By Megan Fan Munce, THE SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/insurance-fair-plan-wildfire-19597701.php
With California fire season already off to a dire start, new reforms seek to spell out just how much the state’s insurance policyholders could be charged if another year of massive wildfires leads the FAIR Plan to run out of money.
On Friday, Insurance Commissioner Ricardo Lara announced an agreement with the FAIR Plan that would increase the coverage limit for commercial properties it insures and also clarify what happens if a catastrophic fire leaves the insurer unable to pay all of its claims on its own.
The FAIR Plan is a state-created but privately run “insurer of last resort” that offers basic fire insurance coverage to homeowners and businesses unable to obtain it anywhere else.
As California’s insurance crisis has worsened, the number of FAIR Plan clients has exploded. From September 2019 to March 2024, residential policies covered by the program have more than doubled, from just under 154,500 to over 365,600, according to the insurer’s data.
“The FAIR Plan is quickly moving to be the first resort for a lot of people. We’re one of the largest writers in the state right now in terms of new business coming in,” FAIR Plan President Victoria Roach testified at a state hearing in April.
The FAIR Plan now carries around 3% of all home insurance policies in the state. That includes anywhere from 20% to 40% of homes in high-risk wildfire areas such as El Dorado and Tuolumne counties, according to data from the state’s Department of Insurance. It’s left many worried what could happen if a massive fire in one of those areas results in more insurance claims than the FAIR Plan can afford to pay out.
Under current state regulation, if the FAIR Plan ran out of money, it would charge all private insurers in the market proportionally to their market share for the remaining balance. Companies could then file with the department to pass those costs on to their policyholders.
Lara’s new agreement directs insurance companies to split the costs with consumers. For up to $1 billion in residential claim payments, insurance companies would be required to pay half and then — with approval from the department — charge residential policyholders for the other half. The same would happen with commercial policyholders for up to $1 billion in commercial claims.
It’s rare for the FAIR Plan to have to turn to private insurers for help. The deadly wildfires of 2017 and 2018 cost the entire industry around $12 billion each, according to department data, but did not cause the FAIR Plan to charge the industry.
Deputy Insurance Commissioner Michael Soller said the last time it happened was after the 1994 Northridge earthquake, which caused an estimated $32 billion in insured property damage (in 2023 dollars) and is still the ninth costliest natural disaster in the country, according to the Insurance Information Institute. As a result, 93% of companies left the market, leading the legislature to remove earthquake damage coverage from a standard home insurance policy, Soller said.
Insurance companies would be asked to step in only if the FAIR Plan exhausted all its reserves, its reinsurance — insurance for insurers — and its catastrophic bonds and if it still had outstanding claims to pay, according to the department.
In addition to clarifying the payment process, Lara announced the FAIR Plan had agreed to raise its commercial coverage limits to $20 million per building, with a cap of $100 million per property. The long-promised agreement seeks to address scenarios where large multi-building developments — such as housing complexes — are unable to get the full coverage they need under the FAIR Plan’s previous commercial cap of $20 million per property.
Insurance companies will be allowed to charge an upfront “temporary supplemental fee” to their high-value commercial policyholders in order to make sure funds are available for the FAIR Plan to take on this increased liability. Soller said the exact fee would be subject to Department of Insurance approval, and any excess funds would be refunded to policyholders in 2028 once the program sunsets.
A spokesperson for the FAIR Plan said the department agreed to give insurers 120 days to submit a filing to increase coverage limits. Once a filing is approved by the department, the FAIR Plan will then have 120 days to begin offering the policy, the spokesperson said.
“The FAIR Plan appreciates the Insurance Commissioner’s attempts to seek balance in addressing consumer needs and gaps in the insurance marketplace while protecting the financial stability of the FAIR Plan,” the spokesperson wrote. “We look forward to working with the CDI on the development and review of a rate filing for the increased commercial policy limit.”
The last aspect of the agreement requires the FAIR Plan to increase how often it publicly shares data with the Legislature and the department to increase oversight.
Representatives of the building and insurance industries responded favorably to the agreement. Mark Sektnan, the vice president for state government relations for the American Property Casualty Insurance Association, an industry group, called it “an important step toward restoring the FAIR Plan’s financial stability.”
Dan Dunmoyer, the president and CEO of the California Building Industry Association, said in statement that the increased coverage limits would address the issue of builders across the state, especially in wildfire-prone areas, being unable to secure adequate insurance coverage.
“Commissioner Lara’s initiative to increase coverage limits and enhance financial oversight provides the necessary assurance that our projects and investments are protected. This reform is not only beneficial but long overdue, paving the way for continued growth and development in a more secure and predictable insurance market,” Dunmoyer said.
But Carmen Balber, the executive director of the consumer advocacy group Consumer Watchdog, derided the proposal as a “bailout” for insurance companies.
“If the FAIR Plan gets into trouble it will be because insurance companies dumped too many Californians onto its books,” she said in a statement. “Those companies should be on the hook for the fallout, not every homeowner in the state.”
Earlier this month, several homeowners filed a lawsuit against the FAIR Plan and the department, alleging the FAIR Plan did not cover all of the damage caused by fires.
In an interview with the Chronicle on Wednesday, Lara said that decreasing the number of policies on the FAIR Plan would be a key metric of success for his reforms.
“It’s critical for Californians to understand that a growing FAIR Plan contributes to our insurance crisis,” Lara said in a statement Friday. “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.”