Given that 30% to 50%+ of materials in high-net-worth homes are imported, tariffs will increase rebuilding costs for properties lost in the California wildfires, whatever they end up being, according to Stephen Poux, EVP of risk management at The Liberty Company Insurance Brokers.
In an interview with this publication, he added that his research shows that the portion of imported materials for a standard home can be as little as 15%-25%.
“[High] valued homes and luxury homes are built using a significant amount of imported materials,” he said.
“If prices go up, it’s going to cost more to rebuild – that’s just economics. And on top of that, you have the demand surge associated with 11,000 homes that have to be rebuilt.”
The Palisades and Eaton wildfires swept through Southern California in January, destroying homes in some of the most affluent neighborhoods in the country. Sources’ estimates around insured losses have coalesced to around $40bn, with Aon pegging the figure at $37.5bn in a report last week.
Poux has worked in risk management and loss prevention for HNW homes for more than three decades, the majority of which he spent at AIG, before joining the Californian broker last July. He spearheaded the launch of AIG Private Client’s loss prevention unit in 2004 and was also an adviser to the Biden administration’s Wildland Fire Commission.
Steel, metal and windows are items that can be particularly impacted, Poux said. For example, Tischler, a window brand popular among HNW homes, is custom-made months ahead and shipped from Germany. Anecdotally, Poux said he’s seen the window contract alone hit $1mn for the construction of a large home.
In addition, high-value homes typically involve more steel than wood in the framework, because of its durability and due to the sheer size of the structure that the framework has to cover. The US imports steel from Canada, Europe and Asia.
“Any tariffs associated with that are going to be impactful,” the executive said.
Tariffs tied to “anything with metal” can have an impact, he added, especially high-end appliances, which are often European.
Even for wood, the US has a high dependency on Canadian lumber, where the Department of Commerce announced its intention to increase duties to 34.5%, which does not include the 25% tariff on all Canadian goods the Trump administration has threatened.
But setting the structure aside, “the finishes are what really differentiate a high-net-worth home from a traditional home,” according to Poux, like Italian marble, English tile and plumbing fixtures, and exotic woods from Brazil or South America.
He added that the installation of imported high-end materials requires skilled labor, which can pose challenges due to the demand surge in the affected area, compounded with the effect of immigration policies from the Trump administration.
“My experience on construction sites is that you’ve got tile fitters from all over the world – carpenters from Eastern Europe, tile setters from Italy, Latin America,” said Poux.
Time is money
With all the moving pieces around how the tariffs will ultimately look, the executive refrained from giving an estimate on how it will impact the industry’s losses for the January wildfires.
One LA-based construction management company he spoke to didn’t expect the construction for new homes to start any time before fall, because the cleanup is still ongoing and there may be adjustments to building codes and regulations that need to take place.
“There is some lead time here that could play in favor of figuring out where these tariffs are ultimately going to end up,” he said.
But even so, materials need to be sourced before someone puts a shovel in the ground. And the uncertainty factor alone will likely cause delays and hedging of prices, which can push up costs in the long term.
For example, suppliers and manufacturers of construction materials are increasingly not guaranteeing prices beyond a very short window to protect themselves from price fluctuations.
Normally, construction firms were offered 30- to 60-day guarantees to lock in price estimates from suppliers. Now, those windows are shortened to as little as two weeks, according to the executive.
In Poux’s view, the price increases in the works are not purely a consequence of tariffs but part of an ongoing macro trend in the construction space. The US consumer price index for building materials skyrocketed during the Covid-19 years and has never recovered to pre-pandemic times.
But tariffs can have an amplifying effect. “When there’s uncertainty in the marketplace, people can’t plan ahead,” said Poux. In turn, the entire supply chain can be disrupted. Without a plan, orders can’t be placed, and materials cannot be manufactured or shipped.
“It just creates volatility and delay. And we know time ultimately ends up costing everybody. Time is money,” noted the executive.
Other factors at play
Apart from total loss recovery, several sources have raised concerns over smoke damage pushing the industry losses above initial estimates. Poux agreed that smoke damage claims in homes that survived the fires could evolve as the recovery process continues.
“They always do – they discover things that they didn’t know about, so I wouldn’t be surprised if the [loss] estimates are low based on that,” he said.
What can intensify this is the fact that typical provisions in a high-net-worth policy allow “flexibility in terms of settling a claim to a client’s satisfaction”, Poux noted, which can be as simple as the customer saying they still smell smoke in the house.
However, he predicted that the loss creep for smoke damage will likely be a bigger issue for uninsured losses, given that insurance forms have been pretty tight in the California marketplace and a lot of the coverage tends to be capped.
Many HNW carriers have reduced their writings over the years, moving from an admitted policy to a surplus lines policy, which allowed them to limit coverage and put higher deductibles in place.
Additional living expenses, for example, which cover insureds’ stays in rented homes, are often capped. “It's likely most people that are rebuilding their home will run out of that coverage long before their home is built,” said Poux.
Meanwhile, a significant number of insureds are choosing not to rebuild their homes but instead max out their policy. According to the executive, The Liberty Company is seeing this from around 60% to 65% of insureds who have lost their homes in the fires.
This idea of “walking away” is advantageous to insurers, said Poux.
“They can max out the coverage, write the check, close the claim, be done and move on, as opposed to having a claim that is open potentially for years,” which can result in reconstruction costs exceeding initial estimates and both parties negotiating with limits.
That goes back to the basics of insurance claims: “The sooner you can close out a claim as an insurance company, the easier the process is.” But for now, every indicator points to a difficult recovery process, and tariffs will likely add to that.
The 2018 Camp Fire destroyed nearly 14,000 structures in the town of Paradise, in Butte County, California. Six years later, only 23% of the homes have been rebuilt, according to the Urban Institute.
Los Angeles has better infrastructure that can speed the recovery process for the Eaton and Palisades fires, Poux noted.
“There’s some advantages to that, but just the scale of this is going to be very challenging,” he added.