Arizona lawmakers are currently discussing a bill that would shield utilities from lawsuits related to wildfires, a move that could significantly impact the insurance industry.

The proposed legislation would make it more challenging to hold utilities accountable for wildfires caused by faulty or poorly maintained equipment, while also capping damages. In return for reduced liability, utilities would be required to submit plans every two years outlining their efforts to minimize wildfire risks.

However, the bill in its current form does not necessitate utilities to adhere to these plans. If a utility fails to follow its plans or is negligent in maintaining its equipment, it would still be protected from liability claims.

The insurance industry has been severely affected by wildfires, and this bill could inadvertently shift the burden of wildfire claims from utilities to homeowners’ insurance providers.

According to Marcus Osborn, an insurance company lobbyist, “There’s no free lunch in this. You’re either going to pay in higher insurance premiums or you’re going to pay in higher utility costs,” he stated during a public hearing on the bill.

Some Arizona homeowners have experienced significant increases in their insurance rates, with some seeing their rates triple this year, while others have had their coverage dropped altogether.

This is largely due to insurance companies attempting to recoup their losses as wildfire claims accumulate. For instance, Hippo, an insurance startup that went public in 2021, reported $42 million in losses resulting from the recent Los Angeles wildfires. Another startup, Lemonade, which went public in 2020, is anticipating a loss of $45 million from the same disaster.

The increasing risks associated with wildfires have created opportunities for other startups. Kettle, for example, offers reinsurance and models potential wildfire outcomes to help companies mitigate their wildfire risk. Nevertheless, the overall trend has been toward higher costs for homeowners.

The Arizona bill is being considered as states across the Western United States struggle to cope with the threat and aftermath of wildfires, which have been exacerbated by climate change and over a century of fire suppression.

Historically, fires in the United States were rapidly extinguished. Prior to this, low-intensity fires would sweep through the understory, eliminating weak saplings and transforming dry leaf litter into rich ash that fertilized the soil. However, as fires were suppressed, understories grew thick with brush and years of accumulated leaf litter.

These conditions created what wildfire experts refer to as “ladder fuels,” which facilitate the spread of low-intensity fires from the forest floor to the canopy, where they can become catastrophic.

Climate change has further increased the risk of high-intensity canopy fires. Rising temperatures have intensified droughts, according to a study published in November, by increasing evaporation. In other words, the limited precipitation that does fall to the ground evaporates more quickly, leading to even drier conditions.

Warmer winters have also contributed to the problem. Reduced snowpack results in drier spring conditions, and insects that were previously controlled by cold temperatures have been thriving. For example, warmer temperatures and pine beetles killed over 100 million trees in California between 2014 and 2017. These dead trees became ideal fuel for subsequent wildfires.