By Camille von Kaenel, POLITICO
https://subscriber.politicopro.com/article/2024/07/insurance-commissioner-lara-00171434
SACRAMENTO, California — Insurance Commissioner Ricardo Lara announced changes on Friday to the coverage limits and financial liability of the state’s property insurer of last resort that he said would eventually give property owners more options for insurance.
What happened: Lara’s agreement with the FAIR Plan, a pool of insurance companies that is required by state law to offer insurance to Californians who can’t find traditional coverage, increases its coverage limits from $20 million per location to $20 million per building and $100 million per location. The change means there could be multiple, $20 million structures per address or location — whether that’s homes or wineries or other buildings. It also defines how much traditional insurers would be responsible for covering the FAIR Plan’s claims in case of a catastrophic loss that would wipe out its cash reserves.
Why this matters: The changes will provide some relief to both insurers that have fled the state because of wildfire risk, as well as the owners of expensive properties in fire-prone areas.
“Modernizing the FAIR Plan is a crucial step in our strategy to stabilize California’s insurance market,” said Lara in a press release. “By strengthening the FAIR Plan while providing financial stability and solvency protections, we are creating long-term security for consumers, homeowners, and businesses across the state that is long overdue.”
More context: The FAIR Plan has grown exponentially as traditional insurers flee the high wildfire risk in certain areas of the state, leaving property owners there with few options. But the property insurers are still, by law, responsible to pay out the FAIR Plan’s losses in case of a big catastrophe.
That process, though, hasn’t been very clear. Legislation that would have allowed insurers to pass along all those costs to their policyholders failed to gain traction in the Legislature both last year and this year amid pushback from consumer advocates.
Under the new agreement, the FAIR Plan would now have to first seek out credit to help cover a massive loss, and then be allowed to recoup up to $1 billion from most traditional property insurers. They can then ask the Insurance Commissioner to pass along up to 50 percent of those costs to their policyholders. If they get assessed more than the $1 billion, the insurers can ask to pass along all the costs to policyholders.
Reaction: Carmen Balber, the executive director of Consumer Watchdog, said the changes could amount to a multibillion dollar “bail-out” of the insurance companies.
“Nothing in the law today authorizes the insurance company members of the FAIR Plan to charge consumers for FAIR Plan losses, and so for the commissioner to exceed the law by granting insurance companies the ability to do that in this stipulation is really outrageous,” she said in an interview. “We’re talking about every consumer in the state paying if there’s a huge loss in in the riskiest homes.”
Rex Frazier, the president and CEO of the Property Insurance Federation of California, said the changes are encouraging because they create clearer limits on how much insurers would have to pay out to the FAIR Plan. The prospect of unlimited liability drove a lot of anxiety, furthering property insurers’ departures, he said.
“We look at this as the best of a lot of bad options, but it’s a concrete real proposal that will bring more stability to the marketplace for sure,” said Frazier in an interview.
Meanwhile, builders, homeowners associations and wineries with high-value properties also celebrated the increase in coverage limits because they haven’t found good alternatives with traditional insurers.
“Commissioner Lara’s initiative to increase coverage limits and enhance financial oversight provides the necessary assurance that our projects and investments are protected,” said Dan Dunmoyer, president and CEO of the California Building Industry Association, in a press release from the Insurance Department.
The FAIR Plan did not immediately respond to a request for comment.
What’s next: Lara has promised to implement all his reforms, which also include allowing insurers to raise their rates if they agree to write more policies in disaster-prone areas, by the end of the year.
