This article involves an evolving area of law. The authors do not represent that the information contained in this article is their opinion or their clients’, employers’, or companies’ positions or opinions. The citations referenced herein are intended only to direct you to resources.
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. After statehood, Colorado initially adopted a policy of aiming for total fire exclusion. 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. 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.
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. 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.
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.
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. 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. Insurance companies already require their policyholders to perform some wildfire risk mitigation and are even pulling out of high-wildfire-risk areas. 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. 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.
Insurers help stabilize the economy, especially during crises, by making a positive contribution to the GDP. 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.
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. Approximately 60% of Americans are underinsured with their homeowners insurance. 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. 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. 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. 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.
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. Inflation can render these limits drastically inadequate, particularly after a catastrophic loss, which squeezes local labor and materials markets. 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.
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.
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.” 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. 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. The entrustment factors identified in Parker include “exercising broad discretion to service the insured’s needs; counseling the insured concerning specialized insurance coverage; holding oneself out as a highly-skilled insurance expert, coupled with the insured’s reliance upon the expertise; and receiving compensation, above the customary premium paid, for expert advice provided.”
Negligent misrepresentation. To establish a negligent misrepresentation claim, a plaintiff must show that (1) a person in the course of their business, profession, or employment; (2) makes a misrepresentation of a material fact, without exercising reasonable care; (3) for the guidance of others in their business transactions; (4) with knowledge that the plaintiff will rely on the representations; and (5) the plaintiff justifiably relies on the misrepresentations to their detriment. Justifiable reliance is an essential element to a negligent misrepresentation claim.
Homeowners may be less sophisticated than insurers in calculating rebuild costs and have less access to rebuild costs. Courts have held that “[i]f the plaintiff has access to information that was equally available to both parties and would have led to discovery of the true facts, the plaintiff has no right to rely upon the misrepresentation.” Moreover, regardless of whether a policyholder reads the policy, policyholders are generally charged with knowledge of their policy’s terms.
Reformation. In reforming an insurance contract, a court’s purpose is “to make the policy express the true intent of the parties.” A court may not reform an insurance contract without “proof of a mutual mistake between the parties.”Both parties must “labor under the same erroneous conception with respect to the terms and conditions” of the contract.The insurance company’s intent will typically be to insure the property to the stated limit of insurance, so there would be no mutual mistake and no reformation available. However, there may be some instances where the facts lead to a different result.
Recovering under dwelling coverage. In the homeowners insurance context, dwelling coverage is insurance for the loss of a physical structure that is used primarily as a private residence, such as a house, apartment, condominium, duplex, or townhouse. Attached structures, such as an attached garage, are considered part of a dwelling. External structures, like a backyard shed, detached garage, fence, or gazebo, are not.
Most homeowners policies in Colorado provide for replacement cost coverage, paid out in two stages: first, the actual cash value of the loss, followed by payment of recoverable depreciation after repairs are substantially complete. If a dwelling is improperly maintained or has wear and tear, the estimate from the insurance carrier will reflect a lesser actual cash value amount.
Insurance companies are obligated to pay for repairs “based on a prevailing competitive price, as established by competitive bids, generally accepted insurer-based methodology, or market surveys that determine a fair and reasonable market price for similar services.” Insurers tend to rely on industry software to generate their cost estimates. If a catastrophic loss occurs outside of a metropolitan area, there can be a dearth of contractors who are familiar with the insurance company’s software. This can cause hang-ups in the adjustment process as the adjuster might request more documentation and information and the contractor, who may be waiting on payment, becomes less willing to devote time to the loss and instead moves on to the next job. There can also be issues in the estimating process if the adjuster inputs inaccurate information about the structure. It can be difficult to get accurate information if the building is a total loss. If the final repair bill is higher than what dwelling insurance will cover, the insured will have to pay the difference out of pocket.
