The Colorado Division of Insurance is considering an emergency regulation that could classify certain wildfire-related sublimits in residential property policies as potentially deceptive and in violation of state insurance law, according to a draft bulletin.
The proposed rule targets sublimits applied to smoke, soot, ash, odor and char damages caused by wildfires. The division, part of the Department of Regulatory Agencies, said these sublimits may conflict with policyholders’ expectations for coverage and could result in reduced payouts for losses that are not clearly excluded.
Regulators said many consumers do not fully understand the range of damage associated with wildfires, including long-term exposure to particles and odors, and the agency described such damage as capable of resulting in total loss conditions.
The bulletin cites examples of property/casualty insurers issuing residential policies that apply separate sublimits to these specific perils. The division is asking insurers to avoid this practice in residential property lines, including homeowners, renters, and condominium insurance.
The bulletin, however, does not reflect a widespread issue in the admitted market, according to Carole Walker, executive director of the Rocky Mountain Insurance Information Association. Walker said these types of sublimits are more frequently found in surplus lines policies, which are typically used to cover higher-risk properties or those with nonstandard features.
“We are going to ask for clarification that it doesn’t apply to surplus lines, especially as we are looking to attract more surplus lines DIC policies in Colorado with the Fair Plan,” Walker said in a report from AM Best.
DIC policies are used to add coverage for perils excluded in standard property forms or to supplement coverage in cases where traditional policies may fall short. They may also be used for international exposures, according to the International Risk Management Institute Inc.
In April, the Colorado Fair Plan launched policy options providing coverage up to $750,000 for homeowners and $5 million for commercial properties. These policies are designed to address essential perils such as fire and lightning. Coverage can be extended for additional risks like wind and hail, though these options are limited.
Colorado legislators have also taken up wildfire-related insurance concerns. In February, House Bill 1182 was introduced to address transparency in how insurers use wildfire risk models. The proposed bill would require carriers to disclose how such models impact underwriting and premium setting.
Supporters of the legislation argue that homeowners should be informed about whether their wildfire mitigation efforts – such as defensible space or fire-resistant materials – are being factored into insurers' risk evaluations.
Colorado's recent wildfire history has amplified scrutiny over insurance coverage. The 2021 Marshall Fire caused more than $2 billion in insured losses, highlighting the potential for wildfire-related damages – particularly from soot, ash, and lingering odors – to rival the financial impact of complete structural losses.
Insurance affordability remains a concern for many homeowners in the state. Between January 2019 and October 2022, premiums for single-family home insurance in Colorado increased by 52%, according to consumer data.
This jump is attributed to rising wildfire exposure and increased rebuilding costs, leading some residents to reassess their coverage options or seek policies in the surplus lines market.
Another point of contention for insurers is the regulator’s decision to associate these policy sublimits with deceptive trade practices under state law. Walker said the inclusion could create broader regulatory implications if the interpretation of the statute is not narrowly tailored.
“Obviously they (DORA) need to tie their regulation to statutory authority, but we do want to make sure that that's being narrowly viewed at this very specific issue,” Walker said.
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