Dozens Died in California Wildfires. Why Is the State Forcing Insurance Companies To Ignore Risks?

“While wildfires are a common occurrence in the Golden State, 2020 is wrapping up to be the harshest in modern history, a result of a mix of climate change, poor forest management, and citizens’ insistence on moving into wooded areas prone to fires.

Unfortunately, California seems hellbent on prohibiting market solutions from fixing that third problem. The state’s insurance commissioner has announced that the state is mandating that companies that provide fire insurance cannot drop coverage of properties within the areas affected by wildfires. This is the second year in a row he has done so.

This counterintuitive announcement by Commissioner Ricardo Lara is the result of a state law passed in 2018 that forbids insurance companies from canceling or refusing to renew policies of a residential property for a year after a declaration of emergency on the basis of the property being in an area in which a wildfire has occurred. Lara was actually the primary sponsor of the bill when he was a state senator, so while his hands are technically tied here, he’s directly responsible for this legal state of affairs.”

“The marketplace has efficient tools for discouraging building homes in dangerous environments. When insurance companies refuse to insure people who live in places prone to fire, flooding, or other natural disasters, the market is sending consumers a very important message: “It’s not safe to live here. If you make the decision to ignore this warning, we’re not going to be fiscally responsible for your choices.”

Lara’s law subverts these market signals and turns insurance into, essentially, a form of state-enforced financial subsidy. The consequences for bad outcomes are both likely and well-known. Requiring insurance companies to continue covering these properties will encourage people to continue to live and build in places where it’s dangerous. Again, 31 people died as a result of these fires, and Lara’s primary interest is making sure that homeowners apparently don’t learn anything.”

“People who decide to move to or live in areas that are at risk of wildfire should be free to do so, but it’s not the role of the government to shield them from an appropriate market assessment of the risks of doing so. California’s actions are actually fostering dangerous housing choices—ones which may lead to more deaths down the line—by getting in the way of very important market signals.”

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