The California FAIR Plan recently received authorization to impose a hefty $1 billion assessment on its member companies to assist in covering the costs of the devastating fires in Los Angeles. This move, approved by the state’s insurance commissioner, Ricardo Lara, raises concerns about the potential financial burden on consumers, who may be required to shoulder nearly half of the assessment under a new Department of Insurance policy.
This assessment comes in response to the expected losses of approximately $4 billion resulting from the Pacific Palisades, Eaton, and Hurst fires. The FAIR Plan, established as an insurer of last resort, relies on California’s licensed property insurers to pay claims when the plan depletes its funds. These insurers have the option to surcharge their policyholders to recover some of the assessment, as per a policy initiated by Commissioner Lara last year.
In his defense of the policy, Lara emphasized the importance of protecting consumers from bearing the full brunt of the assessment, ensuring that the FAIR Plan meets its obligations to policyholders. He reiterated this stance upon the approval of the $1 billion assessment, clarifying that insurers do not currently have the authority to impose surcharges on their own policyholders. This decision remains pending, awaiting Lara’s further review.
“I took this necessary consumer protection action with one goal in mind: The FAIR Plan must pay claims just like any other insurance company. I reject those who are hoping for the failure of our insurance market by spreading fear and doubt. Wildfire survivors can’t cash ‘what ifs’ to pay for food and rent, but they can cash FAIR Plan checks,” Lara stated.
Under Lara’s policy, the FAIR Plan can assess its member carriers up to $1 billion for residential claims and an additional $1 billion for commercial claims once it exhausts its reserves, reinsurance, and catastrophe bonds. The carriers, in turn, have the option to surcharge their residential and commercial customers for half of the assessment. Homeowners specifically cannot be surcharged for commercial losses. The plan revealed that 97% of its L.A. fire claims pertained to residential properties.
Legislative Response and Consumer Advocacy
In response to the escalating crisis following the Pacific Palisades fire, legislators swiftly introduced a bill permitting the FAIR Plan to issue bonds in cases of liquidity challenges. Although the bill enjoys the FAIR Plan’s support, it awaits further progress through the legislative process.
Consumer Watchdog, a Los Angeles-based advocacy group, vowed to challenge the policyholder surcharges, emphasizing the unfair burden placed on homeowners due to insurers redirecting a significant number of policyholders to the FAIR Plan. The group highlighted the issue of surcharges being introduced through a “bulletin” rather than a formal regulation, bypassing standard rulemaking procedures.
Executive director Carmen Balber expressed concern, stating, “Homeowners across the state shouldn’t be on the hook because insurance companies dumped too many homeowners on the FAIR Plan. We’ll explore every legal option to stop the surcharge if insurers try to make homeowners pay.”
Historical Context and Market Implications
This marks the first time since its establishment in 1968 that the FAIR Plan has levied assessments on its members, a precedent set by previous financial strains resulting from fires and losses linked to the 1994 Northridge earthquake. Despite these assessments totaling $260 million back then, equivalent to $563 million today, policyholder surcharges were not implemented.
The issue of whether carriers can levy surcharges on their own policyholders for FAIR Plan assessments has gained traction amidst California’s home insurance crisis. With insurers halting new policies and issuing nonrenewal notices, homeowners have increasingly turned to the FAIR Plan, which offers limited coverage capped at $3 million for dwelling protection.
The FAIR Plan’s customer base has surged from around 200,000 residential policyholders in 2020 to over 450,000 by September, with potential liabilities skyrocketing to $458 billion. Amidst ongoing claims for damages from the Palisades and Eaton fires, the FAIR Plan has disbursed $914 million to policyholders, covering a range of losses including total, partial, and fair rental value claims.
The plan’s reinsurance, totaling $5.78 billion, features a $900-million deductible and co-payments that influence the cash payouts, driving them up to $3.5 billion. Commissioner Lara’s directive allowing policyholder surcharges empowers insurers to pursue these measures, with State Farm General recently requesting a 22% rate hike to offset its L.A. fire losses.
Jon Farney, CEO of State Farm Mutual, indicated the company’s intent to recover charges from policyholders as permitted by state law, reflecting the broader industry trend. Other major insurers, including Allstate and Chubb, have reported L.A. fire losses exceeding $1 billion, underscoring the widespread financial impact across the insurance sector.
Travelers Cos. projected pretax losses of approximately $1.7 billion from the wildfires, encompassing residential and commercial policies, FAIR Plan assessments, and reinsurance recoveries. Amidst mounting financial pressures, the insurance industry faces significant challenges in navigating the aftermath of these catastrophic events.
