Catastrophic Fire Losses in Colorado An Evolving Landscape

• Date: 01 October 2023
• Author: Tracy Garceau, Katherine Goodrich, and Karen Hannah Wheeler

Catastrophic Fire Losses in Colorado An Evolving Landscape By Tracy Garceau, Katherine Goodrich, and Karen Hannah Wheeler GETTY IMAGES/THE IMAGE BANK/ GAYLON WAMPLER 34 THE BRIEF ❭ Fall 2023 PUBLISHED IN THE BRIEF, VOLUME 53, NUMBER 1, FALL 2023. © 2024 BY THE AMERICAN BAR ASSOCIATION. REPRODUCED WITH PERMISSION. ALL RIGHTS RESERVED. THIS INFORMATION OR ANY PORTION THEREOF MAY NOT BE COPIED OR DISSEMINATED IN ANY FORM OR BY ANY MEANS OR STORED IN AN ELECTRONIC DATABASE OR RETRIEVAL SYSTEM WITHOUT THE EXPRESS WRITTEN CONSENT OF THE AMERICAN BAR ASSOCIATION. Fire has long shaped Colorado’s landscape. Colorado’s history with wildfire predates statehood: oral tradition from Utes describes intentionally lit fires in the San Juan Mountains to clear vegetation for easier hunting; and the Plains Indians, including the Cheyenne in eastern Colorado, set frequent, low-intensity burns to encourage grass shoots to grow and attract bison to the area. 1 After statehood, Colorado initially adopted a policy of aiming for total fire exclusion. 2 While popular opinion now accepts that controlled burns can help prevent large destructive blazes, forest undergrowth accumulated during Colorado’s years of fire suppression. Colorado’s population has also swelled, doubling in wildland-urban interface areas (communities that straddle forested and urban areas) between 1990 and 2020. 3 Combined with climate change, Colorado residents and insurers face increased risks of large, costly blazes today. In 2020, Colorado experienced an extremely dry summer. The Cameron Peak Fire ignited just outside Fort Collins in August, then flared up on Labor Day weekend and in mid-October. The Cameron Peak Fire burned 469 structures, including 224 houses. In October 2020, the East Troublesome Fire ignited in Arapaho National Forest near Kremmling and then, propelled by high winds, jumped the Continental Divide and forged a destructive path into Rocky Mountain National Park north of Grand Lake. In the process, it engulfed 366 homes and 214 structures, killed two people, and surprised locals, who are more used to snowfall in October than high fire danger. 4 Then, in December 2021, Colorado faced another blaze: the Marshall Fire. The Marshall Fire was the most destructive in Colorado history. It killed many pets and two people and incinerated 1,084 residential structures within hours. 5 The Marshall Fire is concerning because it occurred squarely in the front range, close to the Boulder area in Louisville and Superior. Historically, fires are anticipated in Colorado’s forested, mountainous terrain. Now, even suburban communities are proving vulnerable to wildfire due to a combination of climate change, overgrown forest, and increased development across the West. 6 In the wake of the Marshall and East Troublesome Fires, Colorado residents demanded help from the state. Colorado regulators and policymakers face a tough balancing act: they recognize that insurance plays a crucial role in Colorado’s economic landscape and are attempting to balance the desire to keep an active and thriving property insurance market in the state with the interest in protecting policyholder rights and pushing for more legislation to improve Coloradans’ experience with their insurers—and thus Colorado’s resilience in the face of a changing climate. Insurance Contributes to Safety, Security, and Stability Safety and security. Insurers are financial first responders in that they expedite the recovery of claimants and beneficiaries by adjusting the claim and paying in a timely manner. 7 Insurers are risk mitigators through their analysis and dissemination of knowledge regarding safety concerns, such as the negative effects of smoking and opioids and the effectiveness of fire suppression systems along with upgrade incentives, to name a few. As an example of how insurers can contribute to safety, some insurers are even forcing change on police departments over concerns about police misconduct. 8 Insurance companies already require their policyholders to perform some wildfire risk mitigation and are even pulling out of high-wildfire-risk areas. 9 Could insurance companies start incentivizing other changes from their customers to reduce their risk exposure due to the impacts of climate change? Economic and financial stability. Insurance alone accounts for 3.1% of the United States’ gross domestic product (GDP) and is the 11th largest contributor to the U.S. GDP. As of 2021, the U.S. insurance industry was worth $1.4 trillion (in written net premiums, without accounting for health insurance), with property and casualty accounting for approximately 48% of that figure. 