Recovering under contents coverage. Contents coverage, also referred to as personal property insurance, is insurance for the loss or damage to personal possessions at the private residence. At the time of the Marshall Fire, Colorado Revised Statutes section 10-4-110.8(11)(a) required insurance companies to pay out at least 30% of the contents coverage to policyholders who experience a total loss of a furnished, owner-occupied primary residence without a written inventory, but “[p]olicyholders have to detail everything that was lost, down to the last spoon, to collect the remaining 70%.” After the Marshall Fire, House Bill 22-1111 increased that requirement so that the insurer must pay 65% of the contents limit in the wake of a total loss of the contents to a furnished, owner-occupied residence.
After a total loss, contents claims can become quite large, and documentation hard to come by. Policyholders, after losing most of what they own, must sift through memories, family photographs, remnants in the rubble of their home, and old credit card bills, among other things, to create a personal property inventory. They may be suffering from post-traumatic stress disorder, which can contribute to memory issues. Some are not technologically savvy and may not even have computers. Policyholders may experience great difficulties documenting and conveying the documentation to the insurer without technological assistance. Some adjusters will offer lifestyle interviews to attempt to alleviate this burden, but there does not appear to be a general practice of providing this in Colorado.
Creating an inventory for an entire home can take hundreds of hours, and often results in accidental errors. This may make the adjuster suspect fraud.
If there is a partial loss, contents claims can become even more contentious because the condition of the items is somewhat subjective (see below for more discussion on partial loss fire claims). This can cause disputes between the adjuster and the insured as to what can be cleaned and salvaged and what is nonsalvageable and needs to be replaced.
Recovering under additional living expense coverage. Additional living expense (ALE) coverage is insurance that covers the reasonable expenses that people incur to maintain their standard of living when they cannot live in their home due to a catastrophic event like a fire. This is typically a “paid when incurred” coverage, meaning that the policyholder first incurs the expense and then receives reimbursement from the insurance carrier.
Colorado law requires that there be no monetary limit applicable to this coverage for primary homes. This can confuse the policyholder because whether an expense is reasonable and maintains the insured’s standard of living is subjective. If the insurance carrier does not inform the policyholder what it considers reasonably necessary to maintain the insured’s standard of living, then the insured can be put in a situation where they feel they cannot proceed with alternative living arrangements because they do not know in advance if their insurance carrier will reimburse them.
In the wake of a catastrophic loss, policyholders may also struggle to find rentals given the sudden surge in demand. A recent post-fire study in California revealed that the greatest challenge that fire survivors experienced was access to safe and secure shelter. Because the insured may have to move around between different rentals, hotels, or shelters, which makes for housing instability, the cumulative stress can create or exacerbate physical health issues. If the insured suffers from health issues as a result of the accident, ALE insurance does not cover the additional expenses that the insured has to pay in possible medical treatment.
Some Marshall Fire victims whose homes did not completely burn are finding themselves in need of ALE assistance. Although they may still have their homes, now there may be noxious smells and ash on windowsills and in doorways that have made their homes unlivable. Chemicals from the fire linger inside the undestroyed homes and are soaked up into the fabrics of carpets, sofas, drywall, etc. They slowly release into the home following the fire. Compounds like benzene, which are known to have harmful health effects, may appear on many of the Marshall Fire survivors’ industrial hygienist reports. There also exists the potential for metals in the ash and soot deposited in homes to become suspended in the air when people return to their homes and turn on the heating systems. Some policyholders may suffer allergies or other medical conditions that make any exposure intolerable. This results in an evolving and complex situation for insurers and policyholders to navigate as they assess whether it is safe to return home.
Colorado law requires that all dwelling replacement cost policies include ALE coverage of at least 12 months and up to 24 months, with extensions available if the policyholder is not able to reconstruct the dwelling within the policy’s time limit. Even 24 months is proving insufficient for many policyholders to rebuild and move back into their homes. As of February 22, 2024, out of the 1,084 residential structures destroyed in the Marshall Fire, only 367 certificates of occupancy have been issued.
