FAIR needs money to remain solvent, Lara agrees

Last week, California Insurance Commissioner Ricardo Lara announced that he had approved a request from the State’s FAIR Plan to augment its funding.

“I took this necessary consumer protection action with one goal in mind: the FAIR Plan must pay claims just like any other insurance company,” Lara said in his press release. “. . . Wildfire survivors can’t cash ‘what ifs’ to pay for food and rent, but they can cash FAIR Plan checks.”

The recent wildfires through Southern California have placed a massive demand on the FAIR Plan funds. As of Feb. 11, the FAIR Plan has paid more than $914 million to policyholders, including advance payments, to cover claims related to the Palisades and Eaton fires.

The FAIR Plan has estimated its total loss from the Palisades and Eaton fires at approximately $4 billion and anticipates paying 75%, or $2.34 billion, of the remaining $3.125 billion reserved for unpaid losses over the next few months and may be called upon to pay more if there are subsequent events later this year, according to Lara.

As of Feb. 9, the FAIR Plan has received approximately 3,469 claims for damage caused by the Palisades Fire and approximately 1,325 claims for damage caused by the Eaton Fire. In addition, more than 500 claims have been submitted for other reasons, such as windstorms and fire claims unrelated to these wildfires. New claims, including total loss claims, continue to be reported daily, according to FAIR.

The FAIR Plan was established by statute in 1968 as California’s insurance safety net. The California FAIR Plan Association was established to meet the needs of California homeowners unable to find insurance in the traditional marketplace. It currently has about 450,000 policies.

The FAIR Plan is not a state agency, nor is it a public entity. There is no public or taxpayer funding. Every property insurance company licensed in California automatically becomes a FAIR Plan member as a condition of doing business in California and may be called upon to help fund the FAIR Plan’s continued operation in response to extreme catastrophes such as these recent Southern California wildfires.

Lara authorized member companies to provide an additional $1billion to the current FAIR financial resources. This is commonly referred to as an assessment, the first in more than 30 years. Consumers will not have to pay the full cost of the assessment, with insurance companies responsible for half the assessment under an agreement reached last year.

Before insurers may recoup up to 50 % of their assessment from customers, they must ensure that their costs are not reimbursed from reinsurance or other sources.

Assessments are based on an insurer’s market share of dwelling and commercial policies in place from two years ago. Member companies would receive their share of the assessment amount broken down between the 2024 and 2025 pool years and by line of business. Once the FAIR Plan issues an assessment to a member company, the insurer would have up to 30 days to submit the payment to the FAIR Plan, according to its press release.

With this money, the FAIR plan will be able to hire additional staff needed to process and pay these claims fairly, fully, and quickly.

Lara also required the FAIR Plan to utilize all available funds, including reserves and reinsurance funds.

However, the Consumer Watchdog issued a strong objection to Lara’s actions.

“The FAIR Plan is in trouble because insurance companies dumped too many homeowners. That’s why insurers are on the hook for FAIR Plan losses,” said Carmen Balber, executive director of Consumer Watchdog in a press release. “Homeowners across California should not have to pay a penalty to repair the damage from home insurance companies’ predatory behavior. Consumer Watchdog is exploring every legal option to stop a bailout if any insurance company seeks to make consumers pay,”

Further, Consumer Watchdog claimed this action is contrary to the law because the statute enacting the FAIR Plan explicitly put insurance companies, not consumers, on the hook for these losses. The statute requires insurers to participate proportionally in the “writings, expenses, profits, and losses” of the Fair Plan.

Subject to the Commissioner’s prior approval under Proposition 103, insurance companies may issue a temporary supplemental fee as a percentage of the policy premium and cannot pass assessment costs on to consumers in future rates.

The FAIR Plan also relies on reinsurance to cover claims. To date, the FAIR Plan has met its $900 million deductible and has accessed $350 million in reinsurance. The FAIR Plan can access additional layers of reinsurance based on losses incurred and outstanding reserves up to a $5.78 billion limit.

“We must take action to improve the financial standing of the FAIR Plan and prevent this situation from recurring,” Lara urged in his press release. “I strongly support legislation this session — just as I did last session — that would allow the FAIR Plan to access credit lines and catastrophe bonds to help pay claims in worst-case scenarios. I urge the Legislature to act quickly and send it to the Governor’s desk.”

“This gift to insurance companies rewards bad behavior and will only incentivize insurers to drop even more homeowners and force them onto the FAIR Plan in future, because there’s no consequence for abandoning these families,” argued Balber in the Consumer Watchdog press release.

Moving people off the FAIR Plan into comprehensive coverage is the way to protect consumers and stabilize the FAIR Plan, not a bailout, said Consumer Watchdog. The group called for new protections including a requirement for insurance companies to cover homeowners who meet statewide mitigation standards and protect their homes from wildfires.