215

See Krause & Reeves, supra note 213 (“In the eight counties most severely-

affected by Hurricane Harvey, only 17 percent of homeowners held flood insurance

policies . . . .”); supra Part IV.B.

216

See, e.g., AON, WEATHER, CLIMATE & CATASTROPHE INSIGHT, 2018 ANNUAL REPORT

3 (2018), http://thoughtleadership.aonbenfield.com/Documents/20190122-ab-if-annual-

weather-climate-report-2018.pdf [https://perma.cc/58ZU-P2MA] (showing an increase

in natural catastrophe damages since 2000).

864 University of California, Davis [Vol. 54:817

Consider, for example, the town of Paradise, California that was

wiped out by the Camp Fire in 2018 and resulted in eighty-five people

being killed.

217

According to the 2010 Census, it was a small town with

a population of approximately 26,000 people in the middle of California

— not on the coast or some other area with particularly attractive

geographic features.

218

The average income was approximately

$26,000.

219

The mean home price in 2017 was $232,000.

220

Thus,

Paradise was not a refuge of affluent people who were attracted to a

bucolic area due to underpriced homeowners insurance.

The moral hazard argument is also intuitively weak because wildfires

place people’s lives at risk. Most people would take steps to avoid being

burned to death while sleeping if they knew how to avoid it even if their

estates would recover insurance proceeds following their deaths.

Consequently, some empirical studies done in America and Europe

have proven that people who are insured against natural catastrophes

take more, not less, precautions to avoid losses, so the moral hazard

argument is unpersuasive in this context.

221

Nonetheless, even if one were to accept that moral hazard is a

legitimate concern, there are numerous ways to address it. For example,

the premium amount can be tied to whether the homeowner takes

specific risk reduction steps, such as removing flammable materials near

the house, and the policies can include deductibles so the homeowner

217

See supra note 100 and accompanying text.

218

2010 Census Interactive Population Search, CA - Paradise Town, U.S. CENSUS BUREAU,

https://archive.vn/20140715040220/http://www.census.gov/2010census/popmap/ipmtext

.php?fl=06:0655520

(last visited Sept. 28, 2020) [https://perma.cc/PA5E-7F3R].

219

Zip 95969 (Paradise, CA), BESTPLACES, https://www.bestplaces.net/economy/zip-

code/california/paradise/95969 (last visited Sept. 14, 2020) [https://perma.cc/SA7T-

S77U].

220

Paradise, California, CITY-DATA.COM, http://www.city-data.com/city/Paradise-

California.html (last visited Sept. 14, 2020) [https://perma.cc/G7VM-CNK8].

221

See, e.g., Qihao He & Michael Faure, Regulation by Catastrophe Insurance: A

Comparative Study, 24 C

ONN. INS. L.J. 189, 198-99 (2018) (noting that in America,

homeowners “who are more likely to have flood insurance and homeowners policies

that cover wind damage, engage in more ex ante property risk reduction behavior on

hurricane preparedness”); Paul Hudson, W.J. Wouter Botzen, Jeffrey Czajkowski &

Heidi Kreibich, Moral Hazard in Natural Disaster Insurance Markets: Empirical Evidence

from Germany and the United States, 93 L

AND ECON. 179, 181 (2017) (“Our analysis

found that households with flood insurance suffer larger losses than uninsured

households due to their higher hazard level rather than due to moral hazard, which to

the best of our knowledge has not been shown before.”); Gebhard Kirchgässner, On the

Efficiency of a Public Insurance Monopoly: The Case of Housing Insurance in Switzerland,

in P

UBLIC ECONOMICS AND PUBLIC CHOICE 221, 236-37 (Pio Baake & Rainald Borck eds.,

2007) (noting that mandatory participation in Switzerland’s insurance program

incentivizes risk reduction).

2020] America on Fire 865

will not be made completely whole in the event of a loss.

222

These are

simple ways to incentivize insureds to avoid losses.

Indeed, property insurance policies already contain these types of

provisions and others that are designed to address moral hazard

concerns. Such provisions also could be included in a governmental

insurance program. For example, homeowners policies currently

require the homeowner to take preventative measures intended to avoid

or minimize a loss and they cover the costs the homeowner incurs in

doing so under the “reasonable repairs” and “property protection”

provisions of the policies.

223

Similarly, commercial property policies

contain “sue and labor” provisions under which the insurer agrees to

reimburse the insured for the costs associated with minimizing damage

caused by covered perils.

224

In addition, as discussed in Part III, not only are there a number of

risk reduction steps a homeowner can take in the context of wildfires,

but state or local zoning laws and building codes also can address moral

hazard concerns by precluding the development of houses in high-risk

areas and by requiring the use of fire-resistant building materials.

Similar laws could and should be enacted related to building structures

in areas that are susceptible to other types of natural catastrophes, such

as flooding and hurricane winds.

The final argument against governmental insurance programs to

cover natural catastrophe losses is that private markets generally are

better than the government in allocating resources and efficiently

222

See, e.g., Ben-Shahar & Logue, Outsourcing Regulation, supra note 70, at 209

(“[I]nsurers do, in fact, commonly share losses with insureds in various ways, including

through deductibles and copayments.”); Haitao Yin, Howard Kunreuther & Matthew

W. White, Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market

Reduce Environmental Accidents?, 54 J.L.

& ECON. 325, 326 (2011) (discussing the

reduction of premium prices for risk avoidance activities in the context of

environmental liability policies); cf. Tom Baker & Rick Swedloff, Regulation by Liability

Insurance: From Auto to Lawyers Professional Liability, 60 UCLA

L. REV. 1412, 1429-30

(2013) (“The deductible for the driver’s first-party property damage coverage in the

auto policy should control the moral hazard of insurance in these instances.”).

223

See, e.g., Sample Homeowners Policy, Additional Coverages, § 2.a and

Conditions, § C.4, reprinted in C

HRISTOPHER C. FRENCH & ROBERT H. JERRY, II, INSURANCE

LAW AND PRACTICE 602, 610 (2018) (requiring homeowner to protect damaged property

against further damage with the insurer agreeing to pay the costs incurred to do so).

224

E.g., John S. Clark Co. v. United Nat’l Ins. Co., 304 F. Supp. 2d 758, 767-68

(M.D.N.C. 2004) (“To be covered as reimbursable sue and labor expenses [under a

commercial property policy], those expenditures must be made for the benefit of the

insurer in mitigating or preventing a covered loss.” (quoting Swire Pac. Holdings, Inc.

v. Zurich Ins. Co., 139 F. Supp. 2d 1374, 1385 (S.D. Fla. 2001))).

866 University of California, Davis [Vol. 54:817

delivering products and services.

225

To support this argument, one need

only say “NFIP.”

As discussed in Part IV.C., the NFIP is an example of a poorly

structured and administered governmental insurance program. The

NFIP historically has used outdated floodplain maps due to a lack of

funds necessary to create accurate ones, so in many instances the wrong

homes have been insured or were uninsured.

226

In fact, the flood maps

in place at the time of Hurricane Sandy were thirty years old and the

area in New York City considered at high risk on the maps has been

doubled since Hurricane Sandy.

227

Information regarding flood risks is

also poorly understood by homeowners. For example, most people do

not appreciate that a house in a 100-year flood zone has more than a

twenty-five percent chance of being flooded over the course of a thirty-

year mortgage.

