Insurance and Rebuilding Challenges for Hotels in California’s Wildfire Hazard Zones
Hotels have not been immune from the devastation wrought by wildfires in California over the past several years. Among hotels destroyed by wildfires are the Fountaingrove Inn and Hilton Sonoma, both sprinklered and within the City limits of Santa Rosa, California in October 2017 (Tubbs Fire).
More recently, the iconic Meadowood Resort and the Black Rock Inn in St. Helena, CA were destroyed in the Glass Fire in Napa and Sonoma counties in September 2020.
Insurance Considerations Before and After the Devastation
What most traumatized victims of California wildfires, who have suffered a catastrophic property loss, find out as they sift through the ashes is…they are woefully underinsured.
Property insurance typically covers the cost of reconstruction (to a fixed amount unless you have a ‘replacement cost’ policy) based on the building code in force at the time of the original construction date, the ‘like kind and quality’ limitation found in most property insurance policies.
The California Residential Code (Title 24 CCR Part 2.5) for single family homes, townhouses, and small bed & breakfast establishments and the California Building Code (Title 24 CCR Parts 1 & 2) and Fire Code (Title 24 CCR Part 9) for commercial buildings including hotels, are updated every three years, often with new requirements. The older the building destroyed, the more that increases the likelihood that the current building code will impose new and expensive requirements, not covered by insurance, unless property owners have a ‘building code upgrade’ rider on their property insurance policy. That optional rider will cover a fixed amount in dollars of the difference in reconstruction costs between the original building code and the latest code, hopefully enough to cover the marginal cost difference.1
Post the multiple wildfires fires in 2016, several carriers refused to underwrite coverage in ‘high’ or ‘very high’ wildfire zones, leaving those property owners access to only the California FAIR plan which, for commercial coverage, is limited to $3 million for structures and $1.5 million for related coverage, insufficient coverage limits for all but very small hotels.
Periodically reviewing your coverages with your insurance carrier and a reputable general contractor will give you an idea of what dollar value coverages are needed and how long the rebuilding process is likely to take.
Building in California’s Wildfire Hazard Zones
The vast majority of all of the land mass in California is in one of several ‘wildfire hazard zones,’ see CalFIRES map below.
Commercial buildings in the ‘high’ and ‘very high’ wildfire hazard zones are subject to special California Building Code (Chapter 7A), Fire Code (Chapter 49) and Public Resources Code Sec. 4290, adding updated Fuel Modification Standards (Title 14 CCR Sec. 1276) requirements when building or re-building. Local jurisdictions may amend the state codes to require even more stringent requirements based on several factors, including topography.2
In July 2021, new regulations are expected to be imposed for increased clearances between structures and ‘greens spaces’ around communities located in ‘very high’ wildfire hazard zones.
Further, given the staggering number of homes and business destroyed in California wildfires 2014–20203 (estimate = 100K+), the cost of building materials in California has skyrocketed, making most calculations of the cost-per-square-foot to rebuild seriously off the mark. While $200 per square foot used to be a good benchmark for hotel construction in the ‘90s, today it is closer to $4604 per square foot nationwide and higher in California, due to excessive environmental and other regulatory burdens. Building construction costs are rising at a 5.5 percent average annual rate, far more than inflation.
Added to the above, contractors are backlogged such that a historical one-year rebuild time for a destroyed single-family home or 18 months for a gutted hotel are now more than double that timeline. As such, ‘business interruption insurance’ coverage for more than a year is now almost a given for commercial enterprises, such as hotels. Check your policy for the amount and duration of such coverage.
Is ‘Building to Code’ Enough?
Regulatory changes in building and fire codes, State Fire Marshal regulations, and local amendments to those codes/regulations add to the complexity and time needed to get a permit to rebuild. Architects and contractors need to be well-versed in both building and fire codes and maintain their knowledge, as new requirements are added, every three years in California. The plan check process to obtain a building permit can be seriously delayed if your architect is not up to speed.
As part of the rebuilding process, only ‘building to code’ may not protect your hotel from the ravages of the next wildfire. Building and fire code requirements set minimum requirements for fire safety.
Additional considerations for exterior exposure sprinklers,5,6 a greater ‘set back distance’ from adjacent hazards, a walled compound, more ‘defensible space’ than required adjacent to your hotel and a different landscaping plan, avoiding ‘combustible vegetation’ in favor of zero scaping or gardens in lieu of trees, may be wildfire defenses worth considering.
Taking more aggressive than required steps to protect your property may also result in a more competitive insurance environment when you shop for coverage and the possibility of premium discounts, if you can show that your property warrants a ‘highly protected risk’ (HPR) designation by your insurance carrier.
The only given about catastrophic wildfires is that, over time, they will return.
Thomas G. Daly is the President and Managing Member of the Hospitality Security Consulting Group, LLC., the retired Vice President Loss Prevention for Hilton Hotels Corporation, now Hilton Worldwide and the Past Chairman of the NFPA Lodging Industry Section.
- See https://www.robinskaplan.com/~/media/PDFs/Insurance%20Coverage%20for%20Building%20Code%20Upgrades.pdf for a more detailed discussion of this issue.
- See CALIFORNIA BUILDING STANDARDS COMMISSION INFORMATION BULLETIN 19-05 DATE: June 24, 2019 Applicability of California Building Standards and Local Government Amendments.
- Estimates for 2020 are still being tallied but, as of October 4, 2020, already exceeded 8,400 structures according to CalFIRE, see https://time.com/5896221/california-wildfires-4-million-acres/.
- California’s Tax & Revenue Code Article 74 exempts the installation of sprinklers from being considered an ‘improvement’ and thus the value of such improvement is not added to the property’s assessed value, avoiding additional property taxes.
- Neither the 2019 California Building Code nor NFPA 13-2016 Standard for the Installation of Sprinkler Systems, (the edition adopted by California) requires exterior exposure sprinklers for buildings otherwise requiring an interior sprinkler system, but NFPA 13 does provide design guidance for such installations, see Sections 7.7; 184.108.40.206 and 11.3.2.