Wildfires have long been a catastrophic force in California, with recent years seeing unprecedented destruction.

The 2018 Camp Fire, for example, was determined to be started by Pacific Gas & Electric Co.'s power lines and resulted in PG&E pleading guilty to 84 counts of involuntary manslaughter, in 2020 in the Superior Court of California, for having caused that fire.[1]

That fire was the deadliest and, at that time, the most expensive wildfire in California state history, causing more than $16 billion in damages. Facing billions in wildfire liabilities was likely a significant factor in PG&E's decision to file for bankruptcy on Jan. 29, 2019.

As climate conditions worsen, Texas is also experiencing increased wildfire risk, as seen in devastating fires like those in Bastrop County in 2011. While the scale of wildfires in Texas has historically been lower than in California, the impact of California's insurance crisis could have significant consequences for Texas policyholders.

This article examines the implications of California's wildfire insurance crisis for Texas, including potential shifts in coverage availability, regulatory differences and how Texas insurers may react to a major wildfire event.

The Impact of California Wildfires on Insurance Markets

California's wildfire insurance market has been fundamentally altered by increasing fire frequency and severity, leading insurers to adapt in a variety of ways.

Reinsurance, which helps spread risk among insurers, has become significantly more expensive due to massive wildfire losses in California in recent years.

In 2021 alone, global reinsurers faced billions in wildfire-related claims, contributing to reinsurance price hikes and tightened availability of reinsurance for insurers operating in high-risk areas.

Even assuming the reinsurance can be obtained and placed, increased reinsurance costs will lead to higher insurance premium costs for homeowners and businesses. As insurers grapple with these rising costs, some insurers announced their intent to try to reduce levels of risk exposure to California.[2]

Over the last few years, various property insurers are reported to have turned to a variety of methods to manage their risks from California.

These methods include pausing sales of new homeowners insurance policies (Allstate Insurance Co. in 2022), capping the number of policies to be written each month (Farmers Insurance Group Inc. in 2023), electing not to renew policies in the state (Nationwide

Mutual Insurance Co. in 2024), or imposing stricter underwriting requirements, leaving policyholders in the state to face uncertainty and more limited options than in years past.

Further complicating the situation is California's regulatory framework, including Proposition 103, which was intended to protect consumers from insurers' arbitrary insurance rates and practices, and therefore required prior California Department of Insurance approval for insurance rate increases, restricting an insurer's ability to quickly modify rates even in response to rising risks or increasing costs for repairs.

This situation led some insurers to choose to exit the market altogether. As a result, the state's Fair Access to Insurance Requirements, or FAIR, plan, a last-resort insurer, has become increasingly burdened,[3] raising some concern about its long-term sustainability.

This year, the substantial liability exposures arising from the January wildfires in Southern California led the California FAIR Plan to request permission from the California Department of Insurance to levy an assessment upon all its member insurers to secure its ability to continue its operations and be able to pay for the substantial number of property claims being submitted arising from those wildfires.

In February, California Insurance Commissioner Ricardo Lara approved the FAIR Plan's request and granted it the authority to levy an assessment of $1 billion on all its member insurers in California, the first assessment by that FAIR Plan on its members in more than 30 years.[4]

These developments raise questions about whether Texas may be at risk of a similar insurance crisis. The combination of increasing wildfire frequency, rising insurance costs and regulatory uncertainty suggests that Texas may soon face difficult decisions regarding how to sustain a viable insurance market.

Texas' Wildfire Risks and Insurance Challenges

For Texas, hurricanes and hailstorms dominate the insurance landscape, but the state has not been immune to the devastation of wildfires. In 2022, the Eastland Complex fire burned more than 54,000 acres, and in 2011, the Bastrop Complex fire burned more than 34,000 acres and destroyed more than 1,600 homes.

Such fires, fueled by severe drought and extreme heat, should serve as wake-up calls, exposing the vulnerabilities of communities in wildfire-prone Texas areas. Texas continues to face increasing wildfire risks due to prolonged drought conditions, rapid urban expansion into fire-prone regions and extreme temperatures.

Although wildfires have yet to cause widespread disruptions in the Texas insurance market, hurricane-prone regions have already experienced changes to the availability of coverage.