228

Indeed, people generally have a poor understanding

of how likely it is that a natural catastrophe will directly impact them at

some point in the future. Many people are poor judges of risk; they

think natural catastrophes are problems that impact other people and

they do not believe natural catastrophes are likely to impact them until

one becomes imminent.

229

Consequently, the take up rate for standalone flood insurance

nationwide (i.e., the number of homeowners who buy the insurance) is

low — approximately six percent of homeowners.

230

Even in obviously

225

See generally David Brooks, Opinion, I Was Once a Socialist. Then I Saw How It

Worked., N.Y.

TIMES, Dec. 6, 2019, at A31 (“Socialist planned economies — the common

ownership of the means of production — interfere with price and other market signals

in a million ways. They suppress or eliminate profit motives that drive people to learn

and improve.”).

226

See GAO-14-297R REPORT, supra note 190, at 37; Beth A. Dickhaus & Darrin N.

Sacks, Recent Developments in Insurance Regulation, 42 T

ORT TRIAL & INS. PRAC. L.J. 571,

582 (2007); see also Kriesel & Landry, supra note 8, at 405-06.

227

LLOYD DIXON, NOREEN CLANCY, BRUCE BENDER, AARON KOFNER, DAVID MANHEIM &

LAURA ZAKARAS, FLOOD INSURANCE IN NEW YORK CITY FOLLOWING HURRICANE SANDY 1-2

(2013), https://www.rand.org/content/dam/rand/pubs/research_reports/RR300/RR328/

RAND_RR328.pdf [https://perma.cc/7TW9-V4ER] [hereinafter F

LOOD INSURANCE].

228

See Lee & Wessel, supra note 184.

229

See Laura Bliss, Why You Don’t Really Care About the Next ‘Big One,’ CITYLAB (July

21, 2015, 5:00 AM), https://www.citylab.com/environment/2015/07/why-you-dont-

really-care-about-the-next-big-one/398969/ [https://perma.cc/7HHJ-AQNV] (“Turns

out most of us just aren’t that good at calculating risk, especially when it comes to huge

natural events like earthquakes. . . . [W]e have trouble connecting emotionally to

something scary if the odds of it happening today or tomorrow aren’t particularly high.

So, if an earthquake, flood, tornado or hurricane isn’t immediately imminent, people

are unlikely to act.”).

230

See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-14-127, FLOOD INSURANCE:

STRATEGIES FOR INCREASING PRIVATE SECTOR INVOLVEMENT 2 (2014),

2020] America on Fire 867

high-risk areas, few people voluntarily purchase standalone flood

policies. As mentioned, in New Orleans only ten percent of the homes

flooded by Hurricane Katrina had flood insurance even though the city

sits below sea level and is surrounded by water.

231

In the New York City

area, a little more than fifty percent of the homes flooded had flood

insurance even though Manhattan and Staten Island are islands and the

Hurricane Katrina victims’ lack of flood insurance had been widely

reported.

232

These surprisingly low numbers are despite the fact that the

premiums charged by the NFIP have been estimated to be much lower

than what the private insurance market would charge for standalone

flood insurance.

233

And, as noted, because the policy covers only a

single peril — flood losses — adverse selection is a problem for the

NFIP, with almost fifty percent of the policies being sold to properties

in high-risk areas and five coastal states accounting for the sale of two

thirds of all NFIP policies.

234

All told, the NFIP does a poor job of fulfilling its purpose —

reimbursing Americans for their flood losses. Although Americans have

suffered hundreds of billions of dollars in flood losses over the past

three decades, the NFIP has only paid about eighteen percent of the

total amount of the losses.

235

Consequently, if the primary purpose of

selling insurance for natural catastrophes were to run a profitable

business in the most efficient manner possible, then the case for private

insurers selling natural catastrophe insurance instead of the

government could be made simply by saying “NFIP.”

Yet, when given a choice, private insurers generally refuse to cover

natural catastrophes due to the correlated risk problem and adverse

http://www.gao.gov/assets/670/660309.pdf [https://perma.cc/S93D-EB56] (noting that

there are currently 5.5 million NFIP policyholders); Rachel Lisotta, Comment, In over

Our Heads: The Inefficiencies of the National Flood Insurance Program and the Institution

of Federal Tax Incentives, 10 L

OY. MAR. L.J. 511, 518 (2012) (“[A] study in 2005

indicated ‘84 percent of residents in flood-prone areas had not purchased flood

insurance . . . .’”); Quynh T. Pham, Note, The Future of the National Flood Insurance

Program in the Aftermath of Hurricane Katrina, 12 C

ONN. INS. L.J. 629, 652 (2006)

(noting that, as of 2006, “of the estimated 72 million owner-occupied structures, only

4.7 million property-owners purchased flood insurance through the NFIP”).

231

See Christine A. Klein & Sandra B. Zellmer, Mississippi River Stories: Lessons from

a Century of Unnatural Disasters, 60 SMU

L. REV. 1471, 1502 (2007); Scales, supra note

22, at 15; Pham, supra note 230, at 639.

232

DIXON ET AL., FLOOD INSURANCE, supra note 227, at xiii.

233

Lee & Wessel, supra note 184.

234

See id.

235

See French, Insuring Floods, supra note 157, at 69 (“[T]hrough March 31, 2014,

of the approximately $274 billion of flood losses caused since 1978, the NFIP has paid

a total of $50.6 billion, or about 18%.”).

868 University of California, Davis [Vol. 54:817

selection discussed in Part II.A. Thus, a market failure for those

coverages has occurred, and the question remains whether a

governmental insurance program can fill the void. As discussed in Part

IV.B., the answer is “yes,” despite the fact that the NFIP suggests the

answer is “no.” How can these inconsistent answers be reconciled?

Despite the numerous problems with the NFIP, all of its deficiencies

would be eliminated if flood coverage were bundled together with

coverages for other natural catastrophes in a single governmental

insurance program. The adverse selection problem that arises when

only single peril coverage is offered would disappear under a bundled

policy because numerous perils would be covered (e.g., hurricane

winds, flooding, landslides, wildfires, etc.). Thus, because most people

are at risk for one or more of these perils, most people would recognize

a need for the policy. Further, because homeowners insurance is

effectively mandatory for most homeowners due to bank requirements

for a mortgage, the adverse selection problem largely would be moot

because most people would be required by their banks to buy the

coverage.

The program also could be actuarially sound at a reasonable cost for

most homeowners because the purchasers of the insurance would not

be limited to just homeowners with the highest risk. Increasing the pool

of insureds to approximately tens of millions of homeowners with

diverse risk profiles also would have the additional benefit of reducing

correlated risk concerns.

Another way of potentially getting to that same outcome without

creating a governmental insurance program would be to allow private

insurers to sell insurance across state lines and to change some of the

existing tax and accounting rules discussed in Part IV.B that discourage

the accumulation of capital by private insurers.

236

Eliminating the

prohibition against insurers selling insurance nationwide instead of

236

Pursuant to the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015 (2018), the

regulation of the business of insurance is reserved to the states. States only have

authority to regulate within their state borders, however, so insurance companies have

been created to do business in specific states. See, e.g., State Farm Mut. Auto. Ins. Co.

v. Campbell, 538 U.S. 408, 422 (2003) (stating that states only have jurisdiction over

activities that occur within their borders); Daniel Schwarcz, A Critical Take on Group

Regulation of Insurers in the United States, 5 U.C.

