“Insurer of last resort” for homeowners in California becomes the only option

Last week, Californians learned that two of the state’s largest insurance companies, State Farm and Allstate, have decided to stop writing new homeowner contracts in the state.

In addition, State Farm has requested significant rate increases for its existing customers from California regulators.

Industry experts say the decisions by both companies are part of a broader trend in which insurers are pulling out of insurance for California homeowners due to wildfire threats, climate change and higher-than-inflationary construction costs.

The two companies’ decisions raise the specter that more California homeowners will need to enroll in the FAIR Plan, a private “insurer of last resort” for properties in high-risk areas that might not otherwise be able to obtain coverage.

“But nobody should want to participate in the FAIR plan,” said Rex Frazier, president of the Personal Insurance Federation of California, an industry lobby group.

Because FAIR has disadvantages: It covers less and requires higher premiums. In addition, critics say the FAIR is underfunded and mismanaged, not always receiving the payout it should have.

Do you rely on the FAIR plan? Have you had problems with your home insurance? Please contact [email protected].

What is FAIR?

An aerial view shows vehicles and homes submerged by flooding on March 11, 2023 in Pajaro, California. | Josh Edelson/AFP/Getty Images

The Fair Access to Insurance Requirements (FAIR) Plan is California’s solution to an increasingly common problem: homeowners who cannot get fire insurance for their properties in the market.

Although FAIR was incorporated under California law in 1968, it is not a state or public entity. Rather, it is a consortium of all companies licensed to sell property and casualty insurance in California.

“Each member company shares in the profits, losses and expenses of the plan in direct proportion to its market share of business done in the state,” according to the FAIR Plan website.

FAIR’s tariffs are higher than those of standard insurance companies because the risk pool is designed for a higher risk. Nonetheless, the insurance meets the requirements of a home lender to complete a home sale.

In other words: Without FAIR, many people would not be able to buy their houses.

As more and more companies shied away from insuring California real estate — what Frazier calls “silent abandonment” — in recent years, consumers have had to look elsewhere.

One of those places was FAIR. Between 2018 and 2022, the total number of policies more than doubled, rising from around 127,000 to almost 273,000.

“You can tell between the growth of State Farm and the growth of the FAIR plan that people have gone there in the last few years,” Frazier said.

Now State Farm has stopped new home insurance policies.

“There will be communities that only have the FAIR plan,” Frazier said.

What is wrong with that?

A dark orange sky hangs over the San Francisco skyline on Wednesday, September 9, 2020 as multiple wildfires burn in California and Oregon. | Jessica Christian/The San Francisco Chronicle via Getty Images

If your home is in an area with a high risk of forest fires, FAIR is an important lifeline. But it also has limitations.

First, FAIR is not intended to be a permanent insurance.

“The FAIR plan is not intended to compete with or replace traditional insurers, but is intended to serve as a temporary safety net for property owners until traditional insurance coverage becomes available,” FAIR said in a statement.

In addition, unlike regular insurance, it only covers a set of “named perils” that are explicitly listed in the plan. These include fire and lightning, “internal explosion” and smoke damage, the plan’s website says.

In practice, however, policyholders have often found the exclusion of smoke damage to be FAIR.

In response to policyholder complaints, the California Department of Insurance conducted a targeted review of FAIR claims between 2017 and March 2021.

This investigation revealed numerous violations. Among other things, FAIR had failed to offer coverage equivalent to standard fire insurance and had “rejected or discouraged” claims for compensation for smoke damage.

“FAIR’s smoke damage plan policy formulation has been negotiated with and approved by the California Department of Insurance,” FAIR said in a statement. “The FAIR Plan pays to repair direct physical damage caused by an insured hazard to properties it insures.”

But those denials can cause serious problems for policyholders, said Dylan Schaffer, an Oakland-based attorney who represents people suing the California FAIR Plan Association.

According to him, in 2017, FAIR took the position that houses that did not burn in wildfires but suffered smoke damage were not actually damaged but simply dirty. Because of this, the company refused to cover the cost of cleaning and repairing these homes.

READ MORE: State Farm is asking California for a huge hike in insurance premiums as home insurance is being phased out

“They are endangering people’s health and safety because their homes are contaminated,” he said.

Schaffer sees a conflict of interest in the structure of the plan: the very companies that refuse to insure properties in high-risk areas still insure them through FAIR’s “back door.”

These companies don’t like FAIR and so “it’s very badly funded and very badly managed,” he said. “I consider it one of the most sophisticated insurance companies.”