In the wake of major hurricanes, insurers have raised deductibles, limited windstorm coverage, added language reducing exposures for roof claims, and in some cases, withdrawn from high-risk areas entirely. A similar response could emerge with wildfire coverage if insurers begin to view those risks in Texas as unsustainable.

While Texas insurers have not yet imposed restrictions on wildfire coverage to the extent seen in California, this relative stability may not last. As wildfire-related losses mount, insurers may begin following the same trajectory — nonrenewing or reducing policies, raising premiums, or imposing higher percentage deductibles for wildfire-related losses.

Texas Insurance Industry Response to Large-Scale Wildfire Events

To understand how Texas might respond to a wildfire crisis, one need only look at its history with hurricane coverage.

Aside from responding to hurricanes by raising deductibles and restricting windstorm coverage on policies written, limited availability of policies in the open market has shifted policyholders into the Texas Windstorm Insurance Association, a state-created insurer of last resort for windstorm coverage. A similar trend could emerge for wildfire coverage if insurers deem the risks too high to bear.

In an effort to manage risk, insurers may begin implementing stricter fire mitigation requirements. Homeowners seeking to maintain coverage might be required to create defensible space around their properties, use more expensive fire-resistant building materials, or meet new wildfire safety standards. While these measures could improve resilience, they may also place additional financial burdens on policyholders over and above increasing insurance premium costs.

At the same time, the Texas FAIR Plan, which provides last-resort coverage for high-risk properties, could see increased demand like California's FAIR Plan has. If insurers begin pulling out of wildfire-prone regions, more homeowners may be forced to rely on the FAIR Plan, potentially straining its financial stability in much the same way California's FAIR Plan has been affected by recent wildfires.

Another looming issue is the potential for an increase in wildfire-related litigation. As wildfires become more frequent and destructive, disputes over insurance claims could rise. Policyholders may find themselves battling insurers over coverage exclusions, loss measurements, claims denials, or disputes over whether a fire was caused by a third party, such as a utility company. Texas courts could see a surge in litigation similar to the legal battles over property damage following major hurricanes.

Key Legal and Regulatory Differences Between Texas and California

Texas and California take vastly different approaches to insurance regulation, which directly affects the availability, cost and enforceability of wildfire coverage. One of the most significant differences lies in how each state handles insurance disputes.

Texas has seen an increasing trend of insurers including arbitration clauses that can force policyholders to resolve disputes outside of Texas, even when all aspects of the claim are tied to Texas. Such provisions impose a substantial financial burden on policyholders, making it more difficult to challenge unfair claim denials or underpayments. The high cost of an out-of-state arbitration further tilts the balance in favor of insurers, effectively limiting access to justice for Texas businesses and homeowners.

California law, by contrast, more strongly favors keeping disputes within the state, ensuring that policyholders have access to their own courts and consumer protections. California law thus permits, and courts have been more willing to scrutinize arbitration clauses: A court can refuse to enforce an arbitration clause if it is deemed unconscionable or determined to violate California law.[5]

Recognizing the detrimental impact of these arbitration provisions, Texas lawmakers have introduced S.B. 455 to curb their enforceability.

This bill, which has gained bipartisan support, is a response to growing complaints from Texas businesses and property owners who have been forced into costly, out-of-state arbitration processes that offer little recourse under Texas law.

If enacted, S.B. 455 would require surplus lines insurance contracts to conduct arbitration in Texas, preventing insurers from forcing policyholders into expensive, out-of-state arbitration proceedings. It would also mandate that Texas law govern all such disputes, preserving legal protections for Texas policyholders.[6]

These regulatory and legal differences mean that Texas may not experience an insurance crisis identical to California's, but the challenges are mounting. Without proactive intervention, Texas policyholders could find themselves facing increased costs, fewer coverage options and more difficulty resolving wildfire disputes with insurers.

Conclusion

California's wildfire crisis serves as both a cautionary tale and potentially an instructive model for Texas. While the Lone Star State has not yet faced the same level of wildfire-related insurance challenges, increasing fire risk may force changes in coverage availability and cost.

Policyholders, insurers and legislators should take proactive steps to ensure that Texans can have continued access to wildfire insurance without facing the same availability and affordability crisis that currently is plaguing California.

Justin Ratley is a shareholder and leader of the insurance practice at Munsch Hardt Kopf & Harr PC.

Ron Burnovski is a senior attorney at the firm.

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