After saying it would run out of funds by March, California’s last-resort fire insurance provider will impose a special charge of $1 billion on homeowners and insurance companies, the first such move in more than three decades.
The state Insurance Department today approved a request from the provider, the FAIR Plan, to impose the charge and ensure it stays solvent as it covers claims from victims of the Los Angeles County fires, the department said in an order by Commissioner Ricardo Lara.
The plan’s more than 400,000 customers will likely see temporary fees added to their insurance bills as part of the charge, known as an assessment — marking the first time an assessment has been imposed directly on customers rather than just insurance companies.
The FAIR Plan is a pool of insurers required by law to provide fire insurance to property owners who can’t find insurance elsewhere. Its customer base has grown dramatically in the past several years as insurance companies have increasingly refused to write or renew policies in the state, citing increased risk of wildfires.
Many LA fire victims have insurance through the FAIR Plan. Residents of the Pacific Palisades, where thousands of structures burned last month, held 85% more FAIR Plan policies in September than they had a year prior.
The FAIR Plan assessment is the latest insurance fallout from the LA fires. State Farm, California’s largest property insurance provider, recently asked for permission to temporarily raise its premiums an average of 22% because of the claims it is facing from the fires. The insurance department is still considering that request.
The FAIR Plan’s president had been warning about its ability to pay claims in case of catastrophe, telling a state Assembly committee last year that the plan “one event away from a large assessment.” A spokesperson for the plan has not responded to a request for comment.
As of Feb. 9, the plan had paid more than $900 million in claims, the commissioner’s order said.
It is unclear how long FAIR Plan customers will have to pay the temporary fees, or on what percentage of their premiums the fees will be based.
Under new regulations that took effect this year as part of Lara’s effort to address the growing difficulty of finding property insurance in California, customers of the FAIR Plan will now have to shoulder 50% of any assessment through a temporary fee added to their premiums. Before the new rules went into effect, the plan would have gotten the additional funds directly from its member companies, which would have then tried to recoup that money by raising premiums.
The insurance industry supports the change . “This is essential to prevent even greater strain on California’s already unbalanced insurance market and avoiding widespread policy cancellations that would jeopardize coverage for millions of Californians,” said Mark Sektnan, vice president for state government relations for the American Property Casualty Insurance Association, in a written statement.
But Consumer Watchdog, a consumer advocacy group, is considering suing over the fact that consumers are now on the hook for the additional funding for the FAIR Plan.
“We’ll be exploring every legal option to protect (consumers) from those surcharges,” Carmen Balber, executive director of the group, told CalMatters.
Balber added that some insurers, such as Mercury General Corp., said shortly after the L.A. fires began in early January that they expected to have adequate reinsurance to cover any possible increased contributions they would have to make to the FAIR Plan. In that case, “are they going to let insurers double dip and charge consumers (anyway)?” Balber asked.
The insurance department said the last time the state approved additional funds for the FAIR Plan was in 1993, after the Kinneloa Fire in Altadena and the Old Topanga Fire in Malibu and Topanga. Some of those areas were also affected by the fires this year. The additional funds approved then are equivalent to $563 million today, the department said.
In a statement, Lara characterized the new regulation as a “necessary consumer protection action.” The commissioner added: “The fact that we are once again facing this issue 30 years after wildfires devastated these same communities highlights the need for change.”
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