10 In Colorado, citizens spent more than $51 billion on insurance premiums in 2021, with homeowners insurance accounting for 6.4% and commercial insurance accounting for 2% of that figure. 11 Insurers help stabilize the economy, especially during crises, by making a positive contribution to the GDP. 12 They also stabilize peoples’ lives; after catastrophic losses such as the Marshall and East Troublesome Fires, people turn to their insurance companies to help them rebuild. Without proper coverage and resources, it can be tough to stay in the impacted community. Rising Risks and Underinsurance Climate change is generating stronger and more frequent natural disasters. The human and economic costs of climate-related natural disasters are increasing steadily in both frequency and severity in the United States. Colorado is experiencing a perfect storm of increased climate risks and rising building costs. Insurance companies are accordingly increasing premiums, with many Coloradans unable to find coverage. Underinsurance is insurance coverage that leaves a person with a substantial risk for out-of-pocket expenses because the coverage limits do not cover the full cost of a total loss. 13 Approximately 60% of Americans are underinsured with their homeowners insurance. 14 Colorado has experienced multiple large wildfire losses since 2020, including the Marshall and East Troublesome Fires. In the wake of the Marshall Fire, the Colorado Division of Insurance (DOI) conducted a study into the number of Marshall Fire victims who were underinsured. 15 The DOI looked at 951 lost homes that were underinsured when considering estimated costs of $250, $300, and $350 per square foot for rebuilding. The DOI found that at $250 per square foot, 344 out of the 951 policies (36%) were underinsured, and it estimated the average amount of underinsurance per policy at $98,967. 16 At $300 per square foot, 523 out of the 951 policies (55%) were underinsured, and the DOI estimated that the average amount of underinsurance per policy was $164,855. 17 ambar.org/tips ❬ THE BRIEF 35 PUBLISHED IN THE BRIEF, VOLUME 53, NUMBER 1, FALL 2023. © 2024 BY THE AMERICAN BAR ASSOCIATION. REPRODUCED WITH PERMISSION. ALL RIGHTS RESERVED. THIS INFORMATION OR ANY PORTION THEREOF MAY NOT BE COPIED OR DISSEMINATED IN ANY FORM OR BY ANY MEANS OR STORED IN AN ELECTRONIC DATABASE OR RETRIEVAL SYSTEM WITHOUT THE EXPRESS WRITTEN CONSENT OF THE AMERICAN BAR ASSOCIATION. TIP : Monitoring and subscribing to Colorado Division of Insurance updates can help ensure that policyholders have a better claims experience. At $350 per square foot, 639 out of the 951 policies (67%) were underinsured, and the DOI estimated that the average amount of underinsurance per policy was $242,670. 18 How did this underinsurance occur? During the application process, software programs are used to recommend dwelling limits based on inputs from the agent or broker. 19 Inflation can render these limits drastically inadequate, particularly after a catastrophic loss, which squeezes local labor and materials markets. 20 Policyholders also don’t necessarily have the expertise to understand how much it would cost to repair or replace. Some don’t even understand that the limit of their insurance should be adequate to completely rebuild their home and replace their contents after a total loss. Some economic motivators drive underinsurance as well. Homeowners with lower limits will generally have lower premiums. Underinsuring can be profitable for insurers and particularly for brokers and agents because customers tend to seek out those lower premiums and most will likely not ever sustain a total loss. 21 Theories of Relief for Colorado’s Underinsured Negligent procurement. An insurance agent has a duty to “refrain from affirmative fraud, not to watch out for all rights of the insured and inform the latter of them.” Consistent with this general rule, an insurance agent or company does not have a common law duty to ensure complete protection to the policyholder or to recommend higher policy limits, but only has a duty to exercise a reasonable duty of care. 22 A negligent procurement claim must be brought within two years after the plaintiff knew or should have known both the injury and its cause “by the exercise of reasonable diligence.” 23 If the agent procured the insurance decades previously, the insured may not be able to bring the claim. Breach of fiduciary duty. A breach of fiduciary duty claim requires a special relationship. Whether a special relationship exists turns on whether there is “entrustment,” as set forth in the Colorado Court of Appeals case Kaercher v. Sater . 24 Although a Colorado court has yet to describe a test for entrustment, the Kaercher court cited to the Indiana Court of Appeals case Parker ex rel. Parker v. State Farm Mutual Automobile Insurance Co. 25 The entrustment factors identified in Parker include “exercising broad discretion to service the insured’s needs; counseling the...