Lawsuit Challenges California’s Authority to Require Insurance Coverage for Residents of Wildfire-Prone Areas
As California homeowners in wildfire-prone areas struggle to find insurance, a lawsuit filed Friday will test the state’s authority to help them.
California’s insurance industry pays into a fund that sells coverage to people who can’t buy it through no fault of their own. Known as the “insurer of last resort,” the California Fair Access to Insurance Requirements Plan only offers fire insurance. Homeowners must purchase a second plan in the private market to cover other hazards like flooding and theft.
Last month, state Insurance Commissioner Ricardo Lara ordered the FAIR Plan to begin selling comprehensive insurance plans next year. His goal was to save homeowners money by not forcing them to purchase multiple insurance plans.
But Friday, the FAIR Plan Association sued Lara, arguing his order is illegal. They said state law only requires the plan to sell basic property insurance. They argued Lara’s order would hurt the private insurance market, which conflicts with the FAIR Plan’s state-mandated goals of encouraging “maximum use” of the “normal insurance market.”
FAIR Plan Association President Anneliese Jivan said the order would destabilize the insurance market because there would be no incentive for private companies to sell plans in wildfire prone areas.
“We regret having to take this action, but we will do everything we can to continue to protect policyholders and provide stability in the insurance marketplace,” Jivan said. “Unfortunately, the Commissioner’s Order would lead to unintended consequences that will harm consumers by increasing costs of property insurance and restricting options in the voluntary insurance market.”
Lara vowed to “fight for consumers against this industry-driven lawsuit.”
“Insurers can’t have it both ways,” Lara said. “They cannot continue to cancel policyholders at an alarming rate, leaving them with the FAIR Plan as their only option, with woefully inadequate coverage.”
Lara’s order also required the FAIR Plan to increase coverage limits to $3 million from $1.5 million. Lawyers for the FAIR Plan say their rates are “woefully inadequate” to cover that increase, adding that Lara can’t order them to increase coverage limits unless their rates are adequate.
The FAIR Plan is not a state agency and is not funded by taxpayers. It is funded by private insurance companies, who are required to participate in the plan if they want to do business in California.
FAIR Plan policies have increased an average of 8% per year since 2016, coinciding with some of the most destructive wildfires in state history. The Camp Fire in 2018 killed 85 people and destroyed roughly 19,000 buildings, generating $12 billion in insurance claims.
Insurance companies in California have declined to renew nearly 350,000 policies since 2015 in areas at high risk for wildfires. That data, which comes from the state Department of Insurance, does not include information on how many people were able to find coverage elsewhere or at what price.
Earlier this month, Lara invoked a new state law by temporarily banning insurance companies from dropping customers in areas hit by more than a dozen recent wildfires. That order will last for one year, and it only covers people who live within or next to the perimeter of 16 wildfires that burned across the state in October.
The Personal Insurance Federation of California says insurers have struggled to stay profitable following several years of devastating wildfires. In 2017, state insurers paid $2 for for every $1 they collected in premiums, according to data from the California Department of Insurance. Last year, insurers paid $1.70 for every $1 they collected in premiums.
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