A new law that could force homeowners across California to cover billions of dollars of insurer losses caused by a catastrophic wildfire is generating pushback from a leading consumer group, which has called it an industry “bailout.”
State Insurance Commissioner Ricardo Lara announced Friday he had reached an agreement with the California FAIR Plan that would allow losses suffered by the state’s insurer of last resort to be recouped by surcharges on residential and commercial insurance policies statewide in an “extreme worst case scenario.”
The FAIR Plan, which insures property owners who cannot get or afford traditional policies, is backed by licensed insurers such as State Farm and Allstate. As the program is structured, they are on the hook to pay claims if the FAIR Plan runs through its reserves, reinsurance and catastrophe bonds.
Under Lara’s agreement, if that happens and those insurers suffer large losses, they could seek to be reimbursed by their own policyholders. The deal allow insurers that are assessed by the FAIR Plan to cover up to $1 billion in residential losses and up to $1 billion in commercial losses to ask the insurance commissioner to allow them to surcharge their policyholders for half of those amounts. They also could seek surcharges on policyholders for 100% of losses that exceed those limits. Homeowners would not be surcharged for commercial losses.
“It’s outrageous and outside the law for the insurance commissioner to force consumers to bail out home insurance companies and then call that consumer protection,” said Carmen Balber, executive director of Los Angeles-based Consumer Watchdog.
Gabriel Sanchez, Lara’s press secretary, defended the agreement, saying, “It would be easy to listen to the elites and the entrenched interests defending a system that clearly isn’t working. Commissioner Lara is focused on hearing from the public, following the data and creating realistic, long-lasting solutions for everyone in this state.”
The FAIR Plan assessment is the latest element of Lara’s Sustainable Insurance Strategy, a package of executive actions intended to stabilize the California market, which has seen insurers stop writing new policies and decline to renew existing policies amid a sharp increase in claims for wildfires damage.
Just this week, firefighters are battling the massive Park fire in Butte, Tehama and Shasta counties, where 100 structures have been destroyed, 4,200 were threatened and 26,000 people were forced to evacuate as of Monday. It is the sixth-largest fire in state history.
As insurers have pulled back from high-fire risk neighborhoods, the number of residential FAIR Plan policies has more than doubled since 2019 to about 408,000 as of June. Commercial policies similarly increased to 11,026.
The FAIR Plan has a market share under 4%. Policyholders are concentrated in canyons, hillsides and other high-risk neighborhoods, vulnerable to fire and catastrophic insurance losses. The plan’s loss exposure was $393 billion as of June, even though the plan’s policies are more limited than those available through the regular commercial market.
Lara said Friday in a release announcing the agreement that “modernizing the FAIR Plan is a crucial step in our strategy to stabilize California’s insurance market.”
The FAIR Plan’s financial risk is overwhelmingly due to its residential policies, which account for about 95% of its $393 billion in total loss exposure, according to the insurer.
The Insurance Department downplayed a worst-case scenario, noting that even the 2018 Camp fire in Butte County that ravaged the town of Paradise, destroying or damaging more than 19,000 structures and causing some $16.5 billion in damage, did not deplete the FAIR Plan‘s reserves.
The Insurance Department contended that the agreement was actually favorable to consumers because under current law there is nothing prohibiting the insurers from seeking policyholder assessments on all FAIR Plan losses they must cover.
“The agreement … requires insurance companies to share the burden, something not clearly outlined before. That protects consumers by providing predictability which leads to stability,” Sanchez said.
Balber disputed that reading of the law and said Lara has not been able to get legislative authority for the insurer policyholder assessments, so he proceeded under questionable executive authority. “We have several questions about the legality of this proposal and are looking into it,” she said.
Consumer Watchdog has called for requiring insurers to offer policies in wildfire-prone neighborhoods to homeowners who have taken steps to reduce fire risks on their property as the best method to reduce enrollment in the FAIR Plan and stabilize the state’s insurance market.
Another key element of Lara’s FAIR Plan reforms call for the insurer to offer greater commercial coverage — up to $20 million per structure and $100 million for any one location.
Dan Dunmoyer, chief executive of the California Building Industry Assn., said the trade group has been seeking higher commercial coverage limits due to the rise of insurance premiums, which have slowed the construction of condominium complexes that builders insure.
He estimated that astronomical insurance rate increases have slowed condo construction by about 70% in the last 12 months, with fewer than 6,000 units built.
“Our view on this is: Get some competition in the marketplace, expand commercial coverage, let us build the most affordable for sale homes in California, which are condos,” he said.
The American Property Casualty Insurance Assn., an industry trade group, called Lara’s plan “an important step toward restoring the FAIR Plan’s financial stability and ensuring consumers have access to the coverage they need.”
The deal reached by Lara with the FAIR Plan is a binding legal stipulation and it requires the insurer to develop a “Plan of Operation” within 30 days detailing how it will carry out the agreement. It has 120 days to submit a rate plan for offering the higher commercial coverage.
The FAIR Plan was sued last week by four California residents who claim its policies offer subpar coverage for fire and smoke damage. The proposed class-action lawsuit seeks to represent more than 300,000 of the plan’s residential policyholders. The plan also is facing a lawsuit from more than 1,000 homeowners in Los Angeles who say the plan wrongly denied their claims.