This article was co-authored by Iwona McCollor, Counsel of E&O Claims for Bowhead Specialty
The recent wildfires in Los Angeles serve as a stark reminder of the importance of adequate property and fire insurance, particularly for homeowners in high-risk areas. In the devastating aftermath, many homeowners are discovering that their insurance policies fall short of the actual costs required to rebuild. As a result, litigation is increasingly targeting insurance agents and brokers, alleging negligence for failing to recommend or secure sufficient coverage, otherwise known as underinsurance.
Insurance professionals play a crucial role in advising clients on appropriate coverage levels. However, when catastrophic events expose gaps in policy limits, agents and brokers may find themselves facing errors and omissions (E&O) claims. Understanding the legal landscape, market limitations, and potential defenses is essential to mitigating liability.
E&O Exposure for Insurance Agents and Brokers
Insurance agents and brokers are generally expected to exercise reasonable care, diligence, and judgment in procuring coverage for clients. Insurance professionals typically are not considered in breach of this duty, unless they:
- Misrepresent the nature, extent, or scope of coverage being offered or provided.
- Fail to act on a client's specific request for coverage beyond what is initially proposed.
- Assume an additional duty through express agreement or by holding themselves out as specialists in a particular insurance market. HUB Int'l Ins. Servs. v. Morales, 224 Cal.App.4th 581, 584 (2014).
In the current climate, insurance professionals may still face E&O claims as homeowners desperately search for a way out of their financial hardships. It is no secret that they often turn to litigation to recover uninsured losses, arguing that their insurance representatives failed to provide adequate guidance. Most insurance agents and brokers stay within ethical and legal parameters, but sometimes underinsurance still occurs. The common reasons for underinsurance may include:
- Failure to accurately assess property values and rebuilding costs.
- Overlooking unique property features that impact replacement value.
- Not advising clients on available coverage options, including excess and surplus lines.
This raises a significant question: Are agents and brokers responsible for underinsurance, or was the coverage gap an unavoidable consequence of market conditions?
Coverage Challenges for High Value Homes in Fire Zones
High-value properties along the California coastline and beyond face particular challenges in securing sufficient insurance. Many traditional insurers limit coverage or refuse to underwrite policies in fire-prone areas, forcing homeowners to seek coverage through the California FAIR Plan, the state's insurer of last resort. However, the FAIR Plan imposes strict coverage caps of $3 million for residential properties and $20 million for commercial properties per location.i
For homeowners with properties exceeding these limits, substantial coverage gaps can arise. For example, if a home is valued at $5million, the FAIR Plan's cap leaves a $2 million shortfall. In such cases, securing excess and surplus lines insurance is crucial to achieving full replacement cost coverage.
Market Constraints v. Broker Negligence
A key defense for brokers facing E&O claims is demonstrating that adequate coverage was unavailable in the market. In recent years, insurers have scaled back on policies in wildfire-prone regions, leading to higher premiums, stricter underwriting guidelines, and coverage limits that do not reflect true replacement costs.
Brokers can argue that even if they had recommended higher limits, clients may not have been able to secure or afford the coverage due to market constraints. This weakens claims that agents and brokers are solely responsible for underinsurance. Additionally, homeowners routinely reject higher coverage options due to cost. Clients failing to update policies to reflect home improvements or increased property values may also contribute to underinsurance. By documenting discussions recommendations, and declined coverage options, brokers can strengthen their defense against E&O claims.
The Fallout: Insurance Market Instability
The recent wildfires have placed unprecedented strain on California's insurance market, with insured losses estimated between $28 billion and $75 billion. This surpasses even the 2018 Camp Fire, which resulted in $12.5 billion in losses. The broader economic impact, including property damage and rebuilding costs, could reach $275 billion, making these fires the costliest natural disaster in U.S. history.ii
In response insurers are raising premiums significantly, imposing stricter policy terms, and reducing their footprint in high-risk areas. They are also seeking regulatory approval for rate hikes. State Farm requested a 22% increase in homeowners' insurance rates.iii These trends create systemic risks for homeowners, businesses, and insurers alike, further complicating the availability of comprehensive coverage.
The California FAIR Plan: A Temporary Safety Net
As private insurers retreat, more homeowners are turning to the California FAIR Plan, which has seen its exposure surge from $153 million in 2020 to $458 billion in 2024.iv
The problem is the FAIR Plan's reserves- currently at $200 million with $2.5 billion in reinsurance, may be insufficient to cover massive claims from recent fires. To stabilize the fund, Insurance Commissioner Ricardo Lara recently approved a $1 billion assessment on member insurers. His order requires the following:
- Directing the FAIR Plan to increase staff for claims handling.
- Requiring the use of all available reserves and reinsurance funds.
- Protecting consumers form bearing the full costs of assessments.
- Maintaining a healthy reserve fund as future wildfire seasons loom.v
While these measures offer a temporary solution, long-term stability will require structural policy reforms and increased investment in wildfire mitigation.
New Regulatory Framework: Expanding Coverage in High-Risk Areas
In a California first, Commissioner Lara has introduced a new regulatory framework that requires insurers to issue policies in wildfire-prone regions based on market share. Smaller insurers must expand policy offerings in high-risk areas. Wildfire mitigation efforts are now factored into catastrophe models, rewarding homeowners for fire-resistant upgrades. A public catastrophe model is in development to improve risk assessment transparency. These regulations aim to stabilize the market while ensuring that homeowners in high-risk areas have access to essential coverage.vi
Looking Ahead
The Los Angeles wildfires have highlighted the vital role of insurance agents and brokers in ensuring homeowners secure adequate coverage. However, as the frequency and severity of wildfires increase, market limitations, not broker negligence, are often the primary cause of underinsurance. To mitigate E&O risks, insurance professionals should take the following actions:
- Thoroughly assess property values and rebuilding costs.
- Clearly communicate coverage limitations to clients.
- Document all recommendations and declined options.
- Stay informed on regulatory changes and market shifts,
As the insurance landscape continues to evolve, proactive risk management will be key for both homeowners and the professionals who serve them. By adapting to new regulations and maintaining high standards of care, agents and brokers can better protect themselves from litigation while ensuring their clients are properly covered.
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i California Department of Insurance; FAIR Plan.
ii The LA fires have a shocking price tag- and we will all have to pick up the tab. Irfan, Umair. Vox (updated February 12, 2025).
iii Id.
iv Id.
v Commissioner Lara Takes Action to Ensure FAIR Plan Can Continue Paying Consumer Claims after the Southern California Wildfires (February 11, 2025).
vi Commissioner Lara Issues Landmark Regulation to Ensure Insurance Access for Californians Amid Growing Climate Risks (December 20, 2024).