A partial loss in the wake of a wildfire occurs when there is a loss that does not completely destroy or render useless the insured property or does not completely exhaust the applicable insurance limit. In the wake of the Marshall Fire, many policyholders’ homes experienced some degree of smoke contamination. Policies cover “accidental direct physical loss,” which can make finding coverage for ephemeral damage difficult.
There is no current standardized metric for determining smoke damage. How can an adjuster assess whether there is direct physical loss based on an odor? In Western Fire Insurance Co. v. First Presbyterian Church, the Colorado Supreme Court considered whether there was a direct physical loss when “the premises became so infiltrated and saturated as to be uninhabitable.” The court concluded that the insured “sustained a direct physical loss.” In Regents of the University of Colorado v. Factory Mutual Insurance Co., a Boulder County district court declined to rule against COVID-19 causing a direct physical loss at the motion for judgment on the pleadings stage. The court there decided that it was “at least plausible to conclude that a property could become so saturated with contaminated objects, aerosols, and droplets, that its buildings were uninhabitable.”
Particularly when the policyholder is underinsured, paying for cleaning and storage of items can diminish the available insurance benefits. This often results in a battle of the experts. There is limited time to get experts involved because the longer uncontaminated contents sit commingled with items covered in soot and smoke, the more contaminated they become.
There are draft smoke damage standards in the works by the Institute of Inspection Cleaning and Restoration Certification for fire and smoke damage restoration addressing wildfire investigations and restoration of structures, systems, and contents; assessment of HVAC systems; and cleaning, removing, and replacing porous and nonporous personal items (including recommended methods and processes to document the chain of custody of the items). The institute is currently reviewing comments on the proposed standards.
The DOI sought out several commitments from Colorado’s insurers when dealing with Marshall Fire claims. The DOI obtained commitments from the 65 insurance companies on the following:
Colorado also has regulations in place that help to protect insureds.
HB 22-1111. If a wildfire causes a total loss to a furnished primary residence and is a state-declared disaster, HB 22-1111, which amended Colorado Revised Statutes section 10-4-110.8, imposes many new requirements on Colorado’s insurers going forward. The law does not apply to Marshall Fire claims because it was promulgated after the fire. Now, the insured must be permitted to rebuild at a new location and still recover depreciation. The insured must have 36 months to recover depreciation under the dwelling coverage, starting from the date when the insurer provided the first payment toward the actual cash value of the damage or loss. The insured will then have access to two six-month extensions if needed due to unavoidable delays. The insured can use claim payments from the loss of outbuildings and other structures to pay costs to replace the residence if the limit is insufficient. Insurers must also reimburse insureds for debris removal expenses within 60 days of receiving a receipt. The insurer will also pay for any covered loss of trees, shrubs, and landscaping within 30 days after the insurer receives documentation of such loss.
The insured will have ALE coverage for 24 months following the fire, rather than the conventional 12, as well as have two six-month extensions. The insured will have the greater of 365 days after the expiration of ALE coverage or 36 months after the insurer provides the first actual cash value payment to replace the contents and receive recoverable depreciation. The insurer will have to pay the insured ALE within 20 days after the insurer receives documentation of loss, including upon receipt of a signed lease.
HB 22-1111 also requires more transparent communication between the insured and insurer by requiring the insurer to provide a summary of decisions, amounts of losses, notice if an expert has been retained, the amounts of coverages, and all items in dispute.
HB 22-1111 also changes how insurers must adjust contents claims. Rather than the 30% up-front payment previously required (without compiling an inventory), the insurer now must issue payment of 65% of the contents limit without requiring an inventory. After the homeowner submits a personal property inventory, the insurer is required to request additional information within 30 days and to pay undisputed amounts within 30 days after receiving the inventory.
