[REN #833] Fire Insurance Battle in California

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Real Estate New Brief: Fire Insurance Battle in California

There’s a battle brewing over fire insurance in California. The state insurance commissioner issued an order that bans insurance companies from dropping policies for homes in wildfire-prone areas. Commissioner Ricardo Lara also wants the California Fair Plan Association to offer more comprehensive coverage. This last week, the insurance industry went to court to get Lara’s mandate overturned, claiming that Lara has gone beyond his authority and the mandate is a violation of the law.

The California wildfire crisis has turned into a wildfire insurance crisis. While state law prohibits the non-renewal of policies for wildfire victims who’ve suffered a total loss, insurance companies have been refusing to renew policies for high-risk homeowners because they live near an area devastated by wildfire.

Wildfire Insurance Crisis

According to the Los Angeles Times, state officials reported last year that the number of people dropped by insurance companies more than tripled from 2010 to 2016. The paper says that complaints about high insurance premiums also surged 217%. (1) Over the last year, non-renewals rose another 10% in seven counties across the state.

Lara’s order calls for a one-year moratorium on the dropping of policies for high-risk homeowners. He’s hoping that the moratorium will give insurance companies and homeowners time to adapt and reduce the risk of wildfires, and also give state lawmakers time to come up with long-term solutions for a wildfire situation that’s growing worse with climate change.

The moratorium will help some 800,000 people who live in 16 zip codes adjacent to declared wildfire disaster areas. Lara says, “This wildfire insurance crisis has been years in the making, but it is an emergency we must deal with now if we are going to keep the California dream of home ownership from becoming the California nightmare.” (2)

Between a Rock and a Hard Place

Amy Back of the non-profit United Policyholders says: “Home insurance is not a luxury — it’s a necessity. Yet for hundreds of thousands of Californians, it’s become almost impossible to find and afford. This puts people between a rock and a hard place, and communities up and down the state are hurting.”

Homeowners who lose their insurance are often forced into a last ditch option called the FAIR Plan. That’s a bare bones fire insurance policy provided by a coalition of insurance companies. According to the website, “The FAIR Plan provides insurance as a last resort, and should be used only after a diligent effort to obtain coverage in the voluntary market has been made.”

Under this plan, it’s the homeowner’s responsibility to establish the fair market value of the property, and the maximum coverage is only $1.5 million. That’s much less than the value of many California homes. It also leaves it up to the homeowner to determine other costs such as labor and materials for repairs.

In addition to the moratorium, Lara wants the FAIR Plan to expand its coverage from a fire-only policy to a full homeowner’s policy known as HO-3. He also wants the maximum coverage limit increased to $3 million. And, he wants to make it easier for people to pay their premiums on a monthly basis, by credit card, without fees.

FAIR Plan Objects to HO-3 Coverage

Lara’s mandate does not sit well with the FAIR Plan. The FAIR Plan had already agreed to some of the provisions called for by Lara, including a coverage increase to $3 million. It had also agreed to implement a credit card payment system, so those two issues are not causing the problem. The main point of contention is Lara’s order to provide full coverage.

Even though the FAIR Plan is considered a temporary insurance solution, Lara wants it to provide full coverage so homeowners are not forced to run around looking for and paying for a second policy so they can have full coverage. That costs more because insurance includes administrative fees, doubling that part of the cost.

The FAIR Plan filed a petition in the Los Angeles Superior Court last week to undo Lara’s order. The petition claims that Lara doesn’t have the authority to issue the mandate, and that it is essentially illegal.

As reported by the Insurance Journal, FAIR Plan president, Anneliese Jivan, said in a statement, “We appreciate the efforts of the commissioner to address the impact of California’s devastating wildfires on homeowners. Unfortunately, this order, as written, would negatively impact consumers and further destabilize the voluntary insurance marketplace.” She says, “It provides no incentive for the private market to offer insurance in areas at risk of wildfire.” (3)

Lara issued a response, saying, “I took these actions on behalf of California consumers throughout the state who are struggling to find adequate coverage to protect their homes. I will fight for consumers against this industry-driven lawsuit. Insurers can’t have it both ways; they cannot continue to cancel policyholders at an alarming rate, leaving them with the FAIR Plan as their only option, with woefully inadequate coverage.”

It’s not clear how the FAIR Plan’s court petition will affect the implementation of Lara’s order. Lara wants the HO-3 coverage to begin by June 1st of next year. Some of the other changes could happen within the next few months.


(1) LA Times Article

(2) Press Release – Insurance and CA Wildfires

(3) Insurance Journal Report

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