California's FAIR Plan, the home insurer of last resort, may need a bailout after the L.A. fires

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The California FAIR Plan Association, the state's last resort for property insurance, was born from the ashes of a tumultuous event, not literally from a wildfire, but from one of the most chaotic disturbances in the history of the United States.

Resulting in damage or destruction of over 600 buildings, insurers have had to pull out, underscoring the need for a new type of carrier to come in.

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When the plan was bailed out by the state-licensed property insurance companies, which manage the plan and provide it with a financial safety net.

The 2004 earthquake resulted in insurance losses of approximately $15.3 billion for the industry. However, even when adjusted for inflation, the combined costs of the Palisades and San Gabriel Valley's Eaton fires are likely to exceed that amount.

The larger fires were part of a larger outbreak in the area, separate from the other smaller blazes. The fires have damaged or destroyed more than 12,000 structures and have taken at least 27 lives. Many homeowners affected by the fires were on the FAIR Plan after regular insurers pulled out of California's troubled insurance market.

Spending billions of dollars could completely deplete the plan's $377 million in reserves, along with $5.78 billion in reinsurance that the FAIR Plan announced this Friday. This reinsurance agreement mandates the plan to first pay $900 million in claims and comes with other certain restrictions.

To avoid bankruptcy, the plan might have to rely heavily on its own member carriers. These carriers in return may pass the costs on to their own policyholders by adding additional fees to their premiums.

It's looking like the L.A. wildfires will end up being the most expensive natural disaster in California in recent history," stated former California Insurance Commissioner Dave Jones. "And as the effects of climate change continue to intensify, the FAIR Plan will face tremendous financial challenges in handling the risks that private insurers are now refusing to cover due to climate-related concerns.

The insurer provides coverage to rebuild a house after a fire, as well as protection for personal belongings and expenses incurred while a home is being rebuilt. However, this can be pricey, and the maximum coverage limit for dwellings is $3 million. Additionally, the plan suggests that customers consider purchasing extra private insurance to protect against floods, earthquakes, and other unforeseen losses, such as theft and liability.

It's uncertain what the total cost of the FAIR Plan's final bill will be, but its overall financial exposure has surged to nearly $459 billion over the past several years, as indicated on the plan's website. Over that time, hundreds of thousands of homeowners, many living in foothill areas and other communities prone to fires, have joined the plan as more insurers have exited the market due to increasing wildfire losses.

According to early projections released this past Friday, the plan reports that it has insured 22% of the buildings within the Palisades fire zone as identified by Cal Fire, which places the potential loss estimate at more than $4 billion. Additionally, it has insured 12% of the buildings in the Eaton fire zone, potentially exposing the company to losses of over $775 million.

So far, the plan has received 3,600 claims, which are likely to increase, and it's added more staff to process them. Normally, claims account for about 31% of its total potential risk, but the actual losses could be higher or lower.

Our top priority remains to serve and support our customers, ensuring that all eligible claims are paid. The wildfires in Southern California have had a catastrophic impact on families and communities, causing loss that goes far beyond property damage.

Jewlz Fahn and her husband, Terry, enrolled in the FAIR Plan last year after State Farm, which had insured their home for over a decade, refused to renew the fire, personal property, and loss-of-use coverage they had for their property on Fiske Street, which caught fire near the heart of Pacific Palisades.

They got almost the same coverage for their house - a little under $2 million - but their insurance for their personal belongings was cut from $1.55 million to just $153,000 and the coverage for their living expenses while their home is being rebuilt decreased significantly, from $620,160 to $153,000. Fahn was especially exasperated by their inability to get a timely payment for their living expenses.

"I just finally received a phone call from my claims adjuster on Wednesday, eight days after the fire started. They report they're extremely overwhelmed. I was trying to remain calm, and I was informed that they're attempting to provide an advance for a six-month payment, which would amount to a total of $52,038 for us," said Fahn, 52, who has been living in a Century City hotel with her husband.

In contrast, she said, a friend received a $75,000 payment in just days from her business insurance company.