IRVINE L. REV. 537, 543-44 (2015)

(“Historically, many large insurance holding companies adapted to the mismatch

between state-based insurance regulation and the national and international scope of

their operations by incorporating individual insurance entities within multiple different

states.”); Schwarcz & Schwarcz, Regulating Systemic Risk, supra note 110, at 1633

(“[I]nsurance holding companies operate in numerous jurisdictions through many

different subsidiaries . . . .”).

2020] America on Fire 869

state by state potentially would address the correlated risk problem

associated with natural catastrophes because private insurers could

create a nationwide pool of insureds with diverse risk profiles. When an

insurer is restricted to selling insurance only to homeowners in a single

state, then the likelihood the insurer will have a non-diverse pool of

insureds increases. That, in turn, creates the correlated risk problem

associated with natural catastrophes. With those changes to the laws,

then perhaps private insurers would agree to insure natural

catastrophes. A more certain way to create a nationwide pool of insureds

for natural catastrophe coverage, however, would be to create a

nationwide governmental insurance program.

E. Insurance for Natural Catastrophes in Other Countries

In considering whether wildfires and other natural catastrophes

should be covered in America by private insurers versus a governmental

insurance program, one should consider the ways in which other

developed countries handle insurance for natural catastrophes.

Wildfires are not as big a problem in Europe as they are in America, so

they generally are treated like any other type of fire claim, as opposed

to categorized and analyzed as natural catastrophes.

237

Unlike in

America, however, other natural catastrophes that are of significant

concern, such as flooding, earthquakes, and landslides, typically are

covered by government-sponsored insurance programs in other

developed countries. To illustrate this point, the natural catastrophe

insurance programs in Australia, Belgium, France, New Zealand,

Norway, Spain, and Switzerland are considered.

1. Australia

In Australia, a number of “all-hazard” contingency plans have been

developed, complemented by a range of sub-plans developed by each

State and Territory.

238

Natural catastrophe coverage is generally

included in both personal and commercial property insurance.

239

All

Australian insurers generally offer coverage for a variety of natural

237

In 2018, for example, wildfires caused approximately $20 billion in damages

worldwide, with wildfires in the United States accounting for more than $18 billion of

that total. See A

ON, supra note 216, at 22.

238

ORG. FOR ECON. CO-OPERATION & DEV., FINANCIAL MANAGEMENT OF LARGE-SCALE

CATASTROPHES 20 (2008) [hereinafter OECD].

239

Id. at 43-44.

870 University of California, Davis [Vol. 54:817

catastrophes, including fire.

240

Natural disaster insurance is not,

however, compulsory and there are no fiscal or alternative incentives to

insure against these disasters.

241

The State and Territory governments,

along with help from the Australian government, protect citizens from

natural disasters.

242

In Australia, the Disaster Recovery Funding

Arrangements (“DRFA”) assists in providing partial reimbursement or

advance payment

243

for certain natural disaster expenditures,

specifically covering bushfires.

244

The DRFA is a joint Commonwealth-

State disaster recovery arrangement.

245

Once a natural disaster has

occurred, the State or Territory Government seeks reimbursement from

the Australian government after computing the financial assistance

needed, and affected individuals contact their respective State/Territory

emergency response agency for direct assistance.

246

A State is partially

reimbursed for eligible expenditures on catastrophe relief and recovery

240

NEIL WEEKS, FINANCIAL MANAGEMENT OF CATASTROPHES IN AUSTRALIA 4,

http://www.oecd.org/dataoecd/51/33/38120102.pdf (last visited Sept. 14, 2020)

[https://perma.cc/8VZS-UVPE] (providing a simplified breakdown of NDRRA

procedures).

241

OECD, supra note 238, at 44.

242

Id. at 42-43.

243

See AUSTL. GOV’T DEP’T OF HOME AFFAIRS, DISASTER RECOVERY FUNDING

ARRANGEMENTS 2018, at 2 (2018), https://www.disasterassist.gov.au/Documents/

Natural-Disaster-Relief-and-Recovery-Arrangements/drfa-factsheet.PDF [https://perma.

cc/RMX3-Z4WX] [hereinafter DRFA OVERVIEW] (“Advance payments are generally only

made in response to significant and extremely damaging natural disasters where the

cost is likely to be greater than the state can manage in the immediate to short-term.”).

244

See id. The DRFA covers disaster events that occurred on or after November 1, 2018,

whereas the Natural Disaster Relief and Recovery Arrangements (“NDRRA”) covers disaster

events that occurred before November 1, 2018. What is DRFA and NDRRA?, H

INCHINBROOK

SHIRE COUNCIL, https://www.hinchinbrook.qld.gov.au/community-environment/disaster-

and-emergency-information/what-is-ndrra/ (last visited Sept. 14, 2020)

[https://perma.cc/G2SJ-4ZJK]. The DRFA replaced the NDRRA in an attempt to reform

disaster funding in Australia. See Michael Kelly, QRA Ready for Disaster Funding Reform,

OCAL GOV’T ASS’N QUEENSL. (July 30, 2018), https://www.lgaq.digital/web/guest/notice-

board/-/asset_publisher/AHDhMHIxBm3z/content/id/9104547 [https://perma.cc/Y2AE-

EV69]. Reforms to Australia’s disaster funding included “improved autonomy for states and

territories in how they deliver works, the ability for local governments to use their own

labour, plant and equipment, and the ability to allocate efficiencies realised in delivery of

reconstruction programs to resilience and mitigation projects.” Id.

245

Disaster Recovery Funding Arrangements (DRFA), QUEENSL. RECONSTRUCTION

AUTHORITY, https://www.qra.qld.gov.au/funding/drfa (last visited Sept. 14, 2020)

[https://perma.cc/U6HZ-TMFV]. Australia also institutes State Disaster Relief

Arrangements (SDRAs), which are wholly state-funded programs that assists in

alleviating “personal hardship and distress.” Id.

246

See OECD, supra note 238, at 43.

2020] America on Fire 871

once its expenditures exceed a specific threshold.

247

The amount of

financial assistance the Australian government provides to States

depends upon the type of assistance provided and can reach up to

seventy-five percent of the States’ expenditures.

248

Eligible

reimbursements include grants for relief of “personal hardship and

distress,” such as the provision of emergency food, clothing and

accommodation, essential housing repairs, or the replacement of

essential household goods.

249

In addition to the DFRA, Australia implements both a Australian

Government Disaster Recovery Payment (“AGDRP”) and Disaster

Recovery Allowance (“DRA”) to provide financial assistance to

individuals.

250

The AGDRP is a one-time payment of $1000 for eligible

adult residents and $400 for eligible children residents of Australia who

have been affected by a major disaster in Australia or elsewhere.

251

The

Disaster Recovery Allowance is intended to assist “employees, small

business persons and farmers who experience a loss of income as a

direct result of a major disaster.”

252

Under the Disaster Recovery

Allowance, the Australian government provides eligible individuals

with up to thirteen weeks of short-term income relief.

253

In light of the

recent wildfire crisis that occurred in Australia, Australia’s approach to

247

WEEKS, supra note 240, at 6.

248

DRFA OVERVIEW, supra note 243, at 2-3.