HB 23-1174. The Colorado House introduced underinsurance legislation, HB 23-1174, on February 6, 2023, and signed it into law on May 12, 2023. This bill amends Colorado Revised Statutes sections 10-1-144, 10-4-110.7, and 10-4-110.8. The bill requires the commissioner of insurance to engage an independent third party to prepare an annual report on the cost of rebuilding homes in Colorado (based on region, home type, a contractor’s overhead and profit, square footage, and other features of the structure) in the event of a total loss. That report will be published on the DOI’s website.
As of January 1, 2025, insurance companies will have to provide the policyholder or applicant with an estimate of the cost necessary to rebuild the covered structure, disclose how the estimate was calculated, and provide the policyholder with the annual cost of rebuilding report discussed above.
Insurers must now offer increased policy limit options, which increase the limit of insurance available for the loss based on the terms of the policy, in the amounts of 20% of ordinance and law coverage (rather than the 10% previously required) and 50% of extended replacement cost coverage (rather than the 20% previously required). Insurance companies must also now provide 60 days’ notice of cancellation or nonrenewal rather than 30 days, unless the cancellation or nonrenewal is due to nonpayment.
DOI bulletins. The DOI also responded to the crises that wildfire survivors faced by publishing nonbinding insurance bulletins. These bulletins encourage insurers to adopt certain policies and procedures during the adjustment process. For example, Bulletin 5.42, issued on October 25, 2021, “Concerning Extension of Policyholder Benefits in the Event of a Catastrophic Disaster,” asks insurers to extend time limits that restrict the recovery of ALE and replacement cost benefits. The DOI bulletins include many standards that could be helpful to policyholders in a variety of situations, so monitoring and subscribing to updates can help ensure that the policyholder has a better claims experience.
Policyholders can—and should—shop the market. In addition to extended replacement cost policies, which extend coverage typically by 25% or more, there are policies that provide even more extensions (even doubling the limits) if there is a total loss caused by an event that is declared a disaster. There are also guaranteed replacement cost policies, which cover the final cost of replacing or rebuilding your house, no matter the amount.
Another potential solution is parametric insurance, which covers risk without the complications of sending adjusters to assess damage after an event. Instead of paying for damage that has already occurred, it pays if certain agreed-upon conditions, such as a certain threshold of acres burning, are met. It is often used as a complement to, rather than a substitute for, indemnity coverage. According to a study by the Nature Conservancy, residential insurance premiums in wildfire-prone areas could decline 41% when ecological forestry techniques, such as forest thinning and prescribed burning, are combined with parametric insurance.
The use of up-and-coming technology to measure and manage exposure using geospatial data and to adjust insurance rates accordingly is another alternative. For example, GIA Map is a startup that helps auto, home, and commercial property insurers do just this by incorporating clients’ book-of-business data with natural hazard and geospatial data to inform decision-making.
A solution extending beyond insurance is requiring a certain amount of space around homes clear of trees and brush. Colorado does not currently have statewide rules requiring fire-resistant construction. According to a National Bureau of Economic Research study, homes in California built according to 2008 fire-resistant construction standards are 40% more likely to survive a major wildfire.
Wildfire claims in Colorado appear to be here to stay. Colorado regulators are trying to take lessons learned in California and other states with destructive wildfire seasons and apply them proactively to protect residents and encourage a thriving insurance market.
For homeowners, before deciding how much dwelling coverage to include in a homeowners policy, estimate the cost of rebuilding the home in today’s market. Homeowners may want to contact a construction professional, real estate agent, or property inspector to help with this.
For claims professionals, in reviewing insurance claims in Colorado, start with the text of the insurance policy to assess coverage and the parties’ rights and obligations. Throughout the life of a claim—and even into litigation—communication is key. During adjustment, fire claims frequently are reassigned to different adjusters. This can impede the claim’s progress, but documenting communications and ensuring that the new adjuster has access to the previous adjuster’s documents can help keep things moving. Above all, approach the situation with compassion. Fire victims have experienced a traumatic event and frequently struggle to cope for years afterward.
