The California FAIR Plan – Fire Insurance of Last Resort

    Late one January evening, as Orinda resident Carol Bergren was about to turn in for the night, she noticed what appeared to be a hairline crack in the wall behind her bed. With growing fascination, Bergren watched as the gap slowly widened, the wall appeared to be moving and the air in her bedroom grew hazy.
    In no time at all, smoke was pouring into the room and Bergren was dialing 911.
    Within minutes, the full force of the Moraga Orinda Fire Department was at her house, fighting a two-alarm fire. She has nothing but high praise for the local fire department – they were professional, knowledgeable and remarkably kind.
    As Bergren and her husband watched flames – which ironically had nothing to do with wildfires – leap from their roof, their one small consolation was that they were insured.
    Soon they would discover the limitations of their FAIR (Fair Access to Insurance Requirements) Plan – the only option available when Farmers Insurance Group had chosen not to renew their fire policy in 2022.

The FAIR Plan
    Established in 1968 in response to the decade’s brush fires and riots, the California FAIR Plan was only ever intended to be a temporary safety net for high-risk areas until a traditional carrier became available.
    The FAIR Plan is a group made up of all the insurers licensed to provide property/casualty insurance in the state. They are required to participate by law as a condition of doing business in California and share in the profits, losses and expenses of the Plan in direct proportion to their market share of their business in California. The plan is not a public entity and receives no taxpayer funding.
    According to the Personal Insurance Federation of California, “The FAIR plan has historically insured approximately 123,000 policies. However, the number of homeowners in the FAIR Plan is rising in high fire risk areas, reaching 273,000 policies as of December 2022.
    “For residents unable to find an admitted market policy, most likely those in the wildland urban interface (WUI), they will pay much higher premiums if forced to obtain coverage through the FAIR Plan. Allowing the FAIR Plan, ‘the expensive market of last resort,’ to grow too large can threaten the sustainability of the California admitted insurance market.”

Proposition 103
    As well as the growing threat of wildfire in the state, Proposition 103, passed by voters in 1988, has added to the dire fire insurance situation in California, as it forces insurance companies to seek prior approval from the California Department of Insurance before raising premiums.
    Although the intention of the law was to protect consumers from arbitrary rate hikes and to encourage a competitive marketplace, many insurers are citing it as a reason to drop out of the state, claiming that they can no longer be profitable if their rates are subject to the state insurance commissioner’s approval. They assert that California premiums have not kept up with the rate of inflation and the proposition has kept rates artificially low compared to other states.

Increased Wildfires in California Impact Fire Insurance Options
    In 2017, after 9,560 California wildfires resulted in an unprecedented loss of life and property, followed by 8,527 equally destructive fires the following year, approximately 235,000 households suddenly found themselves with non-renewable policies – an increase of 42% over previous years.
    A year ago, State Farm – California’s largest single provider of bundled home insurance policies – announced it would stop selling new policies in the state. This March the insurance giant decided not to renew 72,000 existing policies.
    It has become increasingly difficult to find a traditional insurance carrier when so many companies are denying renewals or pulling out of California altogether.
    Former Chief Deputy Commissioner for the California Department of Insurance, Orinda resident Joel Laucher, calls this “the most challenging insurance market” he has seen in 40+ years as an underwriter, regulator and consumer advocate.
    Although the California FAIR Plan Association admits that it is “the state’s insurer of last resort,” more and more homeowners are forced into the plan for lack of other alternatives.
    At present, many insurance brokers and realtors warn against using the FAIR Plan. Its available timeframe and solvency are not guaranteed.
    According to Independent Insurance Broker, Karl Susman, the Fair Plan Association currently has about $300 billion in total exposure and $200 million in the bank. A catastrophic event could wipe that out.

One Homeowner’s Experience with the FAIR Plan Claims
    The Bergrens have found it exhausting to work with the California FAIR plan. Almost two months after the fire, the couple reported being “so disgusted, angry and discouraged that it’s hard to get through each day,” because the insurers were “slow to respond, slow to show up and have yet to come up with any financial relief.”
    While the Bergrens acknowledge that insurance companies are notoriously slow to pay up, they spent almost $100,000 in living expenses and clean-up in those first two months as they waited for a check that was continually promised “next week.”
    “One end of our house is clearly destroyed,” Bergren said. “There are gaping holes in the roof and laundry where the firefighters had to cut through, and tremendous water damage that warped the floors and flooded the basement.”
    FAIR Plan adjustors advised the Bergrens to get rid of all mattresses, pillows, upholstered beds, couches and rugs – even their beloved 1941 Steinway piano. Despite being without gas, electricity, a kitchen or laundry, and with just one functional half-bath, the two seniors were told that they could live in the house. They chose instead to buy a used RV and park it on their front drive. It was over two months before a check arrived from the FAIR Plan to help cover the cost.
    “It has been really hard to understand the poor communication, impossible ultimatums and complete disregard for our safety and living conditions from a company whose mission is to provide assistance to people in crisis,” said Bergren.
    In March, Insurance Commissioner Richard Lara unveiled the first wave of his proposed regulatory reforms which he hopes to have in place by December 2024. Intended to address “decades-long neglected issues,” the reforms will require property insurers to adopt “catastrophic modeling” when calculating insurance rates, in the form of forward-looking risk from climate change, rather than basing them on previous trends.
    “We can no longer look solely to the past as a guide to the future,” said Lara.

Coming Next: The impact of the insurance crisis on new home sales.