249

WEEKS, supra note 240, at 6.

250

See Helen Portillo-Castro, Emergency Management and Disaster Resilience: A Quick

Guide, P

ARLIAMENT OF AUSTL. (July 16, 2019), https://www.aph.gov.au/About_

Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1920/Quick

_Guides/EmergencyManagementDisasterResilience#_ftn12 [https://perma.cc/J7F8-

9JUX]. Both programs are available to individuals through Australia’s Department of

Social Services. Id.

251

See Disaster Recovery Payment, AUSTL. GOV’T DEP’T HOME AFF.,

https://www.disasterassist.gov.au/Pages/disaster-recovery-payment.aspx (last updated

Apr. 16, 2020) [https://perma.cc/3553-URB2]. Whether a natural disaster is considered

“major” is determined by the Minister for Water Resources, Drought, Rural Finance,

Natural Disaster and Emergency Management. 1.2.6.20 Australian Government Disaster

Recovery Payment (AGDRP) – Description, Social Security Guide, A

USTL. GOV’T,

https://guides.dss.gov.au/guide-social-security-law/1/2/6/20 (last updated July 1, 2019)

[https://perma.cc/8VLR-EXFT].

252

Disaster Recovery Allowance, AUSTL. GOV’T DEP’T HOME AFF.,

https://www.disasterassist.gov.au/Pages/disaster-recovery-allowance.aspx (last updated

Apr. 16, 2020) [https://perma.cc/9PFA-J9Y8].

253

Id. Payments under the Disaster Recovery Allowance vary per year and are

determined by the Minister for Agriculture, Drought and Emergency Management. See

1.2.6.40 Australian Government Disaster Recovery Payment (AGDRP) – Description, Social

Security Guide, A

USTL. GOV’T, https://guides.dss.gov.au/guide-social-security-

law/1/2/6/40 (last updated Mar. 20, 2020) [https://perma.cc/6HYV-WXK5].

872 University of California, Davis [Vol. 54:817

insuring natural catastrophes undoubtedly was tested, and how it

performed will provide lessons for America in the coming months.

254

2. Belgium

Although the types of natural catastrophes that Belgium experiences

is limited compared to those in other countries, it nonetheless suffers

from some natural catastrophes — namely, storms, flooding, and

earthquakes.

255

The Intergovernmental Panel on Climate Change has

projected that Belgium could be exposed to more significant natural

catastrophes as a result of climate change in the future.

256

The Belgian system for insuring natural catastrophes is modeled after

the French and Spanish natural catastrophe insurance programs.

257

All

three systems focus on risk-spreading across the country, thereby

creating a system of solidarity among the citizens of each respective

country.

258

In Belgium, fire insurance policies that cover “simple

risks”

259

are also required to cover natural catastrophes.

260

As such,

because approximately ninety to ninety-five percent of the Belgian

254

See Jon Emont, James Glynn & David Winning, ‘If We Stayed Outside We Would Have

Died’: Australia’s Fires Devour Farms and Forests, W

ALL ST. J. (Jan. 12, 2020, 4:18 PM ET),

https://www.wsj.com/articles/if-we-stayed-outside-we-would-have-died-australias-fires-

devour-farms-and-forests-11578863913 [https://perma.cc/WU3X-GAQW]; Isabella Kwai,

Apocalyptic Scenes in Australia as Fires Turn Skies Blood Red, N.Y.

TIMES (Jan. 23, 2020),

https://www.nytimes.com/2019/12/31/world/australia/fires-red-skies-Mallacoota.html

[https://perma.cc/C7EX-G3AT].

255

See Véronique Bruggeman & Michael Faure, The Compensation for Victims of

Disasters in Belgium, France, Germany, and the Netherlands,

31 LOY. CONSUMER L. REV.

259, 268 (2019); see also OECD, supra note 238, at 48.

256

Bruggeman & Faure, supra note 255, at 268. See generally INTERGOVERNMENTAL

PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 2007 SYNTHESIS REPORT (Rajendra K.

Pachauri & Andy Reisinger eds., 2007), https://www.ipcc.ch/site/assets/

uploads/2018/02/ar4_syr_full_report.pdf [https://perma.cc/59G3-CMQ4] (discussing

the future global effects of climate change).

257

See Youbaraj Paudel, A Comparative Study of Public — Private Catastrophe Insurance

Systems: Lessons from Current Practices, 37

GENEVA PAPERS ON RISK & INS. 257, 271 (2012),

https://link.springer.com/content/pdf/10.1057/gpp.2012.16.pdf [https://perma.cc/YR2X-

TZTP].

258

Id.; see also Michael Faure & Véronique Bruggeman, Catastrophic Risks and First-

Party Insurance, 15 C

ONN. INS. L.J. 1, 46 (2008).

259

Simple risks are “any property or collection of goods where the insurance value is not

greater than EUR 1,445,715.” Insurance of Simple Risks Against Natural Catastrophe in

Belgium, L

LOYD’S (Dec. 28, 2014), https://www.lloyds.com/market-resources/market-

communications/regulatory-communications/regulatory-communications/regulatory-news-

articles/2014/12/insurance-of-simple-risks-against-natural-catastrophe-in-belgium

[https://perma.cc/T4GB-GZP9].

260

See Bruggeman & Faure, supra note 255, at 273.

2020] America on Fire 873

population has fire insurance for simple risks,

261

the vast majority of the

population is also insured for natural catastrophes. Coverage for natural

catastrophes is divided into four types: flooding, earthquakes, overflow

or impoundment of public sewers, and landslide or subsidence.

262

Under Belgium’s mandatory natural catastrophe coverage, insurers

compensate victims for “all direct damage to the insured property

caused by a natural catastrophe or by an insured peril that results

directly from it (notably fire, explosion, or implosion) . . . .”

263

Insurers

also provide coverage for damage to the insured property that arise from

“measures taken by a legally constituted authority to safeguard and

protect goods and persons as well as the clearance and demolition

expenses associated with reconstruction of the property . . . .”

264

Premium rates for mandatory natural catastrophe coverage are

calculated based upon two separate approaches.

265

Approximately fifty

percent of insurers price the insurance based upon only the value of the

property.

266

The other half of insurers take a traditional approach of

basing premiums upon the risk of loss presented by the individual

properties.

267

Regardless of an individual insurer’s approach, the

maximum deductible for natural catastrophe coverage is 610 Euros per

claim.

268

Because natural catastrophes can result in enormous damage and

losses, each individual insurer’s risk of loss is limited.

269

This limit is

calculated based on a formula for each event and for each individual

insurer based on the insurer’s premium income for fire coverage

concerning simple risks.

270

Once the insurer reaches the imposed limit,

the state-sponsored National Cash Registry for Disaster Damage

(“Disaster Fund”) covers losses above the insurer’s limit.

271

The Caisse

Nationale Des Calamites (“CNC”) administers the Disaster Fund and

deals directly with the insurance companies; individual consumers do

261

See Faure & Bruggeman, supra note 258, at 46.

262

See Bruggeman & Faure, supra note 255, at 273.

263

Id. at 274.

264

Id.

265

See Faure & Bruggeman, supra note 258, at 46.

266

See id.

267

See id. Premiums can be based upon, inter alia, the location of the property and

past damage to the property caused by a natural catastrophe. See id.

268

Id.

269

Id.

270

Id.