For the industry in 2013 dollars, according to the Insurance Information Institute.

The plan billed its members $260 million for wildfire and earthquake expenses, according to the state Department of Insurance, leading to the creation in 1996 of the California Earthquake Authority, a non-profit that now secures earthquake coverage for approximately two thirds of the state.

Those who seek to encourage private insurers to write more policies in communities at risk for wildfires by giving them concessions, including the right to charge their California customers for the cost of the reinsurance they buy to cover state risks.

These reforms are just beginning to take shape, but one contentious provision aimed at shoring up the FAIR Plan's finances in the event of a catastrophe may have a statewide impact, leaving homeowners burdened with the cost of any potential bailout.

The measure lets the plan check how well its member carriers are doing – after it runs out of backup funds, emergency funds, and catastrophe insurance – to see if they need up to $1 billion to pay home-related claims and up to $1 billion to pay business-related claims. The carriers can then charge their customers for half of what they were assessed.

Insurers can also charge policyholders the full amount of assessments above these limits. Any surcharge would need approval from the insurance commissioner.

Consumer Watchdog, an organization that sponsored the 1988 ballot proposal making the insurance commissioner the elected official responsible for reviewing and rejecting insurer rate increases, characterized the measure as an industry bailout last year. The group claimed that existing legislation prohibited the rate hikes Darwin Andes maintained that the measures were allowed under current law, stating that he was providing consumers with a vital layer of protection.

"It's really straightforward. Homeowners throughout the state shouldn't be held responsible for the California fires because insurance companies have left those neighborhoods and left homeowners with the FAIR Plan," stated Carmen Balber, the executive director of the Los Angeles consumer group.

Lara's spokesperson, Michael Soller, stated he couldn't provide comment on whether the commissioner would approve any surcharges, but pointed out that the provision requires the FAIR Plan to exhaust all its financial resources before any assessment can even be considered.

"That adds another layer to prevent us from ever having to pass those costs on," he said.

There were no homeowner charges after the Northridge earthquake.

The updated FAIR Plan statement said its assessment of its member carriers would be based on their market share in 2023, but it has not yet made that determination.

For all Los Angeles County residential customers who had not yet had their policies expire.

Jon Farney, the top executive of State Farm, told the Times last week that the insurance company, which is based in Bloomington, Illinois, will try to recoup any costs it incurs from its own policyholders as permitted by state law.

"If there was a plan in place that ensures a fair rate assessment, and we could pass that rate on, that's what we would do," he said.

It has to pay before its reinsurance takes effect and covers higher losses. It also said that its reinsurance will cover any assessment by the FAIR Plan.

The company did not comment on whether it would charge its customers more, choosing instead to have a representative named Lara issue any guidelines.

The idea that millions of Californians who live far from the Los Angeles County wildfires face higher homeowner policy costs - costs that in some cases have skyrocketed by hundreds or thousands of dollars over the past few years - has prompted lawmakers in Sacramento to find an alternative solution.

This change would enable the FAIR Plan to issue bonds if it faces "liquidity challenges." The FAIR Plan stated that it endorses the bill.

"The primary concern for us at present is this: 'In what ways can we assist?'” California State Assembly Speaker Robert Rivas stated during the introduction of the legislative bill sponsored by two lawmakers from Southern California.

A representative for Governor Gavin Newsom stated, "The climate crisis has changed everything" and that the governor along with the insurance commissioner were still examining the impact of the fires on the plan and would be "watchful as the FAIR Plan explores the alternatives they have to ensure that Californians affected receive fair payment on their claims."

Jones, the former insurance commissioner, is skeptical that floating potentially billions of dollars of tax-free bonds to pay claims will resolve the crisis, even though they would greatly assist in ensuring there are funds available to pay FAIR Plan claims.

Bonds will help them cover claims as they arise, but then they'll need to pay off those bonds, and that can only happen if they pass an assessment if they exhaust their funds," he said. "Bonds are not a one-time solution.

Times staff writer Ben Poston assisted with this story.

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