William May’s house The Pacific Palisades store was destroyed in the Los Angeles wildfires in January 2025. He is still haunted by the memory of that hellish day, when “fireballs consumed everything in their path.” And all he wants to do is rebuild the beautiful house where a retired pediatrician lived with his wife.
Since then, he has been battling property insurance company State Farm for the money he says he needs to rebuild his home. When he bought the two-story home in 2017, it was valued at $1.7 million, he said. But after the fire, the insurance company quoted just $1.35 million, May said, leaving her in debt trying to rebuild the couple’s home while waiting for State Farm’s insurance claim to be reviewed. Property values in the neighborhood rose 50% from an average of $2.1 million in December 2017 to $3.076 million in December 2025, according to Zillow’s Home Value Index.
“Is it possible for the value to be lower than when it was new?”
May has accused State Farm of using AI-powered software called Xactimate, which is used by insurance companies to estimate the cost of repairing, rebuilding and cleaning properties. “They’re using this reductive method. It’s a bogus way of calculating every screw, every bolt and undervaluing the house to derive a profit for State Farm.”
May considers herself lucky to have the resources to rebuild, but points out that many of her neighbors can’t afford to rebuild and face similar problems with insurance companies. He also blames Verisk, the data analytics company that makes Xactimate.
“I’m convinced that these companies create programs like this just to sell to insurance companies because insurance companies are interested in milking people for profit, so insurance companies will rate people poorly,” he says.
A State Farm spokesperson told Capital & Main, “State Farm remains committed to assisting customers throughout the recovery process and paying all available benefits under their insurance policies. To date, we have made more than $5 billion in payments to families whose homes, cars, and property were damaged or destroyed in a fire. We encourage customers with questions or concerns to contact us.”
“Xactimate’s AI capabilities support tasks such as summarizing information and labeling photos, and always operate under human review and control,” a Verisk spokesperson said. She added that Xactimate “does not use AI to generate repair costs, nor does AI determine prices for materials, labor, or reconstruction. Xactware’s construction cost database is market-based, transparent, and based on human-verified data. It is intended as a flexible benchmark that users can adjust to specific job and local conditions.”
State Farm, like other large property and casualty insurance companies, is increasing its focus on artificial intelligence to increase efficiency and improve risk modeling. The company reported net income of $5.3 billion in 2024, an improvement from a loss of $6.3 billion in 2023. In late 2024, Hayden Kirkpatrick, the company’s former vice president of innovation and venture capital, said in an interview that AI and other emerging technologies could help the industry “better predict and prevent losses.”
AI is being touted as a transformative asset as the insurance industry grapples with the climate crisis, which is leading to more home destruction from extreme weather events, higher losses and higher premiums. By analyzing vast datasets, this technology has the potential to predict and manage risks more accurately, improving underwriting efficiency and enabling insurers to provide coverage in areas that may otherwise be considered uninsurable due to climate change.
However, AI’s performance in recent years has been criticized for making inaccurate predictions about climate change, algorithmic bias, privacy concerns, lack of transparency, and inaccurate outputs such as “hallucinations.” Industry watchdog groups have expressed concern that insurers may rely on technology to make faster decisions in the name of cost efficiency for complex claims that require human analysis.
From California to Alabama to Illinois, policyholders and prosecutors have filed lawsuits alleging that property and casualty insurance companies’ use of AI has allowed them to lower claims, discriminate against non-white customers, and cut coverage outright. The class action lawsuit focuses on so-called AI washing, where technology is misused to manage risk to the detriment of policyholders.
Following complaints from homeowners like May, Los Angeles County recently announced it would investigate State Farm’s use of AI tools to allegedly delay or deny claims. The county’s attorney sent a letter to the insurance company in November requesting documents related to the L.A. wildfires, including “any documents, including but not limited to memorandums, newsletters, manuals, training materials, policy statements, guidelines, or directives that reflect, describe, or constitute State Farm’s use of artificial intelligence (AI) tools in the insurance claims review process.”
State Farm announced in March 2024 that it would not renew approximately 72,000 California property insurance policies until 2025, citing wildfire risk and related costs.
“Recovery after a major disaster does not proceed in a straight line,” the insurer said in an online update on California’s recovery response. “Many families are engaged in the process of rebuilding and recovering from the devastation,” it added, adding, “Many families continue to move forward with parts of their claims process, and State Farm is working to meet the needs of each unique situation.”