271

See Bruggeman & Faure, supra note 255, at 275.

874 University of California, Davis [Vol. 54:817

not need to interact with the CNC.

272

This type of coverage scheme

represents a loss-sharing arrangement between the private and public

insurance sectors. The overlapping arrangement applies only to

catastrophic risks and does not apply to other, non-mandatory

coverages.

273

The Disaster Fund’s exposure is, however, limited.

274

The

Disaster Fund will generally cover up to 700 million Euros for

earthquakes and up to 280 million Euros for other qualifying natural

catastrophes per event.

275

Scholars have found these upper limits

suitable, considering that the most devastating natural catastrophes to

hit Belgium between 1976 and 2005 ranged from 38 million to 74.7

million Euros.

276

Although the Disaster Fund historically has adequately compensated

victims of natural catastrophes, scholars nonetheless have criticized

some of its shortcomings. For example, scholars have criticized the

Disaster Fund because it imposes long wait times for financial

compensation and presents a complex application procedure.

277

Additionally, for policyholders to receive compensation for a particular

event, the Belgian government must label the event a natural disaster.

278

Specifically, an event must meet the following criteria: (1) the total

damage resulting from the event must be at least 1,239,467.60 Euros,

and (2) the average damage per family must be at least 5,577.60

Euros.

279

Notably, the Belgian system for catastrophic coverage largely

mirrors the French system, which is discussed next.

3. France

France is considered a leader for natural catastrophe insurance in

Europe.

280

France’s Natural Disaster Compensation Scheme (“CAT

NAT”) mandates comprehensive coverage for natural catastrophes

through first-party property insurance.

281

The purchase of property

insurance is voluntary, but approximately eighty-five percent of citizens

opt to purchase it.

282

Thus, although there is no requirement to procure

272

See OECD, supra note 238, at 49.

273

Id.

274

See id. at 49-50; Bruggeman & Faure, supra note 255, at 269-70.

275

See Bruggeman & Faure, supra note 255, at 274.

276

See id. at 274-75.

277

See, e.g., id. at 270.

278

Id.

279

Id. at 270 n.29.

280

Id. at 361 tbl.4.

281

See id. at 299.

282

Id. at 298-99.

2020] America on Fire 875

natural catastrophe insurance, if an individual purchases property

insurance, then the individual receives coverage for natural

catastrophes.

283

Policyholders, however, retain part of the risk via compulsory

deductibles.

284

These deductibles are required regardless of the terms

and conditions of the policy.

285

Deductible and premiums amounts are

updated periodically and can vary on a sliding scale.

286

The purpose of

the sliding scale is to encourage loss prevention measures in areas that

have not adopted loss prevention plans.

287

Policyholders who live in

municipalities that have adopted a loss prevention plan generally

receive premium discounts.

288

Coverage for a natural catastrophe is only triggered if the French

government considers the event a natural disaster.

289

In France, a

natural disaster is typically defined as “an accident that causes damage

which is unusual, unavoidable, and normally not insurable.”

290

Additionally, a causal link must be established between that natural

disaster declared and the damage suffered in order for the property to

be covered by the policy.

291

Unlike the Belgian system, which has been

criticized for its untimely compensation,

292

the French system requires

policyholders to file a claim with their insurer within ten days of the

French government declaring an event a natural disaster.

293

Further, the

insurer is required to make an advance payment to the insured within

two months of the claim and must make an offer of financial

compensation within three months of the claim being submitted.

294

In France, natural catastrophe insurance is backstopped by

government reinsurance through Caisse Centrale de Réassurance

283

Id. at 299; see also OECD, supra note 238, at 61-62.

284

OECD, supra note 238, at 62.

285

Id. Notably, aside from premiums and deductibles, coverage for catastrophic risks

follow the terms and conditions of the underlying policy. Id.

286

Id.

287

Id.

288

See Faure & Bruggeman, supra note 258, at 44.

289

Bruggeman & Faure, supra note 255, at 300. France mandates coverage for

natural catastrophes regardless of an insured’s vulnerability to natural disasters or

exposure to risk. Id.

290

Id. at 299; see also Michael Cannarsa, Fabien Lafay & Olivier Moréteau, France,

in FINANCIAL COMPENSATION FOR VICTIMS OF CATASTROPHES: A COMPARATIVE LEGAL

APPROACH 81, 86 (Michael G. Faure & Ton Hartlief eds., 2006).

291

OECD, supra note 238, at 62.

292

See supra Part IV.E.2.

293

Bruggeman & Faure, supra note 255, at 300.

294

Id. This general rule excludes agricultural damage. Id.

876 University of California, Davis [Vol. 54:817

(“CCR”).

295

The law allows private insurers to transfer the risk of

natural catastrophe losses to the CCR.

296

The CCR, in turn, pays an

annual premium to the government to obtain a governmental

guarantee.

297

One benefit of reinsuring with the CCR is the entity’s unlimited cover

and two different ways to reinsure with it — “quota share” and “stop-

loss.”

298

Under the quota-share scheme, the primary insurer shares a

proportion of premiums with the CCR in exchange for the CCR

covering a share of any losses.

299

Under the quota share approach, the

CCR typically provides fifty percent of the coverage, with private

insurers retaining fifty percent of the risk themselves.

300

Under the stop-

loss approach, the CCR covers losses above a primary insurer’s retained

risk amount. In other words, stop-loss reinsurance is only triggered if

the total amount of the insurer’s losses exceed an agreed-upon amount,

and the reinsurance treaties typically limit indemnity to a specific

amount.

301

On the other hand, the CCR’s stop-loss treaty with the

295

See OECD, supra note 238, at 63; Lorilee Medders, Kathleen McCullough & Verena

Jäger, Tale of Two Regions: Natural Catastrophe Insurance and Regulation in the United States

and the European Union, 30 J. INS. REG. 171, 184 (2011). CCR is a private reinsurance

company based in France that provides both public- and private-sector reinsurance. See The

Group, CCR, https://www.ccr.fr/en/l-entreprise-ccr (last visited Sept. 5, 2020)

[https://perma.cc/NZE9-RJWM]. For a comprehensive flow chart describing the

compensation scheme for natural catastrophes in France, see Natural Disasters Compensation

Scheme, CCR (Mar. 2, 2015), https://www.ccr.fr/en/-/indemnisation-des-catastrophes-

naturelles-en-france? [https://perma.cc/8XPW-88YE].

296

See Décret 82-706 du 10 août 1982 relatif aux opérations de réassurance des

risques de catastrophes naturelles par la caisse centrale de réassurance application de

l’article 4 de la loi 82-600 du 13 jullet 1982 [Decree 82-706 of August 10, 1982 on the

Reinsurance Operations for the Natural Catastrophe Risks by the Caisse Centrale de

Réassurance Application of Article 4 of the Act 82-600 of July 13, 1982], JOURNAL

OFFICIEL DE LA RÉPUBLIQUE FRANÇAISE [J.O.] [OFFICIAL GAZETTE OF FRANCE], Aug. 11,

1982, p. 2562; see also McAneney et al., supra note 186, at 4.

297

See Suzanne Vallet, Insuring the Uninsurable: The French Natural Catastrophe

Insurance System, in CATASTROPHE RISK AND REINSURANCE: A COUNTRY RISK MANAGEMENT

PERSPECTIVE 199, 206 (Eugene N. Gurenko ed., 2004).

