Consumer advocates are suing to halt a massive homeowner-funded bailout of California’s last-resort insurance program after it reported it would run out of money to pay claims arising from the devastating Los Angeles wildfires.
In February, the state insurance department allowed the program, known as the FAIR Plan, to collect $1 billion in emergency payments from other insurers — who are expected to pass on a significant portion of those costs to policyholders statewide.
Consumer Watchdog, the Santa Monica-based group that filed the lawsuit against the insurance department, contends regulators lack the authority to permit insurance companies to put homeowners on the hook for the payments.
“We look forward to defending the rights and pocketbooks of Californians and stopping this socialization of FAIR Plan losses at the public’s expense, while the FAIR Plan’s profits will wholly remain with the insurance companies,” Consumer Watchdog attorney Ryan Mellino said in a statement Thursday.
It’s still unclear how much homeowners might have to pay, which homeowners might be charged, or when they might see a new fee. Under new state regulations, insurers can levy temporary surcharges totaling up to half of the $1 billion emergency assessment, according to the insurance department.
State insurance regulators declined to comment on the lawsuit in detail, but said it will “hurt homeowners, small business and nonprofits who need access to insurance options, while doing nothing to address the insurance crisis.”
The FAIR Plan is a state-mandated, high-risk pool of private insurers for homeowners and other property owners who can’t find traditional coverage. It offers only bare-bones fire damage protection at a much higher premium than standard insurance options. In recent years, the number of policyholders on the FAIR Plan has ballooned to more than 350,000 as insurers ended homeowners’ coverage across the state amid worsening climate-driven wildfire seasons.
The insurance industry contends any price hikes assessed to policyholders are necessary to ensure the FAIR Plan remains a viable option in fire-prone parts of the state, including the East Bay Hills, Wine Country and the Santa Cruz Mountains.
“Blocking recovery of the additional costs insurers have paid to prop up the FAIR Plan would jeopardize the last-resort coverage option for homeowners — and push our fragile insurance market closer to total collapse,” the American Property Casualty Insurance Association said in a statement.
According to the FAIR Plan, the state approved similar bailouts in 1993 after fires in Altadena and Malibu, and again in 1994 and 1995 following the Northridge Earthquake. The total value of those assessments was $260 million, or $563 million adjusted for inflation, well below the current $1 billion requested by the FAIR Plan. Previously, insurers could have tried to recoup those costs by raising premiums instead of charging one-time fees.
The insurance department said providers now seeking to impose a temporary surcharge must first get permission from regulators on a case-by-case basis. Insurers have about another four months to seek approval.
The lawsuit, filed this week in a Los Angeles County court, comes as some of the state’s largest insurers, including State Farm and Allstate, have paused writing new policies anywhere in California despite raising rates. They’ve cited increasing wildfire risks and rising rebuilding costs, as well as the state’s insurance regulations, which are among the strictest in the nation.
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State Farm, the largest insurance company in California, has asked state regulators to quickly approve an interim rate hike averaging 17% for homeowners to prevent a “dire situation” for its customers and the broader insurance market in the wake of the disastrous Los Angeles wildfires, in which damages totaled billions of dollars. The insurer initially asked for a 22% increase but has since lowered its request.
State Farm, which previously had issued warnings about the financial stability of its California-only subsidiary, said the emergency increases are necessary to ensure that it can continue to pay out claims after covering more than $1 billion in losses due to the blazes.
To steady California’s faltering home insurance market, state regulators recently finalized a plan that includes allowing insurers to raise rates based on the growing threat of climate change, long an industry demand, in exchange for expanding coverage in parts of the state with the greatest wildfire risk.
In the greater Bay Area, insurers who opt into the plan will be required to write more policies in Marin, Napa and Santa Cruz counties, as well as parts of San Mateo and Sonoma counties and a sliver of Santa Clara County. Insurers would also have to offer new policies for fire-risk homes in more urban areas such as the Oakland Hills and Los Gatos.
