Help for homeowners in wildfire areas? California wins lawsuit over insurance coverage

With wildfires burning again and thousands of rural Californians losing their insurance coverage, state regulators have won a key legal battle that they believe could stabilize the fragile market for homeowners’ policies in fire-prone areas.

A judge in Los Angeles ruled that Insurance Commissioner Ricardo Lara has the right to force the California FAIR Plan — the so-called “insurer of last resort” — to offer more expansive coverage that resembles typical homeowners’ policies. The industry-run FAIR Plan had sued the commissioner, seeking to block his order.

The decision by Judge Mary Strobel in Los Angeles Superior Court comes as another difficult wildfire season grips the state.

Since 2015 tens of thousands of mostly rural Californians have lost their traditional homeowners’ coverage because of mushrooming wildfire risks. In almost every case, these homeowners are forced to buy a wildfire policy from the FAIR Plan. Then they have to go out and buy a separate policy from a traditional insurer covering the other hazards that are included in a regular homeowners’ policy: break-ins, liability and so on.

The effect is a huge increase in total cost — homeowners who’d been paying, say, $2,000 a year are now paying $6,000 in many instances. Having to buy two separate policies “drives up the price for consumers, which only benefits the insurance companies that profit from this unfair and costly arrangement,” Lara said in a prepared statement Tuesday. “California consumers win when they have greater options for insurance coverage, which is why I ordered the FAIR Plan to modernize its coverage 18 months ago.

Require the FAIR Plan to offer comprehensive coverage?

In 2019, the last year for which statistics are available, about 75,000 Californians were forced onto the FAIR Plan after their traditional insurance carriers dropped them.

That same year, Lara directed the FAIR Plan to start offering comprehensive policies to those who’d lost their coverage. He also ordered the FAIR Plan to double the loss limits on its policies to $3 million — arguing that the old $1.5 million cap on losses was simply too low given the realities of the housing market in some areas of California.

The FAIR Plan wound up doubling its loss limits, as Lara ordered, but sued the commissioner over his insistence that the plan offer comprehensive coverage.

The plan, which was established by the Legislature but is bankrolled by the industry, not state taxpayers, accused Lara of making a “politically expedient maneuver” that ignored the cause of the insurance crisis — the state’s unwillingness to grant insurers high enough rates to cover the risk of selling insurance in wildfire zones.

Officials with the FAIR Plan couldn’t be reached for comment Tuesday.

Meanwhile, as the FAIR Plan’s customer rolls grow, Lara has been negotiating with traditional insurance companies on a plan that would require them to sell coverage in fire-prone areas as long as those communities meet certain standards for safeguarding against wildfire risk. That includes “hardening” homes by retrofitting them with fire-resilient materials.