298

See id. at 205-06.

299

Id. at 205; see also Julia Kagan, Quota Share Treaty, INVESTOPEDIA,

https://www.investopedia.com/terms/q/quota-share-treaty.asp (last updated Apr. 27,

2020) [https://perma.cc/ZR88-A22B] (“Quota share reinsurance allows an insurer to

retain some risk and premium while sharing the rest with an insurer up to a

predetermined maximum coverage.”).

300

McAneney et al., supra note 186, at 4; see He & Faure, supra note 221, at 220;

Medders et al., supra note 295, at 184.

301

Medders et al., supra note 295, at 184 n.24.

2020] America on Fire 877

government provides an unlimited governmental guarantee.

302

The

CCR’s premium for such coverage is a fixed amount regardless of the

number of losses in any given year.

303

4. New Zealand

Since the Insurance Council of New Zealand began tracking national

catastrophes in 1968, New Zealand has been subject to over 150 natural

catastrophes, costing citizens significant amounts of money due to the

resulting property damage.

304

New Zealand is particularly susceptible to

storms, volcanic events, earthquakes, and landslides.

305

The Earthquake

Commission (“EQC”) is the primary source for natural catastrophe

insurance for residential properties.

306

Introduced in 1993 under the

Earthquake Commission Act, it covers natural catastrophe losses for

residential properties.

307

It is owned by the government and it

administers the Natural Disaster Fund.

308

Residential property owners

who voluntarily buy fire insurance from private insurance companies

automatically get EQC coverage, with the premium added to the fire

insurance cost.

309

The policies include coverage for fires of catastrophic

consequences that are not man-made.

310

EQC coverage is compulsory

and collected on EQC’s behalf by the fire insurer if the property owner

insures the dwelling or its contents against fire damage.

311

The EQC

administers the natural disaster insurance, including processing claims

302

See He & Faure, supra note 221, at 220; McAneney et al., supra note 186, at 4;

Medders et al., supra note 295, at 184.

303

See Faure & Bruggeman, supra note 258, at 44; see also OECD, supra note 238,

at 63.

304

See Cost of Natural Disasters, INS. COUNCIL OF N.Z., https://www.icnz.org.nz/

natural-disasters/cost-of-natural-disasters/ (last visited Sept. 7, 2020) [https://perma.cc/

N954-VRMC].

305

OECD, supra note 238, at 83.

306

Id. at 85; see McAneney et al., supra note 186, at 3.

307

See Anastasia Telesetsky, Insurance as a Mitigation Mechanism: Managing

International Greenhouse Gas Emissions Through Nationwide Mandatory Climate Change

Catastrophe Insurance, 27 PACE ENVTL. L. REV. 691, 700 (2010) (first citing Earthquake

Commission Act 1993, Public Act 84, s 13 (N.Z.), http://www.legislation.govt.nz/

act/public/1993/0084/latest/DLM305968.html [https://perma.cc/8UEX-ZK57]; and

then citing EQC Insurance, EQC, http://www.eqc.govt.nz/insurance.aspx (last visited

Aug. 18, 2010) [https://perma.cc/NGQ5-FF8R]).

308

OECD, supra note 238, at 85.

309

Id.

310

Id.

311

Id.

878 University of California, Davis [Vol. 54:817

and acquiring reinsurance.

312

If, however, a homeowner is unable to

obtain coverage through a private insurer, then the homeowner may

apply for direct coverage from the EQC.

313

The EQC reviews

applications for direct coverage on a case-by-case basis, and the

applying homeowner must prove that it was unable to obtain coverage

through the private market.

314

If an insured procures insurance from

the EQC, then the policyholder pays premiums directly to the EQC, as

opposed to paying a private insurer that transfers the payment to

EQC.

315

The remainder of the program is unchanged for those that

contract directly with the EQC.

316

The premiums paid to the EQC are not actuarially calculated.

317

Instead, the premiums are based upon a percentage of the policyholder’s

fire insurance premium regardless of the policyholder’s risk of a natural

catastrophe loss because it is considered too difficult and costly to

attempt to create actuarially sound premiums regarding individual

policyholders’ risks of natural catastrophe losses.

318

For example, EQC

premiums cost twenty cents for every NZD 100, plus the goods and

services tax,

319

of homeowners’ insurance purchased by the

policyholder.

320

After a natural catastrophe triggers EQC coverage, a

policyholder has two years to notify the EQC of any damages from the

peril.

321

312

See Earthquake Commission Act 1993, pt 1, s 5 (N.Z.).

313

EQC Insurance Overview, EQC, https://www.eqc.govt.nz/what-we-do/insurance-

overview (last updated Mar. 2, 2020) [https://perma.cc/B67H-R875].

314

See id.

315

Id.

316

See id.

317

See Rob Risley, Comment, Landslide Peril and Homeowners’ Insurance in

California, 40 UCLA L. Rev. 1145, 1170 (1993).

318

Id. at 1169-70.

319

See Jim Chappelow, Goods and Services Tax (GST), INVESTOPEDIA,

https://www.investopedia.com/terms/g/gst.asp (last updated Apr. 6, 2020)

[https://perma.cc/W9YU-CBAS] (“The goods and services tax (GST) is a value-added

tax levied on most goods and services sold for domestic consumption. The GST is paid

by consumers, but it is remitted to the government by the businesses selling the goods

and services.”).

320

See EQC Insurance Overview, supra note 313.

321

EARTHQUAKE COMM’N, A GUIDE TO YOUR CLAIM WITH EQC 3 (2019),

https://www.eqc.govt.nz/sites/public_files/documents/EQCover/A%20guide%20to%20

your%20claim%20with%20EQC%20DL-July2019.pdf [https://perma.cc/QRT3-DBE4].

The EQC, however, advises homeowners to report a claim as soon as possible for the

EQC to most accurately assess the claim. See id.

2020] America on Fire 879

5. Norway

Each year, policyholders in Norway submit between 1000 and 1500

claims arising from natural catastrophes.

322

Most damage is due to

flooding, but Norway also experiences landslides, avalanches, and rock

falls.

323

Mandatory homeowners insurance covers natural catastrophes in

Norway.

324

The government establishes the aggregate limit of liability

for insurers for any natural disaster.

325

If someone who is impacted by

a natural catastrophe does not have insurance, then a state-sponsored

program — the National Scheme for Natural Damage Assistance (“the

Scheme”) — covers the loss.

326

Norway established the Scheme in order

to “compensat[e] damage caused by natural perils and promot[e] the

adoption of preventive measures against such perils.”

327

The Scheme is

not available if a loss is covered by insurance.

328

In 1980, Norway established the Norwegian Natural Perils Pool

(“NP”).

329

The purpose of the NP is to bridge the divide between the

NP’s participants and the Scheme.

330

All non-life insurance companies

that provide fire insurance coverage in Norway are required to

participate in the NP.

331

The NP reinsures its participants for natural

catastrophes in proportion to a participant’s contribution to the NP.

332

This contribution equates to the participant’s market share of fire

insurance in Norway.

333

Private insurers settle individual claims by the

322

See NORWEGIAN NAT. DISASTER FUND, A HISTORY OF THE NATURAL DISASTER REGIME 23

(2011), https://www.landbruksdirektoratet.no/no/dokumenter/publikasjoner/_attachment/

16927?_ts=134cd12b350 [https://perma.cc/T69V-2HNW].