The insurance industry is touting AI as a tool to help model risks as climate change becomes more serious. The company is also optimistic that the technology will help limit losses and improve profitability. In Bain & Company’s policy paper, the consultants say they expect generative AI to lead to “a 30% to 50% reduction in total breaches (the difference between the amount paid under the contract and the amount owed).” This difference arises when the adjuster deviates from policy guidelines or when supply chain issues incur unexpected costs.
In a recent white paper from CAPE Analytics, which specializes in selling AI-powered real estate risk intelligence to insurance companies, the company cited several reasons why the technology is needed to sift through “mountains of contradictory data” and point out that it can help insurers avoid over-covering at low prices. Without AI, “using raw data or drawing incorrect conclusions from it could result in overexposure if the market is too low, or loss of premium if the market is unnecessarily high.”
For insurance experts and policyholder advocates, this raises concerns that insurers will rely on technology to make hasty decisions in the often complex claims process.
“For example, an AI system could make decisions based on incomplete or biased data, leading to unfair treatment of policyholders,” said Chip Merlin, a Florida attorney who represents policyholders.
He cited a 2022 class action lawsuit brought by Illinois homeowners who claimed that State Farm’s use of algorithms in the way it processes insurance claims disproportionately impacts Black policyholders, causing delays in repairs and benefit payments. The lawsuit is pending, and the insurance company maintains its actions do not violate federal law.
The biggest factors impacting the affordability and availability of insurance are climate change and technologies such as AI, said Amy Buck, executive director of the advocacy group United Policyholders.
“Now they’re not going to insure a lot of people anymore, and a lot of that is due to data and the use of AI in predictive analytics and aerial surveillance. When people ask me, ‘What benefits are consumers getting from AI?’ I say, from an insurance perspective, I think nothing. ”
Monica Palmeira, associate director of economic equity at the nonprofit Greenling Institute, said AI could be used to increase blue linings (a modern version of red linings), a practice in which financial institutions and insurance companies pull out of poor areas or sharply raise interest rates in areas considered to be at higher risk from climate change.
When Palmeira and her colleagues began studying communities considered vulnerable to the effects of climate change, “we saw this pattern of the same communities being excluded from financial services in the past continue to emerge as excluded today.”
He said insurance was “one of the first ways communities experience the withdrawal of financial services, and now entire communities are starting to become uninsurable, which means they can’t get mortgages. So this contagion starts to occur.”
To address these concerns, states are taking steps to protect consumers. One common theme among these measures is increased transparency. It requires consumers to be informed when AI is used in decision-making, companies to maintain guidelines for the responsible use of AI, and to publicly share policies and procedures regarding the use of AI. These requirements are included in the National Association of Insurance Commissioners’ guidance, which provides a framework for the responsible use of AI.
At the same time, some lawmakers are calling for human review of insurance company decision-making. Florida Representative Hilary Cassell recently sponsored a bill that would allow humans to make the final decision on insurance claims.
“I think insurance companies should be allowed to use AI as a tool, because insurance premiums are so high nationally and especially here in Florida. If insurance companies can use AI to aggregate their resources and pass on the savings from using those types of tools to consumers,” she told Capital & Main. “But we also know that AI can be used for malicious purposes, and we thought it was really important that in the field of dealing with denials, computers don’t always get it right.”
The state-level action gave Palmeira hope that consumers “start to understand the level of scrutiny and transparency they really deserve.” He noted that the National Association of Insurance Commissioners faced an outcry from consumers at a meeting just before it released its guidance on AI. “The way the insurance industry has been able to influence insurance regulation has been so dominant for so long that we may finally be starting to see a small shift in the tide.”
Palmeira acknowledged that climate change could make certain regions of the country uninsurable, and that insurance companies could use AI in beneficial ways to improve risk modeling and predictive analysis.
“But it must not be a black box model, with no human checks on their decisions or working with local communities to make informed decisions about their lives and well-being.”
One possible tool is parametric insurance. It leverages data such as satellite imagery, Internet of Things (IoT) sensors that detect changes in the environment, and weather information to trigger automatic payments to policyholders when certain weather conditions are met at a particular home. Palmeira said this could be a “very useful tool to make sure people cover some baseline in a very efficient way to deploy it.”
She also suggests more community-based measures, such as local governments insuring entire neighborhoods, and “more careful and serious discussions about relocation in very specific areas.”
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