323

Id.

324

See Rules of Norwegian Natural Perils Pool, 21 Dec. 1979, Act on Natural Damage

Insurance, 16 June 1989, No. 70, § 1.

325

See id. § 3.

326

See id. § 1.

327

OECD, supra note 238, at 86; see also The Norwegian Natural Perils Pool,

ORWEGIAN NAT. PERILS POOL, https://www.naturskade.no/en/the-norwegian-natural-

perils-pool/ (last visited Sept. 6, 2020) [https://perma.cc/A8GC-Q3YE].

328

The Norwegian Natural Perils Pool, supra note 327.

329

See id.; see also OECD, supra note 238, at 87.

330

The Norwegian Natural Perils Pool, GREEN FIN. PLATFORM,

https://greenfinanceplatform.org/financial-measures-database/norwegian-natural-perils-

pool (last visited Sept. 6, 2020) [https://perma.cc/9979-MDR9].

331

OECD, supra note 238, at 87; see also The Norwegian Natural Perils Pool, supra

note 327. As of 2008, approximately eighty insurance companies were members of the

NP. See OECD, supra note 238, at 87.

332

See The Norwegian Natural Perils Pool, supra note 327.

333

Id.

880 University of California, Davis [Vol. 54:817

terms of the relevant policy and are reinsured proportionally through

the NP.

334

Premiums for natural disasters are set by the NP and are

based on the individual consumer’s total fire coverage.

335

The consumer

pays premiums for natural catastrophes directly to the primary insurer

under their fire insurance policy.

336

If the premiums collected by the

insurer exceed the insurer’s pooled share of the NP, the insurer retains

the remaining sum to use for future natural perils claims.

337

6. Spain

In Spain, floods, earthquakes, and tsunamis are the most frequent

natural catastrophes.

338

Like the natural catastrophe coverage regime in

France, insurance is generally optional in Spain, but some specific lines

of insurance require mandatory extraordinary risk coverage.

339

These

lines of insurance include fire and natural events, land vehicles, railway

vehicles, business interruption, and life.

340

Spain’s public funding for natural catastrophes operates on three basic

principles: compensation, solidarity, and cooperation.

341

The principle

of compensation comprises compensation based on risks and

geographic location, and it seeks to compensate constituents swiftly.

342

Like France, Spain’s natural catastrophe insurance regime also focuses

on solidarity between citizens.

343

The solidarity principle requires that

all insureds “contribute, in proportion to their respective insured

capital, to the endowment of a common fund available to those of the

insured[s] who may be affected by the natural hazards covered.”

344

Lastly, the principle of cooperation encourages proper communication

334

See id.

335

Id.

336

Id.

337

Id.

338

See OECD, supra note 238, at 91.

339

See id. at 93.

340

Id.

341

CONSORCIO DE COMPENSACION DE SEGUROS, NATURAL CATASTROPHES INSURANCE

COVER. A DIVERSITY OF SYSTEMS 140 (2008), https://www.consorseguros.es/web/

documents/10184/48069/CCS_Natural_Catastrophes_Insurance_Cover.pdf/d7cf67cc-

9591-476b-87d9-728e6a57ca60 [https://perma.cc/7NPQ-PC2G] [hereinafter N

ATURAL

CATASTROPHES INSURANCE COVER].

342

See id.

343

See Paudel, supra note 257, at 271; see also NATURAL CATASTROPHES INSURANCE

COVER, supra note 341, at 140.

344

NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 140.

2020] America on Fire 881

between the private market and public funding for the purpose of

appropriately insuring citizens.

345

Against the backdrop of these three principles, Spain operates a state-

sponsored insurance program known as the Consorcio de Compensación

de Seguros (“CCS”).

346

The CCS is a public business organization that

covers both natural catastrophes and unnatural catastrophes (e.g.,

terrorism).

347

If an extraordinary risk is not specifically covered by

another insurance policy or the other insurer cannot pay the claim, then

the CCS pays the claim. In 2009, the CCS paid 541 million Euros for

losses stemming from Storm Klaus, and in 2016, the CCS paid 120

million Euros for flood damage.

348

The CCS collects premiums as compulsory contributions known as

“Consorcio charges.”

349

Consorcio charges are collected from private

insurers that charge premiums on the underlying insurance policies.

350

The private insurers are able to retain a five percent collection fee for

any collected Consorcio charges.

351

The charges apply nationally and

are fixed rates that depend upon the type of coverage.

352

For example,

the CCS will generally charge 0.08-0.09 percent per thousand insured

for homes.

353

For personal injury lines, the CCS will generally charge

0.005 percent per thousand insured.

354

The CCS places the accumulated

funds in a stabilization reserve, and it assumes the role of insurer for the

extraordinary risks associated with natural catastrophes. The CCS is not

345

See id.

346

McAneney et al., supra note 186, at 3; see also THOMAS VON UNGERN-STERNBERG,

THE BENEFITS OF INTRODUCING A MANDATORY STATE HURRICANE INSURANCE SCHEME IN

FLORIDA 4 (2009), http://www.unil.ch/de/files/live/sites/de/files/working-papers/09.10.

pdf [https://perma.cc/85TU-4NL2].

347

See VON UNGERN-STERNBERG, supra note 346, at 4; see also OECD, supra note 238,

at 92; McAneney et al., supra note 186, at 3.

348

Spain: Consorcio Charges, LLOYD’S (Jan. 25, 2017), https://www.lloyds.com/

market-resources/tax/tax-news/2017/spain-consorcio-charges [https://perma.cc/5SKW-

RVPY].

349

Id.

350

Id.

351

Paudel, supra note 257, at 266; see also Belén Soriano Clavero, The New Rate for

Extraordinary Risks with the Consorcio de Compensación de Seguros from 01/07/2018,

ONSORSEGUROS, http://www.consorsegurosdigital.com/en/numero-08/front-page/the-

new-rate-for-extraordinary-risks-with-the-consorcio-de-compensacion-de-seguros-

from-01-07-2018 (last visited Oct. 17, 2020) [https://perma.cc/KN4E-4NEF].

352

OECD, supra note 238, at 94.

353

NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 143; Clavero, supra

note 351.

354

NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 143.

882 University of California, Davis [Vol. 54:817

reinsured, but the program is backed by an unlimited governmental

guarantee even though the guarantee has never been used.

355

The payment of losses by the CCS does not depend upon a declaration

of an official disaster by the state.

356

Further, coverage under the CCS is

not determined by a minimum or maximum amount of quantitative

damage.

357

Instead, coverage is triggered whenever an event is deemed

an “extraordinary risk.”

358

Extraordinary risks include “extraordinary

floods, earthquakes, tsunamis, volcanic eruptions, atypical cyclonic

storms and fall of meteorites.”

359

Because the Spanish government need

not determine whether an event is considered a disaster, any

policyholder who suffers damage from an extraordinary risk may

recover its losses, subject to any applicable exclusions.

360

7. Switzerland

In Switzerland, the most common natural catastrophes are

avalanches, floods, and landslides.

361

Coverage for natural catastrophes

is mandatorily included in fire insurance policies.

362

Consequently, over

ninety percent of Swiss citizens are insured for natural catastrophes.

363

This mandatory coverage includes protection against numerous natural

catastrophes.

364

Notably, however, the mandatory coverage does not

include coverage for damage caused by earthquakes.

365

The insurance

schemes vary, however, among the twenty-six cantons in the country,

thereby creating two main systems of coverage.

366

355

OECD, supra note 238, at 92-93; see also McAneney et al., supra note 186, at 5

(noting that the Consorcio “has a large and growing surplus and its Government

guarantee has not been called upon”).

356

See NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 141; Telesetsky,

supra note 307, at 699.

357

OECD, supra note 238, at 93; see also NATURAL CATASTROPHES INSURANCE COVER,

supra note 341, at 141.

358

See OECD, supra note 238, at 93.

359

NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 141.

360

See id. at 141-42.

361

Id. at 147; see also OECD, supra note 238, at 94.

362

OECD, supra note 238, at 94.

363

See Paudel, supra note 257, at 265.

364

See OECD, supra note 238, at 94 (“Under Swiss federal law, the coverage of flood,

inundation, windstorm, hail, avalanche, snow pressure, rock and stone fall, and

landslide (but not earthquake) is mandatorily included in the scope of fire insurance

for buildings and chattels.”).

365

Id.; see also NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 148.

366

See OECD, supra note 238, at 94.

2020] America on Fire 883

In seven of the cantons,

367

the insurance is sold by competing private

insurance companies.

368

In these cantons, private insurers thereby

compete for consumers in an open market. Nonetheless, private

insurers have formed the Natural Perils Pool (“the Pool”) in those

cantons.

369

The Pool operates as a typical risk-sharing model with

participants pooling funds to cover damage arising from natural

catastrophes.

370

In the other nineteen cantons, cantonal building insurance

companies, which are institutions governed by public law that hold a

monopoly in their respective cantons, sell the insurance.

371

Like the

other seven cantons, cantonal companies participate in a collective

reinsurance pool, the Intercantonal Reinsurance Union (“IRV”),

372

thereby pooling their funds to share the risk of any losses arising out of

natural catastrophes.

373

For especially disastrous catastrophes, the IRV

and cantonal insurers trigger the Intercantonal Community for Risks

from Natural Elements (“IRG”).

374

The IRG is another risk-sharing

method by which each cantonal insurer contributes to the fund, which

provides supplementary coverage for natural disasters.

375

The IRG is

triggered when a cantonal insurer exceeds its loss limit.

376

Each

insurer’s loss limit is fixed depending on the insurer’s capital.

377

When

triggered, the IRG provides supplementary coverage up to 750 million

Swiss Francs.

378

For events that require assistance from the IRG, the

payment mechanism is typically broken into three layers.

379

The IRV

will pay the first twenty-five million Swiss Francs.

380

Cantonal insurers

367

The seven cantons include Geneva, Uri, Schwyz, Ticino, Appenzell Inner Rhodes,

Valais, and Obwalden. Id.

368

See id.

369

Id.

370

Id. The Pool is reinsured by the private Swiss Natural Hazard Pool (“SVV”). See

Paudel, supra note 257, at 266. The SVV reinsures natural risks under a stop-loss

agreement. See N

ATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 152.

371

See OECD, supra note 238, at 94-95.

372

Like the SVV, the IRV reinsures natural risks under a stop-loss agreement.

ATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 150.

373

See OECD, supra note 238, at 95; see also Paudel, supra note 257, at 266.

374

See NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 150.

375

Id. at 151.

376

Id.

377

Id.

378

Id.

379

See id.

380

Id.

884 University of California, Davis [Vol. 54:817

pay next 500 million Swiss Francs.

381

External reinsurers pay the

remaining 225 million Swiss Francs, with the IRV paying the premiums

for such reinsurance.

382

Of the nineteen cantons insured through cantonal building insurers,

only Nidwald is covered under a State guarantee.

383

In Glarus, coverage

may be provided by both private insurers and cantonal insurers.

384

Premiums are charged at a uniform rate determined by the Federal

Office of Private Insurance.

385

Deductibles for damage to homes range

from ten to fifteen percent of the damage.

386

Additionally, cantonal insurers separately cover damage arising from

earthquakes of at least a level VIII intensity based on the MSK intensity

scale.

387

Notably, coverage for earthquakes in Switzerland is not

insurance or indemnification in their colloquial understandings. Rather,

cantonal insurers contribute voluntary funds to the Schweizerischer

Pool für Erdbebendeckung (“SPE”).

388

The cantonal insurers do not pay

additional premiums on these voluntary funds. The SPE serves the sole

purpose of charitable coverage for policyholders who are subject to

damage from earthquakes and would otherwise be uninsured.

389

The

SPE reinsures with the IRV and other private insurance companies.

390

The deductibles in earthquake claims are ten percent of the insured

value, and the SPE will pay a minimum of 50,000 Swiss Francs.

391

In sum, natural catastrophes are covered by many governmental

insurance programs throughout the developed world and some

governmental insurance programs have been proven to work in

America (e.g., Florida’s Citizens’ homeowners insurance program), so

such programs are demonstrably feasible. With Americans facing

various natural catastrophes exacerbated by climate change, such as

wildfires in the West, tornadoes in the South, Midwest, and East,

381

Id.

382

Id.

383

Id. at 149.

384

Id.

385

See Special Requirements for Insurance Class B8: “Fire and Natural Forces,” SWISS

FED. DEP’T FIN. (Jan. 1, 2006), https://www.finma.ch/FinmaArchiv/bpv/download/e/

Spez_Merkblatt_ES_E.pdf [https://perma.cc/4RES-HMN4].

386

NATURAL CATASTROPHES INSURANCE COVER, supra note 341, at 149.

387

Id. at 150.

388

Id. Unlike the other eighteen cantons, Zurich covers earthquakes independent of

the SPE. Id. There, the canton insurer provides earthquake coverage up to one billion

Swiss Francs. Id.

389

See id.

390

Id.

391

Id.

2020] America on Fire 885

hurricanes in the South and East, and flooding throughout the country,

it may be time for America to consider following other developed

countries’ leads by covering natural catastrophes under a governmental

insurance program.

ONCLUSION

America is on fire. In recent years, due to past forestry management

practice, climate change, and urban encroachment into wildlands,

wildfires in the West have reached unprecedented levels of frequency

and damage. Private insurers are fleeing the market. This wildfire crisis

should be addressed on multiple fronts: reducing the chances of

wildfires occurring, making homes in the paths of wildfires fire

resistant, and filling the insurance void being created by private

insurers’ unwillingness to insure homes in the paths of wildfires.

To fill the insurance void, a governmental insurance program that

covers wildfires, as well as other natural catastrophes, is an option

whose time may have arrived. Many developed countries around the

world cover natural catastrophes through governmental insurance

programs. The government can raise the capital needed to cover the

correlated risks that natural catastrophes present — both pre- and post-

loss — which private insurers contend they are unable to do when they

attempt to justify their refusals to cover such risks. Bundling coverage

for the various natural catastrophes (hurricanes, flooding, landslides,

wildfires, etc.) in a property policy sponsored by the federal government

also would eliminate the adverse selection and correlated risk concerns

presented by standalone policies that cover only a single peril. Such a

program also would address the underinsured and uninsured problem

in America currently presented by natural catastrophes because most

homeowners would be required by their banks to have such coverage.